Cost of Credit
As the price of gasoline continues to climb, gasoline retailers are wincing as their gross profits are swiped away by a growing number of customers using plastic to pay for their motor fuel purchases. While high per-gallon retails have pushed up the industry's gasoline sales figures, c-store operators are paying substantially more in credit and debit merchant fees even as many experience stagnant or declining gasoline volumes.
With fee structures based both on per-transaction charges and percentages of the total transaction, credit- and debit-card fees equaled approximately 80 percent of an average convenience store's profits last year, according to the National Association of Convenience Stores (NACS). Credit and debit fees jumped 20.8 percent in 2003 and equaled 5.8 percent of gross profits, or $24,265 for the average convenience store.
Comparing the first half of this year to the first half of 2003, interchange fees are up 18 percent, added Teri Richman, NACS's senior vice president of public affairs and research. "That is because the average price of a gallon of gasoline at midyear was $1.85; for all of last year, it was $1.55," she said. "Last year, the industry paid $3.2 billion in interchange fees. If I had to make an educated guess, I'd guess interchange fees could be higher than the industry's pretax profit for 2004."
The credit/debit fee burden is a huge issue, said Bill Douglass, NACS chairman and CEO of Douglass Distributing Co., a fuel wholesaler and retailer based in Sherman, Texas, which operates 10 c-stores and 150 dealer sites. "This is a sad admission, but we paid more in credit-card fees than we netted last year. I have a friend with 115 stores and he told me recently his fees vastly exceeded his net. For some retailers, these fees are the single biggest cost outside of labor."
The Society of Independent Gasoline Marketers of America echoed the complaint. One-third of its members' pretax profits are eaten up by credit/debit fees.
"Without these fees, companies' profits would be 50 percent higher," said Thomas Osborne, director of communications for the Reston, Va.-based association.
While retailers struggle with the charges, the use of plastic for gasoline purchases continues to grow. The number of gasoline transactions made with American Express cards is up 10 percent year to date.
Through April 30, MasterCard credit-card transactions in the petroleum sector also were up 10 percent, while purchase volume grew 16 percent. As a comparison, MasterCard's inside-the-station transactions increased 7 percent, with purchase volume up another 7 percent, stated Anthony Gracia, vice president, retail and small-ticket markets, North America acceptance, for MasterCard International.
While the price of gasoline may be pushing the use of plastic at the pump, the increase in the use of Visa credit and debit cards in the c-store channel closely parallels growing use in other retail channels, added Bill Sheedy, executive vice president, interchange strategy fees, Visa USA.
Debit-card usage, in particular, has taken off, pushed primarily by consumers' desire for more convenience. Credit-card purchases are a larger market in terms of dollars put on the cards, but more transactions are made with Visa debit cards. (Last year in the United States, debit represented 36 percent of Visa USA's sales volume and 59 percent of total transactions.)
Because debit-card fees, though increasing, are usually a bit lower than credit-card fees (though some retailers report they are virtually the same now) and are less driven by the amount of the transaction, c-store operators could benefit by encouraging the use of debit cards — but few are.
"We need to work on this in our industry," said Holly Tuminello, vice president, Petroleum Marketers Association of America, adding that operators may want to consider configuring point-of-sale (POS) equipment to more clearly offer the option of debit or credit use when presented with plastic and to ask for a PIN number for debit transactions.
Part of the settlement of the much-heralded lawsuit brought by Wal-Mart Inc. against credit-card companies requires MasterCard and Visa to develop a way for retailers to better identify and process a card as either credit or debit, reducing the number of debit transactions processed as higher-fee credit-card transactions.
"But retailers must specifically request Visa and MasterCard to do this by writing a letter to the attorneys handling the settlement and pressing this issue," Tuminello said.
There is a place on the second track of a card's mag stripe where digits identifying a card as debit or credit could be placed, added Richman, but it's not happening yet. Plus, some banks are discouraging consumers to use debit by charging fees for PIN-based debit purchases.
