Convenience stores in the United States have paid a staggering amount of the swipe fees that the credit card industry charges for many years. But a little more than a decade ago, our industry began asking pointed questions to the credit card industry about fees that were approaching the size of a store's pretax profits.
By 2005, credit card fees surpassed the average store's pretax profits, and the situation continued to worsen. Last year, convenience stores (which sell 80 percent of all the gasoline in America) paid $11.1 billion in card fees and made $5.9 billion in pretax profits.
This remarkable increase in fees was fueled by a lack of competition and transparency. In September 2005, we determined that there were violations of antitrust laws behind this explosion in fees and filed suit as part of a class action.
Over the past seven years, congressional hearings and government studies have helped us learn much more about the card industry and how it has institutionalized practices that detract from the potential for a competitive and transparent market.
There are two major problems with the credit card swipe fee market.
First, Visa and MasterCard each separately fix the amounts of the swipe fees to be charged by their banks. Because they do this, the banks do not compete with one another on the basis of price. Instead, they charge the same schedule of fees. That is not competitive and is a central element of the explosion in the amounts of these fees.
Second, Visa and MasterCard serve as self-appointed merchant police. They severely limit merchants' ability to do business with competing networks, to accept and reject the cards they want and to price their products and interact with their customers the way they want. These policing activities obscure the size (and, in some cases, even the existence) of swipe fees and diminish the potential to bring downward pressure on the fees. These policing activities also do not protect consumers even though the card companies sometimes pretend otherwise.
As we've pressed the legal antitrust claims, we have kept those two major problems central to our thinking. As the lawyers in the class-action case came to us with ideas about potential settlements, we examined closely how a settlement would or would not address the problems.
Unfortunately, the proposed settlement of these legal claims that was unveiled on July 13 does not address the two fundamental problems in the broken credit card swipe fee market. Instead, the proposed settlement would actually cement Visa's and MasterCard's roles both as price-setters for their banks and as merchant police.
The proposal would tinker at the edges of the rules the merchant police use to protect the market against transparency and competition, but it would approve of their ability to use those rules for that same anti-competitive purpose. The rules would still provide Visa and MasterCard plenty of leeway to deploy their police forces to intimidate merchants that dare to challenge the opaque, noncompetitive system they have established.
With that in mind, we simply cannot in good conscience agree to the settlement that's been proposed in the case. It would allow Visa and MasterCard to rapidly increase swipe fees by more than the amount of money that would be paid to merchants in the settlement and would distinguish merchants' legal rights to challenge illegal behavior into the future.
Perhaps most egregiously, the proposal would not even allow merchants who disagree with the settlement to disavow it and bring their own suits to gain structural changes that would be effective.
The proposed settlement would even cut off the rights of future merchants that haven't yet come into being. We can't cut off their rights when they will get no benefits from a settlement.
We choose to say "no" to the settlement and expect that other plaintiffs in the case will take seriously their responsibilities to merchants who aren't in the case and make the best choice so that the two big problems with swipe fees have a chance to get fixed. It is the right thing to do for our members and for the 160 million customers they serve every day.
Henry Armour is president and CEO of the National Association of Convenience Stores in Alexandria, Va.