ALEXANDRIA, Va.—Cash is becoming a rarity as shoppers increasingly rely on credit cards, apps and online purchases during the current pandemic. That’s a growing problem for some retailers, such as Bump ’n Grind, an independent coffee and vinyl record shop, in Silver Spring, Maryland, according to the Wall Street Journal.
The shop, which roasts its own coffee beans, spent less on green beans last year ($12,827) than on the card-processing fees ($18,645) it pays to the financial institutions that enable cashless payments.
“All you know is at the end of the month they’re pulling out X thousands of dollars,” owner David Fogel told the Journal.
Bump ’n Grind closed for almost two months during the coronavirus pandemic, but Fogel continued to roast and sell beans. The coffee shop is now open for takeout only, but unless Fogel can renegotiate his rent, he may shut his store to focus on wholesale coffee beans.
Bump ’n Grind’s plight is an example of what is going on in the largely hidden interchange economy. The fees are set by the major card networks, and merchants pay the fees to banks, driving the payments system and pushing up retail prices.
For NACS members and retailers across the country, swipe fees are retailers’ second-highest operating expense behind labor. Convenience retailers paid an estimated $11.8 billion in card fees in 2019, according to NACS State of the Industry data.
Last year, cards represented 73.2% of sales transactions at convenience stores, NACS SOI data indicate. During the pandemic, cash sales have been down—which means more people are paying with debit or credit cards. A May NACS Consumer Survey found that the percentage of customers paying for gas by cash dropped from 21% to 14%, which may be the lowest it could go given how many consumers are shying away from handling cash in the current climate.
When a customer makes a credit card purchase, the merchant often remits 2-3% of the price to the bank that issued the card. These are swipe fees, and the bank may return some of the fee to the cardholder in the form of rewards.
Because retailers’ profit margins are slim, they pass some of the fees to customers through higher prices, according to the National Retail Federation. Customers typically pay the same price whether they use cash or a card. Economists say this equates to a transfer from users of cash to users of cards. On average a cash-using household pays $149 a year, and a card-using household receives $1,133, according to a 2010 study from the Federal Reserve Bank of Boston.
Most U.S. households that have credit cards have a rewards card, even those earning less than $20,000 a year, according to Greg Weed, director of card-performance research at Phoenix Marketing International, which tracks the credit-card market.
Merchants paid issuers $53.6 billion in Visa and Mastercard credit-card interchange fees in 2019, more than double what they paid in 2012, according to the Nilson Report, a trade publication. The growth reflects two things. First, credit-card use rose in recent years: Americans made 67% more credit-card payments in 2018 than in 2012, according to the Federal Reserve. Second, banks rolled out more cards with higher swipe fees to pay more rewards.
To help support the rewards programs, banks also charge higher rates. Average annual percentage rates for credit cards have risen more for those with the lowest credit scores by about 4.2 percentage points since 2010, reports WalletHub.com, a consumer-finance website. That’s compared with about 1.3 points for those with the highest credit scores. Merchants have battled card companies over swipe fees for decades and point to the impact on low-income consumers to help make their case.
Card networks bar merchants from accepting some but not all of their credit cards. A merchant who accepts Visa credit cards can’t turn down premium cards that are often carried by wealthier consumers and have higher swipe fees. NACS is a plaintiff in the long-running merchant litigation against the card networks challenging their “honor all cards” rule and other practices on the grounds of antitrust violations. Roughly 63 merchants, including Amazon, Lowes, The Gap and Starbucks are suing Visa, Mastercard and card-issuing banks, claiming they collude to avoid competing over interchange fees. The merchants allege card fees are a hidden tax, especially for lower-income consumers who are more likely to pay with cash.
Merchants want the freedom to select which cards they will accept and to negotiate swipe fees directly with card-issuing banks rather than Visa and Mastercard. But card companies argue this would confuse consumers. They say the fees help cover costs such as fraud, innovation, reissuing cards with updated features and losses on unpaid cardholder bills. They add that cards help avoid cash-related costs including theft.
Large merchants fare better in the interchange economy than small. Costco switched its co-branded cards in the U.S. from American Express to Visa in part because Visa lowered Costco’s interchange fees on all Visa-branded credit cards close to zero, according to people familiar with the matter. Small businesses lack that negotiating power. Swipe fees are especially harmful to small businesses, which account for more than 60% of the convenience retailing industry.
As reported in NACS Daily, Visa and Mastercard planned to increase interchange fees for many merchants starting next month, with the changes in some cases hitting small businesses the hardest. Visa and Mastercard have since said they’ve delayed those changes until next year. While some merchants bypass cards entirely, that has become more challenging during the pandemic when both consumers and retailers try to avoid touching cash.
Governments in many developed countries, including Australia and much of Europe, have capped credit-card interchange fees. A week ago, NACS Daily reported that in a landmark ruling the U.K. Supreme Court has supported a lower court’s ruling that credit card firms charge excessive fees. The decision will allow Sainsbury’s Supermarkets, along with other retailers, to proceed with a 2016 suit that seeks damages based on claims in which the fees violated U.K. anti-competitive regulations. The U.S. only has caps on debit-card fees.
“Banks have no incentive to curtail [credit-card spending], because they make money on it … so they don’t have an incentive to prevent people from using credit cards,” said Joanna Stavins, an economist at the Boston Fed.
To lower interchange fees, merchants are looking for a way around card networks.NACS and other merchant groupshave urged the Fed to develop a real-time payments system as an alternative to card networks. And more merchants, led by gas stations and supermarkets, are pursuing their own payment apps and other options that lower the stores’ fees.