Three in four drivers today (75%) pay by plastic when fueling up, according to results from the 2018 NACS Consumer Fuels Survey. And the trend to pay by plastic at the pump translates to retail overall: Americans have made more payments at stores by credit or debit card than they did with cash or checks every year since 2003, according to the American Bankers Association.
An estimated 39 million Americans fill up every day and 29 million of them pay at the pump. However, the system is not without its problems. Credit card and debit card rates are set in a duopoly, where the two largest card issuing companies (Visa and MasterCard) set rates and write rules for retailers that they can either follow or refuse to accept cards, which is not much of an option in today’s competitive marketplace.
The rules that retailers must adhere to also are incredibly complex, running hundreds of pages long. Rates also vary based on the store and even the customer. The card fees that retailers pay are based on the type of card used (rewards cards cost retailers more to accept), the type of business (larger retailers may get better rates based on volume discounts) and how the card is used (fueling islands tend to have higher rates than inside the store because it they are considered unattended terminals).
Ultimately, the convenience of paying at the pump comes at a cost—both in terms of higher gas prices and a slew of security-related challenges. This backgrounder examines these challenges with a look ahead at a system that began taking shape nearly a century ago.
The use of cards at the pump is almost as old as the service station. In 1924, only 11 years after the first purpose-built gas station opened, gas credit cards were issued. These cards followed the simple dog-tag style metal plates issued by department stores prior to World War I. While this nascent payment system was still developing, the onset of the Great Depression and World War II quashed the concept of credit cards for several decades.
Post War optimism rekindled the idea of charge cards. American Express considered the concept in 1946. Then in 1950, the modern credit card system was introduced by Frank McNamara and Ralph Schneider with their Diners Club Card. In 1958, Bank of America introduced BankAmericard (which later became Visa); American Express also began issuing cards in 1958. (Master Charge, which became MasterCard, was first issued in 1966.)
While credit card payments could be made with in some retail establishments, you couldn’t easily charge for your gas. In 1964, the concept of remote fueling set the stage for its introduction. The simple innovation of being able to pump your own gas, without a service attendant, and then pay, was revolutionary. It allowed consumers to save a few cents a gallon because of reduced labor costs, but they still had to go inside to pay, whether by cash or by credit card.
It took nearly 20 years for the next innovation. In the early 1980s some retailers experimented with pre-paid gas cards and installed card readers—similar to the technology used in rapid mass transit—into the pumps to read the cards.
Next, were credit card readers at the pump, which were introduced in the United States in 1986 (They were introduced in Europe in 1982). E-Z Serve and its subsidiary AutoGas in Abilene, Texas, installed dispensers featuring a built-in credit/pre-paid card reader system.
However, not everyone in the industry embraced pay-at-the-pump. Many retailers were concerned that this convenience would reduce in-store sales because customers would buy their gas and then leave without any other purchases. Yes, many customers do buy gas and leave without going inside the store to buy other items. But 45% of gas customers still go inside the store to buy items, use the ATM or bathroom or pay for their gas. Pay-at-the-pump enhances the shopping experience for everyone. Gas-only customers are able to quickly leave. And in-store customers have a better experience because they didn’t have to stand in line behind someone who needs to pay for gas.
Still, adoption was slow. Only 13% of convenience stores had pay-at-pump technology in 1994, but 80% of convenience stores were using the technology by 2002, and virtually all stores do today.
The payments landscape also continues to evolve beyond cards. Some retailers, like Tennessee-based MAPCO Express, allow consumers to pay for their gas via a mobile app. Cumberland Farms was among the first to embrace Apple Pay as a payment option. But while the method of payment is evolving, the cost associated with delivering convenient payment options remains a problem.
With nearly three-quarters of consumers at the pump paying by plastic, most retailers have no choice but to accept credit and debit cards. However, credit and debit card transactions result in retailers paying swipe fees (also known as “interchange fees.”) These fees typically average between 2% and 3% of the total purchase, but can be as high as 4%. Because retailers already have razor-thin margins on fuel (the average gross margin on fuel has averaged only 7.0% before expenses over the past 5 years), these costs are passed along to the consumer in terms of higher gas prices.
Gross margins aren’t to be confused with profit margins. After factoring in expenses, most retailers make, at best, a few cents per gallon in pretax profit, and may even lose money on some sales when margins are tight and credit card expenses are high.
(based on a 10-gallon fill-up when gas is $3.00/gallon):
- 2.4 cents per gallon.* Debit fees are 21 cents per transaction, plus other costs, with a maximum charge of 24 cents for the transaction.
(*This is only true for the 60% of debit cards that are regulated. The other 40% of debit cards carry fees that are closer to those for credit cards: around 2%.)
- 6 cents per gallon. Credit card swipe fees include both fixed and variable costs. Taken together on a typical fueling, they average 2%, or 6 cents per gallon.
The fees that convenience stores pay credit card companies and banks for processing transactions is almost equal to overall convenience store industry profits. In 2015 the industry reported credit card fees of $10.0 billion and profits of $10.6 billion.
Retailers Offer Consumers Savings to Reduce Costs
The rise in credit card expenses has led to an increasing number of retailers to seek alternatives, especially cash discounts. Amounts for the discount vary, but most retailers offer approximately 5 cents off per gallon to customers paying by cash. Some retailers offer significantly higher discounts for cash, particularly if the gas purchase is tied to another purchase, such as a car wash.
