(EDITOR'S NOTE: This story has been updated to include comments from American Express, MasterCard and the Electronic Payments Coalition, which represents the banks, major credit cards and credit unions.)
More and more gas stations are seeing cash as king. They’re advertising lower pump prices if you pay with cash or debit instead of credit. This is a trend that could soon expand to other retailers — if they continue to get their way in court and on Capitol Hill.
We first saw a spike in gas stations rewarding consumers who pay with cash with lower prices during the time when fuel prices spiked in 2008. The practice went on even though it was highly discouraged by the policies of Visa , MasterCard and American Express.
“When someone uses a credit card at a gas station, it typically adds nine to ten cents a gallon to the price," said Douglas Kantor, a partner at Steptoe & Johnson. "That is more than what the gas station makes after its expenses. So now, every year since 2006, the industry has made less money than they have paid in card fees.”
Kantor is counsel to the National Association Of Convenience Stores and to the Merchants Payments Coalition. He said retailers should be able to charge lower prices for cash and debit.
The NACS published a report this week suggesting interchange fees are rising much faster than gasoline prices. It finds fuel prices rose 80 percent between 2004 and 2011, while the fees charged to the industry surged 180 percent during the same time period. Last year, the convenience store industry paid $11.1 billion in credit card fees. That’s a 23-percent increase from the year before.
These fees are also hitting consumers, the trade group alleges. The report estimates the average family pays more than $400 in swipe fees on all goods and service, and about $30 of that comes from gasoline.
Those are the kinds of figures retailers have been bringing to the government — and it’s been making an impact on policy. Federal lawmakers have been clearing the way for merchants to set prices depending on the method of payment. The Durbin amendment of the Dodd-Frank Act took effect in October and Department of Justice actions have favored a retailer's right to discount for cheaper cards or forms of payment. There’s also a pending antitrust lawsuit for alleged price fixing of interchange fees.
Banks Dispute Report
But the issue surrounding credit card interchange fees has become a multi-billion dollar blame game.
The Electronic Payments Coalition , which represents banks, major credit cards and credit unions, disputes the findings from the National Association of Convenience stores.
Trish Wexler, the spokesperson for the Electronic Payments Coalition, said if you take in account all forms of payments, the convenience store industry as whole is paying cumulatively close to a penny versus a dime in interchange fees. Plus, then gas stations often don’t charge the cash prices for debit cards, she added.
“We’ve had people out shopping and trying to get a discount for debit and are always rejected…I challenge the NACS to show how many retailers are doing this,” Wexler said.
She particularly takes issue with how the NACS perceives the Dodd-Frank bill as it relates to interchange fees. According to Wexler, the Truth in Lending Act has allowed gas stations to offer cash discounts since the 1970s.
“The real problem for convenience stores and gas stations is the business model," she said. "In today’s marketplace, a convenience store operator makes more selling beer, candy or cigarettes than they do on a gallon of gasoline.”
MasterCard said it’s tried to be more accommodative as gas prices started squeezing consumers. In fact, if you charge more than $50 on a single fuel purchase transaction, MasterCard waives the interchange fee. So, technically if there’s no interchange fee being charged to gas stations, the consumers should pay the cash price.
“As the cost of fuel has risen, this program has led to retailers having lower payments-related costs with each filling of the tank; to date, gasoline retailers have received more than a quarter of a billion dollars in savings,” said Jim Issokson, a spokesman from MasterCard.
Visa referred us to the Electronic Payments Coalition and did not offer us a statement.
Cash, Debit or Credit?
But if gas stations continue to charge higher rates for charging gas purchases to a credit card, it is likely to influence consumer behavior considering that many people drive out of their way to find cheaper gas. According to the NACS report, about 70 percent of consumers say they would drive five minutes out of their way to save 5 cents per gallon of gasoline.
So on the surface, avoiding the extra fees for using credit seems like a very practical way for consumers to save money at the fuel pumps — unless you take into account credit card incentive programs. Many consumers are loyal to them.
Brian Jauntig, a 30-something year old commercial real estate manager, still pays for gas exclusively with plastic. To get the best prices, the Manhattan-ite fills up his BMW coupe just over the Hudson River in New Jersey.
“I typically pay for gas with an American Express Card. The card offers two-times bonus points on gas and grocery purchases. It also makes a trip to the gas station quicker,” said Jauntig.
Scott Estrin, a 38-year-old engineer from New Jersey, prefers to pay with credit when he fills up his Chevrolet Equinox. His top choice is the Discover “Open Road” credit card. Estrin says he redeems the 2.4 percent cash back on purchases for gift cards.
“Even if gas reaches four dollars a gallon, an eight cent differential would still make it more worthwhile to use the lowest-reward credit option at the lowest reward value,” said Estrin. “If my local station started charging dramatically different rates, I’d likely get a charge card for that specific station — you still only pay cash rates when you use the station’s own card.”
Analyst Christopher Brendler covers the credit card industry for Stifel, Nicolaus & Company. He believes we’re on the cusp of a transformation in the way we make purchases.
”The reason why it works at gas stations is because Visa and MasterCard rules for discounting cash was not explicitly banned — they just made it difficult,” said Brendler. “The rules required merchants to display the cash and credit price for each product at the point of sale. This was much easier for gas stations, but way too cumbersome for traditional merchants such as grocery stores given the sheer number of products. Under Dodd-Frank, these rules have been eliminated.”
That means other merchants with thin margins — such as your corner store or supermarkets — could eventually follow. Down the line, there’s even speculation stores could set prices depending on which credit card you use.
The Biggest Loser?
In that case, the biggest loser could be American Express.
“American Express only has one product: Credit cards. Visa and Master card has debit, too,” said Brendler. “American Express sees this as a big threat to its franchise. Visa and MasterCard are more agnostic. They have all the cards — credit, prepaid and debit.”
However, American Express expects its cardmembers value the other benefits the card offers.
“We are confident that American Express Cardmembers will continue to value the many benefits of using American Express charge and credit cards over debit cards and other competitive products, notwithstanding any discounts merchants may offer," said Diana C. Postemsky, the company's spokeswoman. "Merchants choose to accept our cards because working with American Express helps them grow their business and serve their customers effectively.”
Questions? Comments? Email us at firstname.lastname@example.org . Follow Stephanie Landsman on Twitter @StephLandsman