Fee Futility?
The largest component of the industry's credit/debit fee payment is interchange fees, making up about two-thirds of the total cost.
"There are many costs loaded into the interchange rate that don't accrue any benefit to retailers, like marketing costs," Richman charged.
Acquiring fees, which include payments for authorization, data capture and settlement, are another component that has increased. The portion of the fee structure most likely to be favorably negotiated by retailers, processing fees, is a relatively small part of the total. While many c-store operators are able to negotiate lower fees with their third-party processors, such as First Data Corp. or Paymentech LLP, few find any give in the interchange and other fees charged by American Express, Visa or MasterCard.
To illustrate: Visa and MasterCard transactions comprise approximately 75 percent of all gas station and c-store credit-card transactions — bringing in $2.8 billion annually in flat fees and percentage-based fees that rise with the price per gallon of gasoline, while their costs stay the same. Processors charge flat fees, ranging from 6 cents to 15 cents per transaction, or about $500 million per year from the gas/c-store industry, according to PMAA's Tuminello.
The association has been working with Paymentech to offer unbranded members lower processing fees. "Plus, we'd like to offer programs to motivate customers to use alternative payment options — like loyalty cards and prepaid cards — that don't have higher interchange fees attached to them," Tuminello said.
NACS, partnering with First Data Corp., introduced a program to reduce card-processing fees for c-store/petroleum operators that allows retailers to choose between a card processor that charges a percentage of the sale versus one that charges cents per transactions.
Branded marketers, however, are tied to their major oil company parents, who typically handle electronic card processing. In response to its marketers' recent profit squeeze, Shell Oil Products US recently modified the transaction fees charged to Shell-branded retailers and wholesalers to process credit and debit card purchases. By switching its percentage-only fee structure to a hybrid rate, overall bankcard fees will drop approximately 10 cents on a $25 purchase. For MasterCard and Visa transactions, which have the highest usage rates, the fee was moved from 2.8 percent to 2 percent, plus 10 cents.
Based on average cash-versus-credit card transaction ratios for the Shell network, a retailer with a site volume of 1.8 million gallons per year may save an estimated $2,000 annually under the new fee structure. Wholesalers with an average yearly volume of 20 million gallons may see processing fees drop $23,000 annually.
Shell-branded retailers and wholesalers will continue to enjoy no transaction fees on Shell-branded consumer credit cards and gift cards. Shell MasterCard from Citi Cards will continue to offer cardholders a 5-percent gasoline rebate, while the Shell fleet card offers cardholders a rebate of up to 3 percent. Also, retailers and wholesalers benefit from a 3-percent rebate on the Shell gift card, upon activation at retail sites.
What's The Other Guy Paying?
For many c-store/gas operators, retail channel parity is a primary issue. Other types of retailers, such as grocery stores and mass merchants, typically pay lower fees inside the store, as card issuers attempt to build business in other channels and justify higher petroleum-sector fees by pointing to a greater risk of fraud and lower transaction sums.
"Plus, c-stores are disproportionately affected because of the volatility of gasoline prices and cigarette prices," Richman said.
Many gasoline retailers believe supermarkets and mass merchants pay lower fees even for gas transactions at their pay-at-the pump facilities. Not so, counter the card companies.
"It is a common misperception that other retailer channels with lower fee structures are paying these lower rates on their pay-at-the-pump transactions," Sheedy said. "We have operating rules and fees that allow us to classify those transactions under a unique fuel merchant category — which applies to c-stores, grocery stores, everyone.
"Regarding differences in retail fees among channels, there are a whole host of reasons behind the fees charged by credit card companies — competition, cost to support and route the transactions, differences in fraud-related costs," added Sheedy, who noted VISA sets interchange and other fees, but member banks ultimately set prices for retailers accepting VISA cards. (PMAA's Tuminello said she has not seen evidence of fraud being higher at pay-at-the-pump sites now.)
