Tuesday, August 28, 2007

How Pay By Touch Can Put a Tiger in it's Tank

Awhile back, I posted about how Gas Stations were ripe for ID theft, and mentioned how Pay By Touch could not only solve that problem, but just as importantly, save them tons of money by offering to replace credit card transactions with checking or ACH debit reward transactions. But I never really did get into any detail. I will today.

I found an interesting article detailing how gas station owners /operators are becoming increasingly discouraged by accepting credit cards, and thought that now was as good a time as any, to take and explain my ideas as to why and how Pay By Touch could be a godsend to these owners/operators.

I'll just touch on some of the points, as I tie in the less expensive ACH Debit, with a loyalty program administered by Pay By Touch which refocuses on the niche that S&H GreenStamps carved out with Gas Stations years ago. It would be a good blend, and would result in a win-win situation for everyone involved.
There's a tremendous opportunity for Pay By Touch in this arena.

The article is below...I interrupt it several times (always in green) in an attempt to either educate, make a statement or have fun with a sarcastic comment in an attempt to prevent myself from becoming bored doing this blog...

Gas stations discounting cash sales


Americans love their credit cards. But at more and more gas stations, it pays to use cash. In Costa Mesa, Calif., Craig Hummel pocketed a 12-cent-a-gallon discount recently for using cash at a Valero station instead of his Visa or MasterCard. He bought 9 1/2 gallons of premium for his Mercedes sport utility vehicle and saved $1.14.

"I know a lot of people just go wherever they want for gas ... but I only come here," Hummel said. "Over a year's time, you save quite a bit. I think more stations should offer it." (Ed. Note: Proof that loyalty exists in regards to consumers for gas stations)

They are. To dodge the rising fees that credit card companies tack onto transactions, both no-name and big-brand stations are charging drivers less when they buy with cash.

The Valero station favored by Hummel was offering self-serve regular for $2.97 a gallon for cash and $3.07 on a credit card a few weeks ago. Not far away, a busy Shell offered a 6-cent cash discount for regular.

Francisco Galicia, the manager of that Shell, said he had been offering cash discounts of 4 cents to 6 cents a gallon for six months. At first, customers had questions, Galicia said, but now "they understand why I'm doing it ... and they're responding." Fees vary, but on a typical credit card sale,

Galicia's station pays 10 cents plus 2 percent of the purchase price to the credit card company.

Editors Note: Here's as good a time as any to discuss how this 10 cents plus 2 percent creates an opportunity. First of all, the 2% is mentioned after the 10 cents, in order to create the illusion that the 2% is inconsequential. In reality, the 2%, at $3.00 per gallon is closer to 65%. I'll "touch" on that in a bit. Let's start here...

Gas station owner/operators have the same per gallon profit, whether gas costs consumers $2.00 or $3.00 or even $4.00. With that said:

When gas was $2.00 per gallon, 20 gallons cost $40.00.

2% was .80 cents + .10 cents. or .90 cents.

That's 4.5 cents per gallon to Visa/MasterCard.

Assuming a gas station operator makes 10 cents a gallon, (that's high, but it's easier for me to do the math in my head...) after paying the credit card fees, the profit is split 55/45.

The owner/operator gets only 5.5 (.055) cents per gallon at $2.00 because, Visa and MasterCard is earning 4.5 cents. (.045) of .10 cents.

That's a staggering 45% of the .10 cent per gallon margin.

Gas is no longer $2.00 per gallon so let's do the math at $3.00 per gallon.

When gas is $3.00 per gallon, the same 20 gallons cost $60.00 instead of $40.00.
2% of $ 60.00 is $1.20 + .10 cents. or $1.30)

Instead of .90 cents, it costs $1.30

That's .065 cents per gallon to Visa/MasterCard out of .10 or 65% of the profits.

As I mentioned, the gas station operator's profit, remains the same per gallon from their supplier, regardless of whether it's $2.00 or $3.00, but now, because of credit card fees, it has been reduced from 5.5 cents to 3.5 cents per gallon. The owner operator is being punished and the credit card companies are being rewarded, and nothing has changed except the price per gallon of gas!

