Fill-up with cash; charging on your credit card may cost ya!

At some gas stations, you will pay less for that fill-up if you pay cash. (© McCaig)
At some gas stations, you will pay less for that fill-up if you pay cash. (© McCaig)

Jun. 23, 2008

By Brian Burnsed 
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Starting in July, motorists who drive into many of the 180 Flash Foods service stations in Georgia and Florida might be caught off guard. Instead of seeing signs displaying the price of regular, midgrade, and premium fuels, they will notice only two prices: "unleaded credit" and "unleaded cash." The cash price will be 6¢ cheaper than the credit option.

The difference speaks to a relatively obscure aspect of credit finance called interchange fees. Those are the fees (usually slightly under 2% of a purchase) that the merchant must pay the credit-card issuer.

As gas prices skyrocketed, the money paid to card issuers ballooned as well. Today, the fees amount to 9¢ to 12¢ a gallon. That, coupled with a sharp rise in the number of people who use cards at convenient pay-at-the-pump machines, squeezed Flash Foods' profit margins. Those margins have fallen to an estimated 4¢ to 7¢ per gallon. To put the increase in perspective, consider that in 2004 Flash Foods paid $4 million in credit-card fees, but this year it estimates it will pay $14 million.

Ridiculous Fees

"It's getting ridiculous," says Jenny Bullard, chief information officer of Flash Foods' parent, Jones Co., in Waycross, Ga. The cash discount that the chain is offering won't completely offset the cost of interchange fees, she says, "but something is better than nothing."

Gas retailers say that $136-a-barrel oil isn't the only factor driving up costs at the pump. Card companies have long charged interchange fees, but as credit-card use soars, the total cost of interchange fees has risen drastically. About 60% of gas purchases were made with a card last year. While the National Association of Convenience Stores doesn't have comparable earlier data for gas purchases, the share of all convenience store purchases made with a card has risen from 32% in 2003 to 56% today.

Most consumers don't even know the interchange fees exist. Yet according to the National Retail Federation (NRF), the average dollar amount that an American now pays in such fees has tripled since 2001. The total amount of credit-card fees that convenience stores paid in 2007 was $7.6 billion, according to the NACS. Their total profits in that year were $3.4 billion, down from $5.9 billion two years earlier.

Louder Complaints

Merchants have long howled about the card fees, but today's rapid price increases are cranking up the volume of their complaints and forcing store owners to adjust. "Outrageous, everything about the system is outrageous," says Jeff Lenard, spokesman for the NACS. "American consumers are the cash cow."

Offering cash-only gas service is one such adjustment. It recognizes the shift from cash to credit business, and that many drivers will pay more for the convenience of not having to pay at a window. Besides, with gas prices shooting past $4 a gallon, many drivers don't have $60 or $80 cash in their pocket to pay for a fill-up.

The burden on merchants is even higher when customers pay with premium credit cards, which offer various rewards in exchange for higher fees. Visa's signature cards, for instance, have a 0.27% higher interchange fee than their average charge.

There is a bipartisan push in both the House and Senate to force credit-card companies to negotiate their interchange fees with merchants. Last July, Mallory Duncan, senior vice-president and general counsel of the NRF, testified before Congress in support of a bill. "There is a lack of transparency and a lack of negotiation," he says. Visa and MasterCard "have never wanted to negotiate, so there has to be a method to induce it."

For their part, Visa and MasterCard maintain that the interchange fees serve an important purpose. The card companies say they don't draw revenue directly from the fees. But, in fact, while the banks that issue the cards collect the interchange fee, they later pay Visa and MasterCard a processing fee.

Last year, MasterCard capped interchange fees at $50 for gas purchases. Visa, meanwhile, points the finger at oil companies, which it claims negotiate separate transaction fees for gas-station franchisees.

Credit-Card Revolution?

"Like all Americans, the people at Visa feel the sting of high gas prices and are sympathetic to small, independent station owners who are working hard to earn a profit," Visa said in a statement. "However, the business challenges these owners face stem from within their own industry, where wholesale prices are often set by the large oil companies."

The card industry argues as well that the fees make possible crucial services. "Interchange fees are in place so that merchants can have access to customers, fraud protection, and safe, convenient transactions," says Peter Madigan, executive director of the Electronic Payments Coalition, an advocacy group for credit-card companies and issuers.

Meanwhile, it's the gas stations-and their customers-who are feeling the pinch. Shipley Group, the York (Pa.) owner of 23 Tom's convenience stores throughout the state, recently signed a deal with Revolution Money to accept its RevolutionCard, which carries a lower, 0.5% fee per transaction. Shipley hasn't seen any changes in its bottom line yet, because not enough people are using the RevolutionCard. But Bob Astor, Shipley's wholesale fuels business manager, is hoping the card catches on.

"It helps us save money, so that we can pass that money back to consumers," Astor says.

Brian Burnsed is an intern for BusinessWeek based in Atlanta.