C-stores can take a swipe at interchange fees with savvy service solutions.
By David Bennett, Senior Editor
In the convenience store industry, distinguishing the ‘big guys’ from the ‘little guys’ can be straightforward. You can pick out a 500-store chain over a five-store operator pretty quickly. Some retailers get by with four fuel dispensers. Some c-store operations have 40 pumps.
In one way Leo Vercollone, co-owner, CEO and president of VERC Enterprises Inc. considers himself a little guy in terms of the size of his retail chain, which comprises 27 stores. He also considers himself a realist as well as a good business man, who has built a loyal customer base in Massachusetts and southern New Hampshire over the last 30-plus years.
However, the Duxbury, Mass.-based company’s operational costs are big. For example, the chain pays nearly $2 million in charge card fees per year. That goes up or down depending on what the interchange fees are at the time.
Before 2017, the company didn’t have much say about the processing fee structure because of its branded status.
“We’re associated with two major brands: Mobil and Gulf. They have their own interchange system that we are required to use.”
Conversely, VERC also operates two independent car washes, and both have no tie to the processing platform associated with ExxonMobil Corp. and Gulf Oil Corp.
“The swipe fees we pay with major oil are almost twice the rate that I can get for my individual car washes—understanding that we take more risk at the independent car washes; so any type of fraud issue or chargebacks, the oil companies have a better process, but it is much more expensive,” said Vercollone.
In the end, the payment processing fees, or interchange fees, that the c-store lays out every time a customer uses a debit card or credit card, Vercollone chalks up to “the cost of doing business.”
COST OF DOING BUSINESS
Perhaps no topic unites c-store retailers of every size as do interchange fees, better known as “swipe fees,” which are easy to define and almost impossible to escape. Basically, the term interchange refers to fees paid by the merchant’s bank to the issuing bank for this service. Interchange covers the cost to convert a charge on an account holder’s card to a cash deposit at the merchant’s bank account, including billing services, credit risk and fraud risk.
For small purchases, swipe fees can add up to a percentage of a purchase, eating into retailers’ margins.
How much? The Durbin Amendment limits debit card interchange fees to 21 cents plus 0.05% of the payment. An additional one-cent fraud-prevention charge is also allowed in some cases. Those rules only apply to “covered transactions,” which include cards issued by some of the largest card issuers. However, other card issuers can charge more.
For example, those rules only apply to banks and credit unions with $10 billion or more in assets. In 2015, the Federal Reserve reported that debit card transaction fees are typically around 24 cents per payment.
The Durbin Amendment is part of the 2010 Dodd-Frank law, which sharply lowered debit card interchange fees. Supporters said the measure, sponsored by Sen. Dick Durbin, D-Ill., for whom it was named, would lower prices for consumers by cutting retailers’ costs.
So how do convenience retailers lessen the operational impact of interchange fees? Experts agree that the more knowledge retailers have, the better they can fortify their payment processing position. The first question should probably be: What is your processing IQ?
Anand Goel is the CEO and founder of Atlanta-based Optimized Payments Consulting, which advises merchants on how to streamline their payment operations and reduce the cost of card payments.
Goel explained that most retailers don’t actively manage their payment processing relationship with their processing vendors, but they should—regularly.
“Retailers typically contact their processor when there is an issue. Instead, retailers should actively manage their processor relationship with quarterly or semi-annual meetings and reviews,” said Goel.
These meetings can be used to:
• Review opportunities to streamline payment operations, costs.
• Explore interchange qualification and chargeback trends and opportunities.
• Review card network changes and their impacts on the retailer.
• Discuss new or upcoming solutions relevant to the retailer.
• Upcoming changes to retailer’s payments environment.
• The importance of retailer acquisitions and/or divestments.
“Credit card processing fees are unavoidable, but they can be negotiated and reduced with the right strategy and execution,” said Goel.
WAY OF THE DINOSAUR
Like other c-store chains, Boise, Idaho-based Stinker Stores Inc. has learned to adapt to payment processing fees. Four years ago it partnered in a program that helped trim those fees and provided customers purchase rewards.
At all participating Stinker Stores in Idaho, customers receive a 10-cents-per-gallon discount price when they use the Stinker Advantage Card inside or pay at the pump. Also, there are no authorization holds placed on their checking account, which can sometimes happen with a regular, bank-issued debit card. Stinker also issues the Sinclair Green Card, which provides customers gas rewards, and has lower processing fees for the Idaho retailer as well.
“It’s a win-win between Sinclair partnership and the discount we are able to extend to our customers,” said Steve Watts, Stinker’s chief operating officer.
The partnership with Sinclair will also benefit Stinker’s plans for expansion. The chain in February 2017 acquired Bradley Petroleum Inc. and Sav-O-Mat Inc. in a deal that includes 40 c-stores in Colorado and one in Wyoming, pushing Stinker’s portfolio to 106 store locations.
