Friday, August 31, 2007

More on Credit Card Fees and Gas Prices

The recent environment of high retail prices for motor fuels has put additional focus on the cost of payment transactions. While credit-card companies have not provided relief, ConocoPhillips has chosen to reduce processing fees temporarily to help our customers save money."

Below is a comparison of the regular fee structure vs. the temporary reduction:

Visa -- From 2.00% + $.10 per transaction to 1.90% + $.10 per transaction

MasterCard -- From 2.00% + $.10 per transaction to 1.90% + $.10 per transaction

American Express -- From 2.50% + $.10 per transaction to 2.40% + $.10 per transaction

Discover -- From 2.50% + $.10 per transaction to 2.40% + $.10 per transaction

In other news:

Chevron Corporation (NYSE: CVX) today announced that its subsidiaries Chevron U.S.A. Inc. and Chevron Credit Bank, N.A. reached agreements to sell their respective proprietary credit card businesses.

"The credit card business environment is changing rapidly," said Danny Roden, vice president of Chevron North America Marketing. "Consumers' usage patterns are changing and they are looking for new payment products and features. Our goal is to provide payment products that attract and retain consumers, marketers and retailers."

From the Washington Post:

Major credit card companies are reaping huge profits from rising gas prices because the fee that banks charge gas stations to process a credit card transaction is based on a percentage of the purchase price. As gas prices go up, the processing fee goes up.

Since last year, the fees that gas stations paid to credit card companies have risen more than 75 percent, right along with the price of gasoline.

"It's unexpected revenue, because people are just doing what they were always doing," said David Robertson, publisher of the Nilson Report, a credit card industry newsletter. "It's not like a whole new market opened up. There's no behavioral change. It's just more money."

And lots of it. On a typical day, Americans buy 382 million gallons of gasoline, according to the Energy Department's Energy Information Administration. About 70 percent of that is paid for by credit card, said several trade associations representing gas stations. The credit card processing fees paid by gas stations, meanwhile, average about 2.5 percent, these trade groups agree.

That is $183 million more a month, or nearly $2.2 billion dollars on an annual basis in extra money paid to the nation's banking giants just because of rising gasoline prices.

"The credit card processors and banks are reaping enormous profits right now," said Paul Fiore, director of government affairs for the Washington, Maryland, Delaware Service Station & Automotive Repair Association. "That's right out of the dealer's profit."

Fiore said credit card fees have become the top issue among gas station owners because they have not been able to raise their profit margins to cover the increased fees they must pay to the banks. Typically, a retailer's own bank gets 25 percent of the processing fee, while three-quarters goes to the bank that issued the credit card, said Robertson of the Nilson Report.

The fees are especially burdensome for gas stations, because their profit structure is generally fixed: Stations tack on anywhere from 7 to 11 cents a gallon to get their profit. That margin stays the same, or may even shrink a little, as prices rise, yet the station has to pay more each month to cover rising credit card transaction fees.

Marty Dustin, who manages the Burnt Mills Citgo station in Silver Spring that he and his father own, said rising credit card fees are rapidly eating up the family's entire profit from the business.

"We are not going to be able to make it on that 7, 8, 9 cents [per gallon] because there's more coming out of the back side," he said. "We're all going to have to try and grow our margins a little bit to make up the difference."

But so far, Dustin and others say, the price competition among gas stations is so intense that few stations have been able to raise their margin to make up the difference, or even part of it.

Adding to the difficulty for gasoline retailers is the fact that consumers are using credit cards more often for those costlier gasoline purchases. The National Association of Convenience stores says that since Hurricane Katrina, the percentage of gasoline purchases on plastic has gone up 10 points , to 80 percent.

Each oil company's own branded credit card charges its station owners lower fees, but those cards account for a small -- and decreasing -- percentage of sales at retail gas stations, said Daniel F. Gilligan, president of the Petroleum Marketers Association. Debit cards, too, have slightly lower fees than traditional credit cards but also represent a small portion, about 16 percent, of total card transactions, according to the convenience store association.

It is major credit cards offering frequent-flier miles and rebates that get swiped the most, by far, these groups say.

But there is growing pressure on the industry to rein in its fees.

The lead plaintiff in a class-action lawsuit against the credit card companies for merchant fees has seen a wave of interest in his case because of the gas-purchase profits.

"As gas prices have doubled, so, too, have the earnings for the banks that own the credit card associations," Mitch Goldstone said. "What I proposed to the CEOs of both Visa and MasterCard is to very simply suspend the interchange fees at all service stations."

He got no response, but he has chronicled his battle on his Web site,