"We're not crazy enough to think there will be one fee structure for everyone, but we want a level playing field with other retailers and the way we are trying to define 'level' is finding out how much these transactions actually cost [the card companies] and if we can peel back the layers, we might get there," Richman said.
In early 2004, after listening to the frustrations of gasoline marketers, Visa made changes in its debit fees, increasing the per-item fees, while lowering the percentage fees, Sheedy said. "I'd like to look for more opportunities with other Visa products."
Making It Easier
Over the last few months, MasterCard unveiled new programs aimed at improving cost efficiencies for petroleum merchants and helping them expand pay-at-the-pump technology. These include allowing a $1 authorization prior to dispensing gasoline, giving charge-back protection up to $50, eliminating the need for a cardholder's signature at the pump and allowing gas retailers to prompt for zip code and use its address verification system to minimize fraud.
For its part, American Express encourages retailers to process its transactions directly through the card company, at no charge, instead of routing them through a processor, noted Sumathi Laterza, director of industry development, American Express Co.
"Most of the largest retailers are connecting with us directly," Laterza said. "We believe that is a best practice and may be something to look at, especially if they are margin-squeezed." Connecting directly with American Express requires some reprogramming of the POS.
American Express also has worked to reduce fraud through initiatives such as zip code verification. "C-store operators' rates are based on our rate table, but a reduction in fraud would help reduce their overall costs," she said.
Still, when judging their fee structures, the major card companies believe many petroleum marketers do not recognize the true value of accepting their cards.
"Typically, American Express card members are buying more premium gasoline, filling their tanks all the way up and going inside more, all adding to the average ticket," Laterza said.
The view was echoed by the folks at MasterCard. "Card acceptance can be a powerful revenue driver leading to increased customer traffic and higher average tickets," said Gracia. "Plus co-branded cards, such as those unveiled by Tesoro and Marathon, or longer-standing programs from ConocoPhillips, ExxonMobil and Shell, and participation in card usage promotions often translate into improved customer retention and sustained repeat business."
Fueled by card use, expansion of pay at the pump has enabled gas stations to reduce overhead and increase sales while reducing the number of personnel required to run the site, Gracia continued. "As staff resources are freed up [many retailers are] creating additional revenue streams and offering more value to their customers. In many respects, embracing card payments has been a boon to business."
Self-serve card payments also are leading to advancements in technology. "Contact-less payments, much like acceptance of credit and debit cards, may very well change the way consumers pay for entire categories of purchases that historically were made with cash," Gracia said.
But many retailers already place a value on plastic, Douglass countered. "We aren't ascribing a value on he labor-saving side, but on customer attraction and the ability for customers to spend more."
Added Richman: "These companies say you'll get a sales lift from people using credit cards — but we are not seeing any lift, mostly because people don't have extra disposable income."
Douglass summed up the exasperation of many c-store operators: "The card companies are a legal monopoly, but our lawyers say we can't win an antitrust suit. These companies aren't working with the industry. If you were part of a monopoly, would you care about us? But that has to change — they are killing the golden goose."
NACS is working on a strategy to address the problem. "We want to know what are the appropriate fees attached to these transactions? The government is able to do it at a fairly low rate. What is in this thing we call 'interchange'? If we opened it up, would we find costs a merchant shouldn't bear?"
Card companies are successful in protecting their fee structures, Richman said, because they play for time, they litigate aggressively and they fragment the retailing sector.
"If one retail sector or retailer starts making noise, they act to keep the entire retail industry from coming together [on this issue]. But we have determined they can shut us up one at a time, but at the end of the day, they still haven't solved the problem. Retailers are taking a longer-term view and we are hopeful we have a broad coalition of retailers to address the issue. (See "Other Retailers Feel the Pinch of Plastic," Page 42.)
