Running on Fumes

  It is not fun to sell gas nowadays. Despite increasing demand for decreasing supply, many consumers blame even single-store gas-station owners for setting fuel prices unreasonably high. Petroleum merchants, though, say they wince with each gas-price increase just as consumers do.
  As fuel prices rise, profit margins grow slimmer for merchants trying to keep their prices as low as those of competitors. But interchange costs still increase, a problem exacerbated when more consumers delay sticker shock by paying for fuel purchases with credit cards instead of cash, the merchants say.
  The National Association of Convenience Stores claims that its 4,000 members sell about 75% of the gasoline in the United States. Last year, the association's members' costs related to accepting and processing credit and debit cards reached $5.4 billion, up 42% from $3.8 billion in 2004. The association says the increase primarily was caused by more credit card use and higher gasoline prices, which the U.S. Energy Information Administration says averaged $2.92 per gallon on May 1, or 68.4 cents higher than a year earlier.
  Kal Abhari, who owns the Arnold Express Mart, a Phillips 66 station in Arnold, Mo., says last July, when gasoline first hit $3 per gallon, his monthly credit card costs exceeded $5,000. Before gas prices started rising dramatically, he paid $2,800 to $3,500 per month for credit card acceptance.
  "In this business, for a store my size, $5,000 is significant," Abhari says. "It could mean the difference between me losing money or making money."
  Barnhart, Mo.-based Home Service Oil Co. operates 13 gas stations and rents property, distributes petroleum, and handles payment card services and settlement for 40 retailers in the area, including for Abhari. Petroleum suppliers Citgo and Conoco Phillips oversee card processing for Home Service Oil and their other distributors.
  David E. Manglesdorf, Home Service Oil president, says Citgo charges 1.6% of the purchase price plus 15 cents per Visa or MasterCard credit transaction; Conoco Phillips charges 2% plus 10 cents. "Our margin for the month of April, which is the best month we've had in five months, was 9 cents a gallon," he says. "3.7 cents of that went to the credit card people, so 40% of my total gross margin went to credit [fees]."
  Faced with grumbling from their petroleum merchants, card acquirers and processors Chase Paymentech and First Data Merchant Services say their representatives espouse to merchants the benefits of allowing customers to pay however they please. First Data offers a program to the convenience-store association's members that charges card-processing fees about 5% to 10% lower than the norm, thanks to efficiencies of aggregating transactions among the association's members. Chase Paymentech offers a similar program to Petroleum Marketers Association of America members.
  Jeff Raimondi, Chase Paymentech petroleum industry director, says the company's telephone and field representatives help merchants lower interchange costs by pointing out common mistakes and equipment problems that lead to chargebacks and higher rates. "We try to show them which locations are costing them the most and drill into why," he says. "Sometimes you have tangible things you can do to help them reduce their costs."
  For example, merchants can fix or upgrade terminal communication systems that often fail and require more-expensive voice-authorization transactions. And they can clean dirty magnetic stripe readers that can cause inadequate captures of card data, Raimondi says.
  He says acquirer customer-service representatives and field agents also can explain additional security measures, such as requiring cardholders to enter their ZIP codes during transactions, that also help lower interchange costs.
  Barry McCarthy, First Data Commercial Services senior vice president of product and business development, says the company sympathizes with merchants facing higher card costs. But he says First Data does not set interchange or determine what rules the associations make public.
  "First Data aggressively works with merchants to help them solve the problem at hand," he says.
  One new problem at hand is that many fill-ups now exceed $50, which is beyond what Visa requires its member card issuers to guarantee for pay-at-pump credit and signature debit purchases. MasterCard's guarantee requirement is $75, which is still beyond the average fill-up.
  THE $50 QUESTION
  Many merchants, taught not to set minimum or maximum purchase limits, did not know of the guarantee ceiling for those pump transactions until they started seeing chargebacks and found they were not paid for some Visa transactions beyond $50 that cardholders later challenged.
  MasterCard lists its limit in its rules summary available to merchants. Visa does not. "MasterCard is mostly viewed as a good actor here," says Gray Taylor, the convenience-store association's vice president of research. "Their limits are higher, and they allow chargeback of only that amount over the $75, versus Visa, who charges back to penny one."