Based in Denver, Bradley Petroleum operates in the Colorado market, especially in the Denver metropolitan region—bringing a new urban segment to Stinker’s customer base.
When it launched its card program, Sinclair enlisted the expertise of P97 Networks Inc., developer of PetroZone, a cloud-based mobile commerce and behavioral marketing platform for the convenience and fuel retailing industry.
The program also enables consumers to increase their mobile shopping experiences, options for lower fuel prices and opt-in personalized digital offers for in-store purchases.
Houston-based P97 is involved with other cutting edge payment processing networks including the new Gulf Pay program from Gulf Oil, and is also a partner with Visa.
Don Frieden, president, CEO and chairman of P97 Networks has seen the payment processing landscape change in several ways to include heightened level of fraud prevention and multi-factor authentication, which ultimately provides longer-term benefits for all merchants in the form of lower interchange fees.
“We’re seeing new innovative programs like Chase Pay’s 0,0,0 program (zero acquiring fees, zero network fees, and zero fraud liability shift) forcing other networks to re-evaluate 15 year old programs like ‘card not present’ interchange for mobile transactions in favor of lower interchange rates,” said Frieden.
By partnering with Visa to license its own transaction processing network called ChaseNet, Chase Pay can charge retailers a fixed price, with zero network, fraud liability or processing fees. Of the digital wallets covered, Chase Pay is touted as the only system that can affect transaction processing, essentially acting as the acquirer, the card network and the card issuer—and therefore providing ultimate control over transaction fees.
According to Frieden, when convenience store operators are weighing these new solutions, there are also systematic requirements they should be assessing, for today and the future.
“Look for mobile payment platforms built by solutions providers, which are based on industry standards and insures seamless integration with (point-of-sale) POS systems, digital marketing and sales automation tools, and loyalty and payment networks—enabling speed to market and the most cost effective mobile payment solutions,” said Frieden. “Essentially, we’ve spent years building integrations with industry partner platforms (e.g. POS, loyalty, payments, etc.) so customers can plug and play with best of breed systems providers.”
Another unique payment processing solution P97 has contributed to is Gulf Pay. Currently, customers at select Gulf Oil fuel stations in the New England and New York markets have access to a mobile payment service that enables drivers to navigate to the nearest station, pay for fuel at the pump, receive exclusive offers and purchase products inside the convenience store.
Gulf Pay is powered by the PetroZone mobile commerce platform, and will provide special deals on both fuel and in-store products, while allowing customers to tailor in-app preferences.
Among its highlights, the program also allows consumers to securely store and manage their preferred payment methods, so no swiping is required; also it includes a state-of-the-art token-encrypted data component that safeguards customers’ account information.
Like other proprietary processing payment solutions, Gulf Pay offers partnering merchants a reduced interchange fee structure. The program is still a pilot program.
“At this time, Gulf Pay is still in the initial launch phases. Even though the program has been extremely successful in this short amount of time, we feel it would be best to hold off (discussing the network) until we have been up and running for more than a few months,” said Nikki Fales, director of marketing for Gulf Oil.
Gulf plans to expand the Gulf Pay app by teaming up with leading mobile wallets and technologies. Gulf has signed an agreement to partner with Mastercard and will accept Masterpass through the app.
VERC Enterprises has already joined the group of retailers in New England. Vercollone explained that the Gulf Pay platform is the next stage in the development of the c-store chain, not only because it promises to lower the company’s interchange fees, but will provide a mobile payment platform that will accommodate future customer’ needs.
“We’ll see how it goes,” Vercollone said, when the Gulf Pay results start coming in.
There are more than a 154,000 c-stores in the U.S., and more than 124,000 of these retail outlets sell motor fuels.
According to the 2016 National Association of Convenience Stores (NACS) Fuel Report, approximately 50% of the fueling outlets in the country have a major oil company brand or carry the brand of another refining company. The remaining 50% sell “unbranded” fuel.” These stations often are owned by companies that have established their own fuel brand such as QuikTrip and 7-Eleven and purchase fuels either on the open market or via unbranded contracts with a refiner/distributor.
So far, the spotlight has been on branded retailers that are implementing processing programs to better control fees along with providing customer and technological upgrades.
For unbranded retailers that have to rely on third party vendors for their payment processing needs, there are important factors they should look at when doing their homework, said Goel. Some questions that retailers should explore when evaluating merchant acquirers in the marketplace should include:
a. POS compatibility. Is the payment processor certified to my POS software and/or payment switch?
b. Chargeback management. What percentage of chargebacks are represented by the acquirer without merchant involvement (e.g. retrieval requests, invalid chargeback codes)?
c. Encryption solution. Every retailer should have an encryption solution that encrypts a card number from swipe/dip to the payment processor. What type of encryption solution does the acquirer offer and what is the total cost?
d. Reporting. What type of online reporting do you offer to help with daily, weekly or monthly reconciliation? What type of reporting do you have for managing downgrades?
e. Cost Management Solutions. What type of reporting/solutions do you have to help me reduce my overall cost of processing cards? Do you offer least cost routing for debit cards, PINless debit processing, and interchange management solutions?
f. Customer Service. Do I have a dedicated relationship manager? What is his/her experience in supporting retailers like me?