"Plastic is here to stay, but we have to make sure the fee structures are not usurious. Whether it is across the regulatory, legal or legislative arena — even the court of public opinion — I would expect retail to step up and counter it's natural fragmentation."
With fee structures based both on per-transaction charges and percentages of the total transaction, credit- and debit-card fees equaled approximately 80 percent of an average convenience store's profits last year, according to the National Association of Convenience Stores (NACS). Credit and debit fees jumped 20.8 percent in 2003 and equaled 5.8 percent of gross profits, or $24,265 for the average convenience store.
Comparing the first half of this year to the first half of 2003, interchange fees are up 18 percent, added Teri Richman, NACS's senior vice president of public affairs and research. "That is because the average price of a gallon of gasoline at midyear was $1.85; for all of last year, it was $1.55," she said. "Last year, the industry paid $3.2 billion in interchange fees. If I had to make an educated guess, I'd guess interchange fees could be higher than the industry's pretax profit for 2004."
The credit/debit fee burden is a huge issue, said Bill Douglass, NACS chairman and CEO of Douglass Distributing Co., a fuel wholesaler and retailer based in Sherman, Texas, which operates 10 c-stores and 150 dealer sites. "This is a sad admission, but we paid more in credit-card fees than we netted last year. I have a friend with 115 stores and he told me recently his fees vastly exceeded his net. For some retailers, these fees are the single biggest cost outside of labor."
The Society of Independent Gasoline Marketers of America echoed the complaint. One-third of its members' pretax profits are eaten up by credit/debit fees.
"Without these fees, companies' profits would be 50 percent higher," said Thomas Osborne, director of communications for the Reston, Va.-based association.
While retailers struggle with the charges, the use of plastic for gasoline purchases continues to grow. The number of gasoline transactions made with American Express cards is up 10 percent year to date.
Through April 30, MasterCard credit-card transactions in the petroleum sector also were up 10 percent, while purchase volume grew 16 percent. As a comparison, MasterCard's inside-the-station transactions increased 7 percent, with purchase volume up another 7 percent, stated Anthony Gracia, vice president, retail and small-ticket markets, North America acceptance, for MasterCard International.
While the price of gasoline may be pushing the use of plastic at the pump, the increase in the use of Visa credit and debit cards in the c-store channel closely parallels growing use in other retail channels, added Bill Sheedy, executive vice president, interchange strategy fees, Visa USA.
Debit-card usage, in particular, has taken off, pushed primarily by consumers' desire for more convenience. Credit-card purchases are a larger market in terms of dollars put on the cards, but more transactions are made with Visa debit cards. (Last year in the United States, debit represented 36 percent of Visa USA's sales volume and 59 percent of total transactions.)
Because debit-card fees, though increasing, are usually a bit lower than credit-card fees (though some retailers report they are virtually the same now) and are less driven by the amount of the transaction, c-store operators could benefit by encouraging the use of debit cards — but few are.
"We need to work on this in our industry," said Holly Tuminello, vice president, Petroleum Marketers Association of America, adding that operators may want to consider configuring point-of-sale (POS) equipment to more clearly offer the option of debit or credit use when presented with plastic and to ask for a PIN number for debit transactions.
Part of the settlement of the much-heralded lawsuit brought by Wal-Mart Inc. against credit-card companies requires MasterCard and Visa to develop a way for retailers to better identify and process a card as either credit or debit, reducing the number of debit transactions processed as higher-fee credit-card transactions.
"But retailers must specifically request Visa and MasterCard to do this by writing a letter to the attorneys handling the settlement and pressing this issue," Tuminello said.
There is a place on the second track of a card's mag stripe where digits identifying a card as debit or credit could be placed, added Richman, but it's not happening yet. Plus, some banks are discouraging consumers to use debit by charging fees for PIN-based debit purchases.
Fee Futility?
The largest component of the industry's credit/debit fee payment is interchange fees, making up about two-thirds of the total cost.
