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Gas station owners often complain that as petroleum prices climb, the margins are squeezed ever tighter between their profits from selling "black gold" and what they pay to accept gold cards. And in the United States, heavy consumer card use and unregulated interchange rates are generating debates more volatile than gasoline.
Two of the world's largest card networks have tweaked their acceptance rules over the past couple of years to ease some of the financial pain for U.S. fuel retailers and drivers alike.
Petroleum-merchant groups welcomed the changes but still contend interchange and charge-backs cost too much. They want lawmakers to enact interchange-control legislation, and some are offering incentives for customers to pay with emerging alternatives to the major card brands.
In April, Visa Inc. lowered the interchange on automated fuel-dispenser transactions made with its high-end rewards cards
Visa kept its check card interchange rate the same for fuel purchases at 0.7% plus 17 cents, and it maintained the rate for its standard consumer credit cards at 1.5% plus 5 cents at fuel dispensers.
MasterCard's interchange rates for transactions cardholders initiate at automated fuel dispensers remained the same this year. The cheapest rate, for Maestro PIN-debit purchases, is 0.48% of the sale plus 8 cents, capped at 28 cents per transaction. At the high end, the MasterCard World Elite consumer credit card rate is 2% of the fuel-purchase amount, capped at 95 cents.
In 2006, MasterCard capped the fee on consumer card purchases that exceed $50 in recognition of "dealers' concerns about fluctuating gasoline prices," according to MasterCard spokesperson Sharon Gamsin.
But even with most rates remaining the same, the percentage-based nature of card interchange means acceptance costs rise with fuel prices, complain officials of the National Association of Convenience Stores, the majority of whose members' stores also operate gas stations. And whenever gas prices spike, more consumers pay for fuel with credit cards to delay the financial pain of filling up, they say.
Last month, the association released estimates suggesting that payment card fees cost convenience stores $7.6 billion in 2007, up 15.2% from $6.6 billion in 2006. Conversely, the industry's pretax profit was down 29%, to $3.4 billion from $4.8 billion year over year.
"When gasoline prices increased from $2.56 to $3.09, credit card fees increased from an average of 6.4 cents to 7.7 cents per gallon," John Eichenberger, the organization's vice president of government relations, said during an April 3 U.S. Senate Committee on Energy and Natural Resources hearing. "While this increase may not seem significant to the retailer, this automatically reduces potential profitability. Credit card companies and their banks now make more per gallon sold than does the retailer."
Margin Impact
Rising card-acceptance costs have become more painful to William Shipley III, president of Shipley Energy in York, Pa., as fuel prices have increased at the company's 23 Tom's Convenience Stores in central Pennsylvania.
"We don't think in percentages when we price our products," Shipley says. "The credit card percentages are eating into our margins quicker than we can raise our prices."
In March, Shipley became one of the first merchants to offer a cobranded Revolution card to his customers. St. Petersburg, Fla.-based Revolution Money Inc. launched the cobranded, PIN-based credit card in September.
Revolution Money charges merchants 0.5% of the sale for Revolution card purchases. So far, Revolution has convinced Citibank and Brookings, S.D.-based First Bank and Trust to issue Revolution cards and Fifth Third Bank Processing Solutions to acquire the transactions for merchants, says Duncan Evans, Revolution Money senior vice president and general manager of retail business.
"Our model is to take the interchange component and shift it back to the merchant," he says. "We partner with the merchant to create a marketing program that meets their needs."
When Tom's Convenience Store customers use Revolution cards at fuel pumps, the price per gallon rolls back on the pump by 10 cents, a discount Shipley Energy plans to fund through the end of 2008.
At Cards&Payments press time, Shipley Energy had distributed fewer than 1,000 cards. It had just started promoting the card on the company's Web site and with signs at fuel pumps and inside stores. Shipley says he is looking forward to diverting more fill-ups from more-expensive card brands.
But alternative card payments will not take market share away from the big card-network brands any time soon, so interchange and charge-backs remain a contentious issue.