Thus, instead of a 55/45 split in favor of the owner/operator at $2.00 per gallon, it now becomes a 35/65 split in favor of Visa/MasterCard at $3.00 per gallon.

The result is a 37% reduction in profit from the $2.00 per gallon price point to the $3.00 per gallon price point for the owner/operator. Of course, Visa will spin this into "It's only 2%!"

That hardly seems fair does it. Almost criminal and worthy of being looked into by the FTC. Wait, until you read about the $5000 a day fine Visa threatens when an owner/operator tries to offer a discount for cash...

Getting back to the breakdown of 3.5 cents to the owner and 6.5 cents to Visa/MasterCard, one could certainly understand why gas station owner/operators are becoming increasingly irked at the credit card companies.

Do the math at $3.50 and $4.00 per gallon and it becomes even more disproportionately unfair to the owner/operators.

This is where Pay By Touch can be of great assistance and help these owner/operators"... Now this is not as complicated as a Shell game, but you will need to follow where I'm going with this compelling argument, so here we go...

Instead of charging 2% and .10 cents Pay By Touch could charge a flat fee of .50 cents per transaction, still make a respectable profit, and insulate the owners from rising gas prices, and themselves, from competitors.

Gas would literally have to drop to $1.00 per gallon (20 gallons x $1.00 = $20.00 X 2%= .40 cents, plus .10 cents = 50 cents) in order for the credit card companies to be competitive with Pay By Touch on a 20 gallon fill-up.

On the flip side, at $3.00 per gallon, the owner/operator still pays only 50 cents to Pay By Touch for 20 gallons, thus instead of "Shelling out" 6.5 cents per gallon with a credit card transaction, they would pay only 2.5 cents per gallon. Kind of a nice touch, wouldn't you say? Therefore under the same 10 cent per gallon scenario with a 20 gallon fill-up they would EARN 7.5 cents per gallon instead of 3.5 cents.

That's 66% more profit for the owner/operator!

Kinda gives a new meaning to the Phillips 66 logo on the left, doesn't it?
Plus imagine the loyalty that Phillips 66 would create with their owner/operators for providing the Pay By Touch service as a form of payment, thus increasing their profits without increasing their workload. In addition, they could get into the "Mobil payments industry" right out of the tank. Pay By Touch would still earn 25% of the gasoline profits, albeit far less than the 65% that Visa is currently making. But is that a bad profit. I think not.

Back to the article... because they touch on several more interesting points.

Customers pay, too.

In 2006, motorists -- whether they used cash, credit or debit cards -- paid an average of 4.2 cents a gallon more because of credit card fees, said Jeff Lenard, spokesman for the National Association of Convenience Stores, which represents outlets that sell about 80 percent of U.S. fuel.

Profit drain

Complaints have grown because money collected through card fees has more than doubled since 2001, and rewards programs have led people to use credit for everyday purchases.

For gas stations, soaring prices have magnified the percentage-based card costs and caused more customers to pay with plastic. (Ed. note: Yeah, that's what I said)

"What's happened is a double whammy," said David Robertson, who publishes the Nilson Report, a credit industry newsletter.

Members of the convenience store group, which has sued credit card companies over the fees, paid $6.6 billion in credit card fees last year, but booked only $4.8 billion in profits, Lenard said.

(Ed. Note: I'm aware that I said 65/35 profit split, and the 6.6 to 4.8 numbers are off from my example, but it's because not all gas stations make .10 cents per gallon profit, and those numbers include profits from food/drinks/car washes etc. where the owner/operator has a higher profit margin than they do on gas.) Still...my point remains significant which is that...)

"The credit card companies made more at our stores than our store owners," said Lenard.

(Ed. Note: The Sales Proposition seems to be as simple as letting store owners know that are aware of the problem and we address it and allow store owners to make more money than they do using their existing payment platforms)

Dealers say the problem is at its worst in California, where gas prices have been higher for longer and lengthy commutes mean drivers fill up frequently. (Ed. Note: Filling up more frequently doesn't have anything to do with it, higher gas prices do.)

Wording dispute

Oil companies have played a role too. Chevron Corp., Exxon Mobil Corp., ConocoPhillips and others have offered rebates and promoted branded credit cards to lock in loyalty.