"There are many costs loaded into the interchange rate that don't accrue any benefit to retailers, like marketing costs," Richman charged.
Acquiring fees, which include payments for authorization, data capture and settlement, are another component that has increased. The portion of the fee structure most likely to be favorably negotiated by retailers, processing fees, is a relatively small part of the total. While many c-store operators are able to negotiate lower fees with their third-party processors, such as First Data Corp. or Paymentech LLP, few find any give in the interchange and other fees charged by American Express, Visa or MasterCard.
To illustrate: Visa and MasterCard transactions comprise approximately 75 percent of all gas station and c-store credit-card transactions — bringing in $2.8 billion annually in flat fees and percentage-based fees that rise with the price per gallon of gasoline, while their costs stay the same. Processors charge flat fees, ranging from 6 cents to 15 cents per transaction, or about $500 million per year from the gas/c-store industry, according to PMAA's Tuminello.
The association has been working with Paymentech to offer unbranded members lower processing fees. "Plus, we'd like to offer programs to motivate customers to use alternative payment options — like loyalty cards and prepaid cards — that don't have higher interchange fees attached to them," Tuminello said.
NACS, partnering with First Data Corp., introduced a program to reduce card-processing fees for c-store/petroleum operators that allows retailers to choose between a card processor that charges a percentage of the sale versus one that charges cents per transactions.
Branded marketers, however, are tied to their major oil company parents, who typically handle electronic card processing. In response to its marketers' recent profit squeeze, Shell Oil Products US recently modified the transaction fees charged to Shell-branded retailers and wholesalers to process credit and debit card purchases. By switching its percentage-only fee structure to a hybrid rate, overall bankcard fees will drop approximately 10 cents on a $25 purchase. For MasterCard and Visa transactions, which have the highest usage rates, the fee was moved from 2.8 percent to 2 percent, plus 10 cents.
Based on average cash-versus-credit card transaction ratios for the Shell network, a retailer with a site volume of 1.8 million gallons per year may save an estimated $2,000 annually under the new fee structure. Wholesalers with an average yearly volume of 20 million gallons may see processing fees drop $23,000 annually.
Shell-branded retailers and wholesalers will continue to enjoy no transaction fees on Shell-branded consumer credit cards and gift cards. Shell MasterCard from Citi Cards will continue to offer cardholders a 5-percent gasoline rebate, while the Shell fleet card offers cardholders a rebate of up to 3 percent. Also, retailers and wholesalers benefit from a 3-percent rebate on the Shell gift card, upon activation at retail sites.
What's The Other Guy Paying?
For many c-store/gas operators, retail channel parity is a primary issue. Other types of retailers, such as grocery stores and mass merchants, typically pay lower fees inside the store, as card issuers attempt to build business in other channels and justify higher petroleum-sector fees by pointing to a greater risk of fraud and lower transaction sums.
"Plus, c-stores are disproportionately affected because of the volatility of gasoline prices and cigarette prices," Richman said.
Many gasoline retailers believe supermarkets and mass merchants pay lower fees even for gas transactions at their pay-at-the pump facilities. Not so, counter the card companies.
"It is a common misperception that other retailer channels with lower fee structures are paying these lower rates on their pay-at-the-pump transactions," Sheedy said. "We have operating rules and fees that allow us to classify those transactions under a unique fuel merchant category — which applies to c-stores, grocery stores, everyone.
"Regarding differences in retail fees among channels, there are a whole host of reasons behind the fees charged by credit card companies — competition, cost to support and route the transactions, differences in fraud-related costs," added Sheedy, who noted VISA sets interchange and other fees, but member banks ultimately set prices for retailers accepting VISA cards. (PMAA's Tuminello said she has not seen evidence of fraud being higher at pay-at-the-pump sites now.)