Even if a c-store operation is satisfied with its payment processing program, it doesn’t hurt to be on the hunt for a better mouse trap.
“Retailers should do a formal merchant services RFP (request for proposal) every four or five years to understand the latest solutions in the marketplace and their application to the merchant’s needs/environment,” said Goel. “The RFP process will percolate new and relevant solutions to the surface.”
Lastly, retailers should have legal counsel with previous experience review merchant acquiring contracts, said Goel. If such a person doesn’t exist internally, they should seek external counsel.
“We had a large client that used a lawyer with no experience with merchant contracts,” Goel said. “This lawyer spent six months trying to negotiate terms that were fixed and dictated by the card networks. Ultimately, an experienced lawyer was able to negotiate the contract within a few weeks.”
Looking for a Processing Partner?
There are several prominent merchant acquirers that network partners to evaluate the value of enabling payment functionality, interchange fee data and a host of other service considerations. Choosing the right one to best fit a retailer’s needs requires gathering as much information as possible. Here are just a few of the bigger companies in the marketplace:
• First Data: First Data facilitates small business payments with its Clover suite of products, including a mini reader that works without Wi-Fi and a mobile reader that attaches to other devices in order to process payments on the go.
• TSYS: Short for Total System Services, TSYS supports millions of buyers and sellers around the world through four major branches: issuing services, acquiring services, prepaid solutions and merchant solutions.
• Global Payments: Global Payments focuses on ensuring businesses accept all major forms of payments. To that end, its services include credit/debit/purchasing cards, electronic check conversion, money transfer, verification and recovery services, gift/loyalty cards, check guarantee, ACH checks and point-of-sale (POS) equipment.
• Moneris: Moneris is the largest credit and debit card processor and acquirer in Canada. It processes more than three billion transactions each year for more than 350,000 merchants.
• Adyen: Adyen provides e-commerce companies with a payment platform that includes gateway, risk management, and front-end processing services. Adyen is a full-stack gateway and includes merchant clients such as Facebook and Spotify.
• Heartland Payment Systems: Heartland helps businesses move beyond accepting major credit cards. The company facilitates payment processing in-store, online, and offsite through multiple methods, such as EMV, Apple Pay, Samsung Pay, Android Pay and gift cards. It also offers next-day funding, real-time reporting and around-the-clock customer service in the U.S.
• Elavon: Formerly known as NOVA, this company is a subsidiary of U.S. Bancorp. Elavon processes payments in more than 30 countries for more than one million merchants.
High Court Sides with Retailers
The U.S. Supreme Court earlier this year denied a petition to review a landmark billion dollar antitrust settlement between Visa and Mastercard and thousands of retailers that for years had accused the credit card networks of improperly fixing interchange fees.
Supporters of the settlement—including Visa Inc. and Mastercard Inc. and a number of large U.S. banks—had filed the petition with the high court, arguing that the majority of plaintiffs had agreed to the settlement and that there was no guarantee that the objecting retail parties would get a better result if settlement negotiations resumed.
The value of the settlement, initially worth as much as $7.25 billion, fell to about $5.7 billion after approximately 8,000 merchants opted out, including retail giants Walmart and Home Depot.
The decision leaves intact a Second Circuit ruling overturning the settlement, sending both parties back to the bargaining table. The decision also concludes a historic chapter involving the National Association of Convenience (NACS), which was especially active on Capitol Hill during the time when the attempt to repeal the Durbin Amendment was in full force.
“NACS was instrumental in beating back efforts to repeal the Durbin Amendment on debit card swipe fee reform this summer,” said Lyle Beckwith, senior vice president of government relations for NACS. “We are maintaining vigilance in watching out for future efforts. “
The Second Circuit had nixed the settlement in the long-running multidistrict litigation in June, after concluding that the class counsel and representatives didn’t adequately stand for merchants who would accept Visa and Mastercard credit cards going forward.
But in their petition, the retailers said that there was no guarantee the objectors could get a better deal.
The class action lawsuit was originally filed in October 2005 by 19 retailers and trade associations against Visa, Mastercard and several large banks claiming that the credit card companies unlawfully conspired with major banks to artificially inflate interchange fees. In December 2013, the District Court for the Eastern District of New York approved a settlement granting both monetary relief and injunctive protection—over the objections of thousands of merchants, banks and healthcare providers.