Convenience Stores and Swipe Fees: Facing Unique Challenges
In this time-pressured era, the U.S. convenience store industry should be a great line of business for its 149,000 stores, 123,289 of which sell gasoline.
They generate about $680 billion in annual sales.
The rub comes from the interchange or swipe fee charged by issuers such as financial institutions for credit and debit cards. That is the industry’s second largest expense, after labor costs. It eats about two percent of each transaction.
The higher the dollar amount of sale, the higher the amount of the transaction fee. That means with rising gas prices, issuers earn more and convenience stores pay more in transaction fees (Source: The National Association of Convenience Stores).
Convenience stores, of course, are not alone in this transactional burden, both for credit and debit cards.
Back in 2003, for example, Wal-Mart, along with thousands of other retailers, won a $3 billion class action lawsuit, begun in 1996, against Visa and MasterCard. They contended that the issuers’ policies caused them to pay excessively for those swipes.
Again in 2012, another lawsuit by retailers resulted in a $6.6 billion settlement. Some of the plaintiffs, including NACS, declined. One reason was that the terms and conditions didn’t ban issuers from raising fees in the future.
However, the convenience store industry faces unique challenges. One is that its fundamental selling proposition is convenience.
Therefore, unlike competitors on the food side such as German-owned Aldi, it can’t be operated on a cash/debit card basis only. Consumers want to get in and out fast, swiping a credit card, without needing to key in a PIN.
They also don’t want to have to worry about the amount of funds in their bank account as they do when using a debit card. A future owner of a gas station asked CreditCards.com about a cash-only business that would provide the competitive advantage of lower prices. In her response, Elaine Pofeldt recognized that but also hammered the importance of convenience.
Another challenge to this industry is that the stores with gas stations usually don’t benefit from the traditional lower rates from debit card use which require a PIN. That’s a major hit to profitability since gasoline generates three fourths of sales.
Issuers tend to process the debit payment as a credit one because users are unlikely to choose debit at other retailers.
The third problem is that store owners are often subjected to double payment fees with many of its customers. They swipe when buying gas outside, then enter the store to purchase merchandise, swiping yet again. For the store that’s an ongoing double whammy.
To address this drag on profits, the industry has turned to the courts, legislatures and its own brainstorming about best business practices.
In an exclusive interview with Payment Week, NACS spokesperson Jeff Lenard shares the organization’s thinking:
“The challenge for retailers selling fuel is to keep costs as low as possible, so that they can most effectively compete on price while, at the same time, delivering convenience. For most retailers, it’s not an option to restrict payment options and remain a convenient option. And until the broken payments system is fixed, retailers are looking at all other options to lower costs and incent consumers to help lower them.
Some retailers offer cash discounts, and consumers are receptive to the idea. However, you need to be convenient to all customers in all formats, and don’t want to make customers paying by plastic feel as if they are being treated differently. Communication over how the discounts work is critical to having success with these discounts, given how much misinformation is spread about cash discounts or the myth of ‘checkout fees.’”
This issue of profitability is urgent because the convenience store industry is fragmented. Large companies such as 7-Eleven and The Pantry only account for about 40 percent of owners.
The rest are individuals struggling to do better than reach the breakeven point (Source: First Research). They need a solution to the drag of swipe fees in general. In addition, they also require a level playing field for debit card transactions.