(Ed. Note: I have an suggestion/idea... How about Gas Stations utilizing a loyalty program offered by Pay By Touch, (as we seem to have some experience there) and now that we've purchased S&H, we could implement an updated plan using Greenpoints. (S&H was pretty big with gas stations at one time...)

One angle...how about consumers being able to earn points to eat at restaurants, which complain about the business slacking off because of the high gas prices. There's something about nostalgia/loyalty and coming from help that always seems to have an attraction. And, it just so happens that S&H already offers the Dining Connection Rewards Platform. How "convenient"

Another angle, tie in Greenpoints with our grocery store clients. It would strengthen enrollments at both, and result in strengthening the Greenpoint program itself.

GreenStamps were huge not only at
Gas Stations..but also Grocery Stores...(from Wikipedia)

Auburn, Calif.-based Nella Oil racked up $5 million in credit card fees last year at its 50 Northern California gas stations, said Thomas Dwelle, a partner in the family-owned business. This year, Dwelle launched a cash discount program at a few stations -- and landed in hot water with Visa.

The card company accused Nella Oil of violating its Visa contract by using the word "credit" on its price signs. Visa threatened to charge the company $5,000 a day (Ed. Note: Isn't the 65/35 split enough for them, resulting in $5 million) and cut off the stations' ability to take Visa credit cards. (Ed. Note: Sounds like that would create even more opportunity for Pay By Touch...)

It demanded that Dwelle use the words "regular" or "standard" rather than "credit" to differentiate the higher price from the cash cost. (Ed. Note: Does Visa have a clue?)

State regulators said Visa's recommended signage would confuse customers and violate California law. Visa backed off.

Visa USA declined to discuss the dispute. Visa Vice President Rosetta Jones said in a statement that a cash discount "is confusing and naturally implies a surcharge for payment card transactions.

(Ed. Note: Yes, but of course using the word "regular" at a gas station wouldn't be confusing at all, would it. I would suggest that, if stations offered a discount for using Pay By Touch, then it would "naturally imply that Visa's surcharge is overtly higher than it needs to be.)

She went on state: "People who use credit cards "should not have to pay what amounts to an unfair checkout fee."

(Ed. Note: Is she insane? Taking credit cards should not result in merchants, who last time I checked, were also "people" too, having to pay what amounts to 65% of the profit. Does Visa even realize how ridiculously hypocritical they sound? Luckily for them fewer people understand the credit card industry and basis points than understood how ARM's worked when they took out their subprime mortgage.

How hard could it possibly be to get these frustrated gas station owner/operators on Pay By Touch's side. en masse). The spillover of owner/operators to Pay By Touch would make the Exxon Valdez look like an oil drip from an ATV on a driveway...

The article continues...

Travis Plunkett, legal director at the Consumer Federation of America, likes the trend toward cash markdowns for fuel.

"It is something that dealers should be freely allowed to pursue, with no coercion on the part of the payment systems," Plunkett said.

Conclusion: If Pay By Touch can make store owner/operators understand that they can increase their profits by 66% on a 20 gallon purchase, using Pay By Touch, the pressure they would put on their supplier would be tantamount to having lobbyists working for us in D.C.

If we could make the oil companies understand how we could reinvent and reintroduce the S&H program and tie it in to a platform that would reward their customers, increase loyalty, increase profits for the owner/operators, and make the transaction significantly more secure (remember Ripe for ID theft) then what do you think would be the result?

In addition, Pay By Touch would accelerate the transaction times, and make them more convenient by having the stations installing Pay By Touch at the pumps. How many times have you waited at the pump while someone goes inside and waits in line to pay. And it sure takes them a long time to come out with their coffee and donuts while I wait at the pump.

Might even get a few enrollees out of it too. Could even strengthen the existing S&H platform. Oh, and they wouldn't have to be threatened with paying a $5000 a day fine or be bullied by Visa into having their livelihood taken away. Which is B. S. anyway, unless they would cut off a company that paid them $5 million last year in fees. Sounds like opportunity staring us in the face while Visa bites off their nose to spite theirs.

Add in a personalized marketing loyalty program using the power of S&H's nostalgic impact, include a Citibank debit card under our partner Discover, and Pay By Touch could have a gas with the possibilities...