I was first bitten by the hamburger bug in 1966 as a high school junior flipping them at my local McDonald’s to earn some summer cash. Then, the fast food franchise business was new, exciting and all about great prices for good food. Now, after more than 40 years in the industry and 30-plus years of franchise ownership, I’m sorry to say that it’s more about bank fees than French fries.
Every time a customer in one of the half-dozen restaurants I operate pays with a credit or debit card, the bank charges a hidden “swipe fee” set by Visa or Mastercard based on the size of the transaction. The swipe doesn’t become any more expensive when a customer orders more food. For decades those fees were barely high enough to register in my profit and loss calculations. In the past few years, however, swipe fees have unjustifiably exploded.
The amount I paid in swipe fees last year actually exceeded the amount I netted after fees in profit. The banks didn’t make a single burger, but they made more last year from my restaurants than I did. Sadly, I’m not alone.
Small franchise businesses like mine all over the country typically operate with average total profit margins of just 1 to 3 percent, margins out of which swipe fees are taking bigger and bigger bites all the time. In 2010, I paid 0.67 percent of my total sales in swipe fees. That bumped up to 0.82 percent in 2011 and 0.93 percent in 2012. Today, they’re running 1.06 percent. That’s an almost 60 percent jump in under four years of virtually no inflation.
And it’s not just that volume is increasing, but also that the cost per sale is increasing. This makes absolutely no sense — if volume is increasing and technology is vastly improved since 1966, shouldn’t I be seeing my costs per sale decrease?
Bad as they are, even these numbers don’t tell the full story. For many merchants, especially convenience stores and fast food restaurants, the profit margin is only 1 to 2 percent of a sale. So when one of my customers takes advantage of our 50 cent ice cream cone summer special, for example, I pay anywhere from 2 to 4 percent of the sale in swipe fees depending on the type of credit card used by the customer. This means I make no profit or even lose money by selling the customer ice cream. Small dollar sales like this of less than $5 are a quarter to a third of all sales in my restaurants.
All of these charges add up to more, much more, than an impact on any one business’s bottom line. They’re a drag on the American economy and damaging to my 200-plus employees and millions more hard-working Americans.
According to the Small Business Administration, the 600,000-plus franchised small businesses in the U.S. account for 40 percent of all retail sales and provide jobs for some 8 million people. Every dollar that we overpay in swipe fees to banks is a dollar that’s not going someplace productive. It’s not going to hold prices down for consumers, hire people, expand the hours of current employees, buy equipment, or to help our employees afford soon-to-be-mandatory health insurance premiums.
“Gouge” is the only word for what Visa and Mastercard do. Back in 2010, Congress ordered the Federal Reserve to study the debit card industry, come up with the real cost to banks of processing a card transaction, and then limit debit card swipe fees to a cost-based level. The Fed calculated that each transaction cost the banks about 4 cents but adopted a rule that allowed them to charge businesses six times that amount.
Fortunately, a federal court judge sent the Fed back to the drawing board recently to do what Congress ordered: come up with limits based on actual transaction costs. European regulators recently also looked hard at all card swipe fees and said they should be 0.2 to 0.3 percent of sales. That’s roughly one-tenth of what big U.S. banks routinely take from businesses like mine.
Lord knows, I’m no fan of big government, but I am a big believer in fair competition, transparency and the market being liberated to set prices. With Visa and Mastercard controlling 80 percent of the payment card market, only Congress and the Justice Department have the tools and the leverage to restore that equilibrium.
America’s economy and my employees need all the small business horsepower that my fellow franchisees and I can generate. We need Washington to ratchet the swipe fee governor off the engine of American small business. We all need it now.
O’Brien is currently the owner and operator of six Burger King franchises near Beaumont.