"We're not crazy enough to think there will be one fee structure for everyone, but we want a level playing field with other retailers and the way we are trying to define 'level' is finding out how much these transactions actually cost [the card companies] and if we can peel back the layers, we might get there," Richman said.
In early 2004, after listening to the frustrations of gasoline marketers, Visa made changes in its debit fees, increasing the per-item fees, while lowering the percentage fees, Sheedy said. "I'd like to look for more opportunities with other Visa products."
Making It Easier
Over the last few months, MasterCard unveiled new programs aimed at improving cost efficiencies for petroleum merchants and helping them expand pay-at-the-pump technology. These include allowing a $1 authorization prior to dispensing gasoline, giving charge-back protection up to $50, eliminating the need for a cardholder's signature at the pump and allowing gas retailers to prompt for zip code and use its address verification system to minimize fraud.
For its part, American Express encourages retailers to process its transactions directly through the card company, at no charge, instead of routing them through a processor, noted Sumathi Laterza, director of industry development, American Express Co.
"Most of the largest retailers are connecting with us directly," Laterza said. "We believe that is a best practice and may be something to look at, especially if they are margin-squeezed." Connecting directly with American Express requires some reprogramming of the POS.
American Express also has worked to reduce fraud through initiatives such as zip code verification. "C-store operators' rates are based on our rate table, but a reduction in fraud would help reduce their overall costs," she said.
Still, when judging their fee structures, the major card companies believe many petroleum marketers do not recognize the true value of accepting their cards.
"Typically, American Express card members are buying more premium gasoline, filling their tanks all the way up and going inside more, all adding to the average ticket," Laterza said.
The view was echoed by the folks at MasterCard. "Card acceptance can be a powerful revenue driver leading to increased customer traffic and higher average tickets," said Gracia. "Plus co-branded cards, such as those unveiled by Tesoro and Marathon, or longer-standing programs from ConocoPhillips, ExxonMobil and Shell, and participation in card usage promotions often translate into improved customer retention and sustained repeat business."
Fueled by card use, expansion of pay at the pump has enabled gas stations to reduce overhead and increase sales while reducing the number of personnel required to run the site, Gracia continued. "As staff resources are freed up [many retailers are] creating additional revenue streams and offering more value to their customers. In many respects, embracing card payments has been a boon to business."
Self-serve card payments also are leading to advancements in technology. "Contact-less payments, much like acceptance of credit and debit cards, may very well change the way consumers pay for entire categories of purchases that historically were made with cash," Gracia said.
But many retailers already place a value on plastic, Douglass countered. "We aren't ascribing a value on he labor-saving side, but on customer attraction and the ability for customers to spend more."
Added Richman: "These companies say you'll get a sales lift from people using credit cards — but we are not seeing any lift, mostly because people don't have extra disposable income."
Douglass summed up the exasperation of many c-store operators: "The card companies are a legal monopoly, but our lawyers say we can't win an antitrust suit. These companies aren't working with the industry. If you were part of a monopoly, would you care about us? But that has to change — they are killing the golden goose."
NACS is working on a strategy to address the problem. "We want to know what are the appropriate fees attached to these transactions? The government is able to do it at a fairly low rate. What is in this thing we call 'interchange'? If we opened it up, would we find costs a merchant shouldn't bear?"
Card companies are successful in protecting their fee structures, Richman said, because they play for time, they litigate aggressively and they fragment the retailing sector.
"If one retail sector or retailer starts making noise, they act to keep the entire retail industry from coming together [on this issue]. But we have determined they can shut us up one at a time, but at the end of the day, they still haven't solved the problem. Retailers are taking a longer-term view and we are hopeful we have a broad coalition of retailers to address the issue. (See "Other Retailers Feel the Pinch of Plastic," Page 42.)
"Plastic is here to stay, but we have to make sure the fee structures are not usurious. Whether it is across the regulatory, legal or legislative arena — even the court of public opinion — I would expect retail to step up and counter it's natural fragmentation."