How can you save on gas? Pay cash

By BusinessWeek

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 signs displaying prices for regular, midgrade and premium fuels, they’ll notice just two prices: "unleaded credit" and "unleaded cash."

The cash price will be 6 cents a gallon cheaper than the credit option.

The difference speaks to a relatively obscure aspect of credit finance called interchange fees. Those are fees (usually slightly less than 2% of a purchase) 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 between 9 cents and 12 cents a gallon.

That, coupled with a sharp rise in the number of people who use cards at pay-at-the-pump machines, has squeezed Flash Foods' profit margins. Those margins have fallen to an estimated 4 cents to 7 cents a gallon.

• Talk back: Would you pay cash at the pump to save a buck?

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.

"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."

Interchange fees are nothing new, but they’ve become a bigger issue as gas prices skyrocket and credit card use soars. About 60% of gas purchases last year were made with plastic.

While the National Association of Convenience Stores doesn't have comparable data for earlier 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, the average amount an American pays in such fees has tripled since 2001.

Stores paid $7.6 billion in credit card fees in 2007, according to the NACS. Their total profits in that year were $3.4 billion, down from $5.9 billion two years earlier.

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 discounts for cash payments is one adjustment merchants can make. But 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 pockets 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 an interchange fee that’s 0.27% higher than the company’s average charge.

There is a bipartisan push in the House and Senate to force credit card companies to negotiate their interchange fees with merchants. Last month, Mallory Duncan, senior vice president and general counsel at the National Retail Federation, testified before Congress in support of such legislation. "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 interchange 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.

Feeling the sting

The card companies say they don't draw revenue directly from the fees. But 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.

"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."

Meanwhile, it's the gas stations, and their customers, who are feeling the pinch.

Shipley Group of York, Pa., owner of 23 Tom's convenience stores throughout the state, recently signed a deal with a Florida company called Revolution Money to accept its Revolution card, which carries a lower fee of 0.5% per transaction.

Shipley hasn't seen any changes in its bottom line yet, because not enough people are using the Revolution card. 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," he says.

This article was reported and written by Brian Burnsed for BusinessWeek.