  A Visa spokesperson says that almost all transactions beyond $50 clear without a snag, adding that while many issuers cover charged-back transactions beyond $50 it is important for them to limit exposure. "When [merchants] elect to dispense product beyond $50, they're assuming risk," she says.
  Some stores have set their pumps to stop fueling at $50 for Visa and $75 for MasterCard transactions, including 7-Eleven Stores, an Oklahoma City chain of 104 convenience stores and gas stations. (Not affiliated with 7-Eleven Inc. but bought naming rights years ago.)
  President Jim Brown says the chain started the shut-offs in March after noticing chargebacks for Visa transactions beyond $50. "Our decision was based more on principle than on the volume of chargebacks," he says. "The card issuers are only absorbing a certain amount of risk. If they're going to limit their risk, so are we."
  Cardholders can initiate second transactions to continue fueling, but the inconvenience annoys many customers.
  Merchants love to see customers pay with proprietary fuel payment cards, which cost issuing merchants about the same as cash to accept. But far fewer customers pay with those than with their bank cards, Manglesdorf says.
  ACH ALTERNATIVES
  Meanwhile, some petroleum merchants are looking to alternative payments. Abhari, for example, installed a BioPay biometric system last July and now offers 4 cents off per gallon for its use. San Francisco-based Pay By Touch acquired BioPay earlier this year. ("Biometrics: Getting in Touch with a Growing Trend," February)
  Abhari lets customers link their biometric wallets only to electronic debits of their checking accounts via the automated clearinghouse system. That costs him 2 cents per transaction up to the first $8 and 20 cents per transaction between $8 and $50, he says.
  So far, only 5% to 7% of his transactions are biometric, while 45% to 55% are done with credit and debit cards. "I would love to switch all my credit card customers to BioPay," Abhari says.
  PUMP HURDLES
  Some customers fear privacy loss through biometrics, but most just want to pay at the pump, which biometrics is not yet supporting. Abhari believes that option would migrate another 10% to 15% of his store transactions to biometrics.
  Mike Vickery, Pay By Touch vice president of global alliances and distribution, says Pay By Touch wants to allow pump payments. "We are in the process of working on a solution with a couple of partners," he says, expressing hope to offer the option next year.
  But the company first must reach agreements with a number of entities, Vickery says. A federal regulatory body must approve any new electrical device as safe to add to a flammable environment, and pump manufacturers must agree to integrate Pay By Touch into their equipment.
  In November, Chico, Calif.-based Debitman Card Inc. announced that some 400 Chase Paymentech petroleum merchant locations were in initial testing phases to accept Debitman cards. The PIN-debit cards are issued and cobranded by merchants, who earn 6 cents back from the 15 cents per transaction Debitman assesses every time the cards are used at their own stores and 9 cents back when they are used at other merchant locations.
  The transactions debit consumers' checking accounts and ultimately settle over the ACH system. The company declined to name any specific petroleum merchants involved in the pilot.
  Debitman's pitch to petroleum merchants includes the fact that point-of-sale terminals on pumps do not have to be retrofitted to accept its cards. One of the merchants testing Debitman acceptance for fuel purchases is offering up to 3 cents off per gallon for its use, says R. Scott Hatfield, Debitman vice president of business development. "Debitman clearly sees an opportunity here to provide our product and services for gas-minimart chains," he says.
  LICENSE TO SAVE
  A new ACH option is Fastlane Payment Network, a division of Boulder, Colo.-based Combined Payments Inc. whose system allows enrolled consumers to use their driver's licenses to support debit payments and loyalty programs at participating merchants. The company does not have petroleum merchant customers yet. But it has developed software to allow consumers to use their cards to pay at pumps by inserting their drivers' licenses just as they would credit or debit cards. The company also says it will guarantee payment on the transactions.
  Harry Clark, Fastlane national sales manager, would not disclose the company's range of transaction fees, but he says "all of our models are considerably lower than credit and debit transactions."
  Whatever changes ultimately lower payment-acceptance costs, they cannot come soon enough for many petroleum merchants. "We've had four of the worst months we've ever had," Manglesdorf says. "That's a combination of bad margins and extremely high credit card fees. It's gotta change."
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