The National Association of Convenience Stores praised Visa for raising its charge-back protection in April on transactions initiated at automated fuel pumps from $50 to the $75 charge-back protection MasterCard has offered since 2005. In April 2007, MasterCard raised charge-back protection on corporate, fleet and purchasing cards to $150.
The major card brands require their issuing banks to guarantee transactions at automated fuel pumps up to certain limits, as long as pump terminals first check account status before fueling by initiating temporary $1 test transactions. Most card brands set that limit at $75 or higher, which, for now, still is higher than most consumer fill-ups.
But fill-ups of larger vehicles began breaching Visa's $50 limit a couple years ago. Some even started exceeding MasterCard's $75 limit on consumer cards. So petroleum merchants that had not set pumps to shut off automatically when customers reached the price limits for card transactions started seeing more charge-backs.
Most issuers honored purchases that exceeded their transaction guarantees as long as they were legitimate and sufficient funds were in accounts. Some charged back only the amount above the guarantee on troublesome transactions.
But enough issuers charged back entire transactions that petroleum merchants began to cry foul.
In April 2007, Visa adopted a rule that issuers could charge back only the amount above $50 for consumer transactions, not the entire amount, which placated merchants somewhat.
MasterCard also reminded its issuers last spring that they could only charge back the amount above its protection guarantee of $75 or $150, a rule that had been on the books for years.
"It's a step in the right direction, and it's something retailers had been pushing for," Jeff Lenard, the convenience-store group's spokesperson, says of the charge-back rules changes and clarifications. "It doesn't mean that there's not more work to be done."
Raising charge-off protection also means fewer pumps shutting off when those limits are reached. That means fewer annoyed customers with expensive-to-fill vehicles, and it will lead to fewer headaches for acquirers and merchants, says Drago Dzerve, senior product manager at RBS Lynk who oversees technical aspects of the processor's services for fuel merchants.
Even when pumps are set to shut off at, say, $50, the speed of fueling often causes enough gas to pass through the hose after shut-off to push the transaction beyond that limit, Dzerve says. "Pump overrun is a situation in which you tell the pump to turn off at $50, and the pump runs to $50.03," he explains.
In those cases, point-of-sale software often submits the transaction as $50, and the merchant writes off the 3 cents as a drive-off theft, Dzerve says.
RBS Lynk and other merchant processors usually can use Internet connections to remotely update their fuel customers' pumps and store-transaction software to accommodate most of the new card network rules, such as charge-back protection limits, he says.
Partial Authorization
But rules changes requiring partial authorization of credit and debit cards may prove more complicated for processors serving fuel merchants.
Partial authorization will enable issuers to return approval to pump terminals for exact funds available in cardholder debit or prepaid accounts.
In October, Visa will require automated fuel pumps to perform partial authorizations of all card transactions. Acquirers will pay Visa an extra 1 cent per transaction that does not use partial authorization.
MasterCard will begin requiring fuel merchants to partially authorize debit and prepaid cards in May 2009.
Today, most pumps do not perform partial authorizations. So when signature-debit or prepaid card holders do not have funds in their accounts to cover charge-back protection limits, issuers decline the transactions, and the cardholders have to pay inside the store.
Dzerve says reconfiguring pump-terminal software is not difficult. Software will trick the pump into treating the partial authorization as if it were a credit card instead of debit or prepaid card transaction.
The challenge is that many pumps cannot be tweaked remotely, so processors must send personnel to make the changes manually. "That can mean anywhere from $500 to $1,000 for a site visit," Dzerve says. "Some of our clients have hundreds of sites, and we'll need to send someone to each of those sites."
RBS Lynk is on track to enable partial authorization of prepaid and debit cards at the pumps of all of its 8,000 merchant locations across the U.S. in time for the deadline, Dzerve says.
Merchants, payment vendors and card networks may find cheaper and easier ways to pay for gas. Gas, though, will only get more expensive. CP
