It's no secret that the cost of accepting credit cards is reaching dire new heights. According to the most recent National Association of Convenience Stores (NACS) State of the Industry (SOI) report, retailers were burned for an estimated $6.6 billion dollars in credit card processing fees—an increase of over $1 billion from the prior year.

Accepting credit cards has become a necessary evil. Foregoing a credit card acceptance program to avoid lofty costs is not an option for any retailer expecting to drive fuel volume and stay competitive. Rising gas prices, hair-thin margins and other consequences are making the growing costs of accepting credit cards seem insurmountable, but there is relief to be found. The following are just a few options some retailers are taking.

Keeping it Simple
While data about interchange fees isn't always clearly presented to retailers by the issuing credit card companies, there are many other fees associated with credit card processing costs that are much more visible and manageable. According to Tom Randolph of Tom Randolph Consulting, a firm that specializes in interchange fees, there are options to limit these fees.

"One of the ways to reduce interchange is to make sure that transactions are qualified for the best rates from Visa and MasterCard," said Randolph. An option often overlooked by retailers is the ability to work with their processor to find out just how many of their transactions are eligible for the best rates from the issuing company. The retailer should request a monthly or quarterly statement that shows the percentage of transactions qualifying for the best rates. After that, storeowners should focus on those being downgraded to find a consistency and develop a plan to get as many of those downgraded transactions to qualify for the best interchange transactions.

"Any mom-and-pop store that is doing transactions at the point-of-sale (POS) through Visa and MasterCard can be penalized for not providing the qualification requirements for a particular sale," said Randolph, which leads to additional charges.

Most retailers take for granted the amount of money lost through additional processing fees that come from seemingly trivial tasks, such as entering a card number manually when a card reader is malfunctioning. It may seem simple, but tasks like machine check ups and encouraging customers to pay inside instead of at the pump could reduce costs and add to the bottom line.

"No matter how many transactions a store goes through, if just 1% are not getting the best processing fees available, that could amount to thousands of dollars taken from the stores' total annual profits," said Randolph.

Steps like this may seem too simple to be true, but Randolph noted many of his clients have overlooked this easy option to offset some overall credit card costs.

"There are quite a few people that have never thought to take this approach," he said. "One of the first things I ask is how often they clean their credit card readers. A lot of them have never done it before and they find that right after they do, they have a dramatic improvement in their downgrades and savings."

Avoiding the Fees
While experts, retailers and lobbyists, led by the Merchant's Payment Coalition (www.unfaircreditcardfees.com), of which NACS is a founding member, try to fight the costs of interchange and credit card fees head-on, individual chains are also fighting the good fight. La Crosse, Wis.-based Kwik Trip Inc., for example, is attempting to dodge excessive credit card fees altogether by developing a proprietary credit card program, the Kwik Card.

The card program was developed, deployed and is completely managed by Kwik Trip without any third party involvement.

Programs like the Kwik Card save stores thousands of dollars each year. The reason is simple—if a customer isn't paying with a Visa or MasterCard, then Kwik Trip doesn't owe their card issuers money.

The company began issuing the cards almost 15 years ago and since then has handled every aspect of the program, from the application phase to the collection process. While Kwik Trip still accepts other major payment cards to stay competitive, promoting the Kwik Card still serves as a potent way to avoid and offset credit card fees.

"We've done the math and compared what it costs us to issue and run our card service verses what it costs us in fees accepting from other major credit cards and found that it costs us about half as much to process our cards then it does to process any other types," said Jeff Wrobel, controller for Kwik Trip.

New Technologies, New Solutions
With new technologies constantly implemented at the store level, retailers are coming up with innovative ways to not only avoid costly credit card fees, but use the situation as an opportunity to cultivate a loyalty program for new and existing customers. One method of doing this is using Automated Clearing House (ACH) networks and combining them with a loyalty program to create a secure debit card program.

ACH networks have been used for years to process various forms of electronic payments, such as e-checks that someone will use through their bank to pay various bills online. Since the networks provide a link

to individual checking accounts and offer low processing costs—almost 50 cents less than it costs to process the average c-store transaction using a Visa or MasterCard— c-store retailers have been searching for a way to take advantage of the technology to offset credit card transactions, but were continuously rebuffed by the difficulty of convincing customers of the benefit of such a system. That's when it was decided to combine ACH with a system that already was benefiting customers— store loyalty programs.

"The ACH debit card is the newest and strongest entrant into the alternative method of payment world," said Pat Lewis, partner for Twin Falls, Idaho-based Oasis Stop N Go stores and CEO of KickBack Rewards Systems. Lewis is attaching an ACH Debit program to his chain's popular KickBack rewards program.

To increase consumer adoption, Lewis has filed a patent for a new process dubbed, "Instant Acquisition." "Rewards alone have not been enough to gain widespread acceptance," said Lewis. "It is also necessary to make the sign up process quick, easy, and convenient."

KickBack members simply present their driver's license and a personal check, which is read electronically and married to their loyalty account. The customer then picks a multi-digit UIN, or "Unique Identification Number" (not to be confused with a PIN), for security purposes. From that point on, their old loyalty card doubles as a debit card, offering "potentially greater" rewards than they were already reaping each time they pay with the card— no more fumbling with multiple cards at the counter; no more paperwork to fill out for enrollment.

Lewis' ACH Debit concept, introduced last month at the 2007 NACSTech show, benefits both retailers and customers. Retailers save big on processing fees. Customers are offered a rewards-based alternative to their credit cards.

"The natural home for ACH Debit is by piggybacking it on a loyalty platform. It affords the user more convenience since not only do they already have the card, but because it's quick, convenient and secure," said Lewis. "If you can transfer some of the savings gained from ACH Debit transactions and give that to loyalty customers, those customers will be open using ACH Debits."

Changing the Big Picture
Retailers have the options to combat costly fees from a variety of fronts within their stores. However, looking at costs similar to interchange and credit card fees may open some other profitability options as well.

"A lot of the frustration that retailers are experiencing over interchange fees comes from two concerns," said David Bishop of Willard Bishop, a retail consulting firm. "First, they have very little, if any, control over motor fuel costs, a primary driver of the higher credit card expenses. And secondly, retailers believe the fee is unfair as their expenses are increasing at an alarming rate even though gallons sold are relatively flat year over year."

What may be a surprise to retailers, moist smokeless tobacco (MST) uses a similar method, albeit for taxing purposes, as used by banks and issuing card companies that is at the center of the current interchange debate. In both cases, changing the current structure can improve overall profitability.

"Even though no other product category uses this taxing method, most states tax MST based on the value of the product," said Bishop. "What we've learned is that this type of tax is also likely restricting a retailer's profit potential. For instance, recent analysis revealed that states which converted from an ad valorem-or ‘at value'—tax to a weight-based tax experienced stronger sales volume 3.3% points higher versus states with an ad valorem tax rate."

The issues impacting motor fuel and MST are different, but retailers do face a common threat with each, relating to an unfair method of charging a fee or taxing a product based on its value.

"As the industry works hard to lobby for changes in how credit fees are assessed, they should be also aware of the opportunity to gain near-term relief by also supporting weight-based taxation in MST," recommended Bishop. "In both situations, retailers have a right to improve the business conditions impacting their ability to earn a profit."