Let’s play a quick game. Guess by who this comment was made and at whom: These companies “used deceptive language to trick their customers into signing something they thought would save them money.” (WSJ) You might think the party being accused of deceiving consumers with deceptive language was the very same industry that was recently subjected to legislation demanding greater accountability. Or you might even think it’s the industry to which American consumers were indebted $972.73 billion at the end of 2008. It would also make sense that the alleged deceptive language users were the guys who just rolled out a “basic” card with easy-to-understand terms in response to customer outrage over their lack of transparency.  You would, in fact, be wrong.

That comment was actually levied at a group of 7-Eleven franchisees by a coalition of credit card issuers and lenders. That is, an industry with a profitability of about $30 billion a year – with just one card issuer even topping the profits of McDonalds in 2004 – is accusing an industry run by franchise owners who split the gross profits from Slurpee sales 50-50 with corporate of greedily exploiting consumers. Something isn’t quite right here.

Who’s the bad guy?

But the thing is that there is some traction to the credit card coalition’s arguments. Consider this:

Say you go to a gas station and buy $20.00 worth of gas. You go in and pay $20.00 with a credit card. The credit card company gets 2.8% of the transaction (called an interchange fee), so really, the retailer only gets $19.44 for the $20 worth of gas you buy. Meanwhile, if you went in and slapped a $20 bill on the counter, the retailer would pocket the whole thing.

So, in essence, the person who pays cash is paying $0.56 more for his gas than the credit card user. And the percentage is different depending on whether you are using debit or credit, who your card issuer is, whether your card has rewards and other factors.

It seems like a small amount, but if you are a retailer, those 50 cents here and there will really add up. And, as the retailers argue, they are forced to raise their prices in order to subsidize the cost. That means higher prices for everyone, especially those paying in cash.

Credit card companies argue that if the retailers had their way, they’d charge everyone using a credit card a surcharge in order to cover the interchange fees (or swipe fees). Furthermore, for example, retailers may offer lower surcharges if customers used their American Express, which may have a lower swipe fee, than a Visa. As of now, this goes against the contract that retailers have with credit card companies.

Interesting enough, though, it does not violate the contracts for retailers to offer discounts for cash, which a few gas stations do.

No Better Mousetraps

The logic behind forbidding retailers to advertise the differences in swipe fees between issuers and/or levying a surcharge for credit card use is obvious. Card companies make money when consumers use plastic, and both of these measures help edge out the competition. That is, it helps Visa block competition from American Express as well as it the biggest competitor to all credit cards: cold hard cash.

In a way, that’s just good business sense. But on the other hand, it’s a bit counter to a “free market.” Imagine if retailers were able to charge customers $1.00 for American Express swipes and $2.00 for Visa swipes. Customers would quickly be motivated to migrate towards cheaper plastic, and the higher fee card issuers would be forced to offer competitive rates. By disallowing this type of competition, the practice almost amounts to price fixing.

Choose: More Credit Card Perks, or Better Retail Prices

But card issuers have to make a living somehow. Dan Mica, president of the Credit Union National Association, wrote a letter to New York Times, stating the following:

Credit unions use interchange revenue to finance card programs and to ensure that their members have access to the same services provided by other, much larger financial institutions — and typically more affordable. If interchange revenue were reduced or eliminated, credit unions would be forced into the impossible decision of raising fees for our members — or eliminating our card programs altogether.

Mr. Mica goes on to urge Congress to not be fooled by the lobbying campaign from “giant retailers” and to protect credit unions and “the Americans who depend on them.”

It’s resonant with the appeal to populism being utilized by both sides. But let’s consider the “giant retailers” that are doing the lobbying.

7-Eleven franchisees, however, are not what you might consider a wealthy, ruling class. In fact, most 7-Eleven operators don’t even own the building, the land or the equipment in their stores. After ponying up a $70,000 franchise fee plus a cash payment for the stores initial inventory (average $89,000), 7-Elevan franchisees have to lease the land and the building from 7-Eleven Inc. Up until 2005, 7-Eleven Inc. footed the bill for the interchange fees, but as profits suffered in 2005, they are now asking franchisees to pay half of the swipe fees out of pocket.

That move is unsurprising – the franchise structuring is one of the best ways to remove financial liability from the corporation and pass it down to individual store operators. A recent NPR story highlighted the explosive growth of Subway, which appeals to franchisees because of its low startup costs, but also pointed out that “franchising seems to be the preferred method for development recently. It takes pressure off the parent company in this down economy” as it “limits the costs, since the franchisee pays for the key investments, in property, employees and such.”

Trickle Down Fees

With the recent turmoil, it seems that everyone – the credit card issuers, the corporation parents, the franchise operators – want to pass the fees even further down the chain to us, the consumers. It’s a fight between retailer chains and the lending giants – but unfortunately, it seems like the consumers will be the ultimate losers no matter how it pans out.

The scenarios:

• Status Quo: Credit card issuers win, retailers continue paying increasingly high swipe fees and jacking up prices to compensate.
• Overturn: Retailers win and get to negotiate more favorable terms and may perhaps tack on surcharges for customers using credit.
• Compromise: We get something akin to the Credit CARD Act, which showed initiative by the federal government, but ended up being a “Swiss cheese” legislation with too many holes, too little effort and far, far too late.

What are your thoughts? Are we, as consumers, screwed? Should we be throwing our weight behind 7-Eleven’s efforts or sympathize with the credit card companies? Or is there some other movement we should be rallying behind?

Image by reinn

Related posts:

1. The Hidden Fee That Costs Us Money
2. MasterCard’s New “inControl”
3. Black Friday and Cyber Monday: Get More Rewards!
4. Trick or Treat?: Bank of America Rolls out Basic Visa Just in Time for Halloween
5. Links with Your Black Friday