House bill could let operators negotiate lower credit card fees: growing use of charge cards raises stakes for restaurants

Nation's Restaurant News,  March 24, 2008  by Paul Frumkin

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WASHINGTON -- As credit card usage within the foodservice industry climbs, operators and foodservice association officials are hopeful that a measure introduced in Congress would give them the ability to negotiate lower transaction fees with certain credit card companies.

Sponsored by House Judiciary Committee Chairman John Conyers Jr., D-Mich., and Rep. Chris Cannon, R-Utah, the Credit Card Fair Fee Act, or H.R. 5546, was crafted to help rein in rising interchange fees. Interchange fees are determined unilaterally by credit card companies and their banks, and operators say they are left with no choices but to accept the fees as presented or to stop accepting individual cards altogether.

And with credit card usage escalating among consumers, the option to accept only cash is rapidly becoming less practical for operators. According to a recent survey of its members, the National Restaurant Association found that customers are using credit or debit cards to pay for 45 percent of all transactions at family-dining locations, 60 percent at casual-dining operations and 80 percent at fine-dining restaurants.

Even in the quick-service sector, which has been relatively slow to accept plastic, about 25 percent of all transactions are paid for by credit or debit cards.

According to the NPD Group, a market research firm based in Port Washington, N.Y., credit card usage for the year ended December 2007 increased 11 percent over the same period a year earlier.

Meanwhile, those numbers continue to grow. Frank Guidara, president and chief executive of Uno Chicago Grill, the 200-plus-unit casual-dining operator in West Roxbury, Mass., said credit card transactions accounted for about 30 percent of sales a few years ago. Today, that figure has risen to 60 percent.

Evidence also suggests that credit cards are helping to boost sales as well. James Greco, chief executive of Bruegger's Enterprises Inc., the 275-unit fast-casual operator in Burlington, Vt., said that while it is difficult to pinpoint the effect credit cards have had on the bagel chain's business since it began accepting them about four years ago, he believes they have contributed to its growth. Over that time, the chain has reported 15 consecutive quarters of same-store sales increases, he said.

John Jelinek, a longtime McDonald's franchisee in the Kansas City, Mo., area, speculated that customers paying with credit or debit cards also tend to run up higher check averages than those paying with cash. He said his three McDonald's units have been accepting plastic for about a year.

But while operators generally acknowledge the benefits of accepting credit cards, they also complain about the rising interchange fees they must pay. Interchange fees are charges used to cover the cost of processing credit card transactions and the risk taken by issuing banks. However, critics argue that the fees have been increasing steadily over the years as processing costs have been decreasing.

Currently, interchange fees average about 1.75 percent of a credit card purchase.

"Many of our members have expressed concern about the unexplained increases in fees and inability to negotiate a fairer rate with credit card companies," said John Gay, the NRA's senior vice president of government affairs and public policy.

Mallory Duncan, senior vice president and general counsel of the National Retail Federation and chairman of the Merchants Payments Coalition--of which the NRA is a member--said, "We welcome this effort to stop the price-fixing practices of the credit card industry and create a transparent market-based process."

Conyers' measure, if enacted, would allow restaurateurs and other businesses to form a broad coalition and negotiate with credit card companies from a position of strength. However, if an individual operator was dissatisfied with the results, he could opt out and negotiate on his own.

Under the bill, if the negotiating parties cannot reach an agreement after a designated amount of time, a three-judge panel would make a decision that best reflects market conditions.

In the Credit Card Fair Fee Act, Conyers underscored the growing cost of credit card fees. He said interchange fees in 2006 totaled about $36 billion, an increase of 117 percent since 2001. In 2007, fees rose to $42 billion, a hike of 17 percent over the prior year.

Conyers' bill is aimed specifically at credit card giants Visa and MasterCard, which together control more than 80 percent of the market, Duncan said. American Express and Discover control less than 20 percent each, thus are not governed under this legislation.

"Merchants are forced to deal within this system because it is simply not an option to refuse to accept Visa or MasterCard from their customers," Conyers told members of Congress.

MasterCard, in a statement, said it "believes there is no need for government intervention, and that it would be inappropriate for the U.S. government to set prices and negotiate the terms of contracts for private commercial entities."