It’s important to note that there is a difference between cash discounts and surcharges for paying by plastic. Until recently, surcharges were forbidden by the contracts developed by the credit card companies. As part of the proposed $7.2 billion antitrust settlement, the card companies added a provision to allow surcharging. However, there are significant limitations and it is inherently consumer unfriendly. NACS is not aware of any retailer who has instituted surcharges.
Requirements for how retailers offer cash discounts are set by the state department of Weights and Measures. Typically, retailers must most prominently post the higher (credit) price. Some retailers also have dispenser “pumptoppers” and advertising billboards that rotate between the cash and credit price.
What about discounts for debit cards, which carry lower costs at the pump? Some retailers have adopted the practice as well. Nice N Easy Grocery Shoppes, a chain based in Canastota, New York, offers debit card users the same discount as it gives cash customers, even though there are costs associated with debit transactions.
As the use of plastic at the pump has increased, so have concerns over debit or credit “holds.”
While online banking statements look like the hold has been placed by the retailer, the retailer is only responsible for setting the amount of the hold—a decision highly influenced by credit card rules that could later deny payments for some transactions.
Both Visa and MasterCard require that retailers place holds, or “pre-authorizations,” on debit and credit card gas purchases. Most consumers don’t notice holds on their credit cards because they have sufficient credit lines that they don’t exceed, even with holds.
Holds are standard practice for any business that accepts plastic as a form of payment in a situation where the final dollar amount to be assessed is unknown in advance. Holds placed on gas purchases are similar to the pre-authorizations that hotels do with a credit card when you check in or at car rental counters. Most car rental agencies and hotels don’t allow customers to use debit cards because the hold would be too large.
However, debit cards are permitted at the pump and it can cause problems — especially for those who carry low balances in their checking accounts. An unexpected debit hold can begin a cascade of overdraft fees or even cause a customer to be locked out of making vital purchases that they intended to make with their “held” money.
One more point of clarification. There are actually two charges that hit a customer’s account when they purchase gas. One is an “authorization” charge, typically for $1. This charge isn’t permanent and is later removed. Its purpose is to make sure that the card being used is “live”—that is, that it is a valid card.
The second charge is the debit hold, which is required by card network rules. The bank issuing the debit/credit card is responsible for the length of the hold.
The amount of a hold varies from retailer to retailer, who set the limit based on a variety of factors. Most commonly, holds are between $75 and $125 and are designed to cover the maximum cost of a fill-up. Retailers with higher hold amounts may have more traffic from vehicles with larger gas tanks, such as trucks.
It’s not the retailer who is responsible for continuing the hold, since credit/debit card network rules make it impossible for the retailer to extend the hold. Also, retailers have nothing to gain from holding onto their customers’ money—it freezes accounts that could be used to spend money in the store. Ultimately, it is the banks that can reap added benefits from holds, such as assessing overdraft fees that happen as a result of unanticipated holds.
The amount of the hold and the time of a hold may vary, but the length of a hold is significantly affected by how the card is used. PIN-debit transactions are real-time transactions (that is, they are processed at roughly the speed of digital transmissions) and holds should be released immediately. However, so-called signature-based debit transactions — those where customers do not use a PIN—are processed like a credit card transaction and have longer hold times that could take several days to clear.
Signature-based debit transactions holds, like the holds on credit cards that can affect a customer’s spending limit, can remain for 48 to 72 hours, since the processing times are slower. Generally, they should last a shorter period of time because retailers conduct “batch” transactions at least daily; any time that the hold lasts beyond that time for signature-based debit is due to bank settlement processes.
For PIN-based debit transactions, which are real-time, online transactions, the hold should last only minutes. When a customer swipes their card and the pump says “authorizing,” that is when the hold is being charged to their account. After the fill-up is complete, the issuing bank is automatically notified, and the hold amount should immediately change to the amount that the customer actually purchased.
Authorization limits imposed by some banks can force retailers to cut off gasoline sales at a pre-set amount, related to the hold amount for payments by plastic. Set the limit too high operators risk ire over high holds; set the limit too low and they risk irritating drivers of large-tank vehicles such as SUVs that are unavailable to completely fill up.
This situation forces retailers to select one of two bad options. One choice is to adhere to this authorization limit and hope that affected consumers don’t take out their frustration on the store by refusing to return. If these frustrated customers do not immediately drive away and instead stay to continue fueling up, they must initiate a second “fill-up” authorization, which further alienates customers and adds more costs for retailers because of the fixed-cost pricing component of swipe fees on the second sale.
The other option is to allow customers exceed this authorization limit. Retailers who choose this option risk having part of the charge denied by the bank (known as “Reason Code 96”), even if the card is not fraudulent, and lose getting credited for the amount of the sale above the limit.
Consumers can make sure the hold is released immediately by using their PIN, since PIN debit transactions should be registered immediately. An increasing number of stations—an estimated 60%—also have PIN pads at the pump.
Consumers should ask their bank about its policy regarding the length of debit holds. If the hold lasts longer than a few minutes for PIN-based transactions, or longer than three days for signature-based debit transactions, consumers should discuss the matter with their bank to learn why the holds are lasting so long. Most banks print their phone numbers on the backs of their cards.
When posed with the option of credit or debit, consumers should always choose the PIN debit option because that transaction will be immediate, whereas credit or signature-based debit transactions can take days. Plus, PIN-based debit is much more secure.
Check online bank statements regularly and call the bank if something looks out of the ordinary on a statement.
Still, many retailers have taken on this risk to reduce customer inconvenience. (Consumers are still assessed the full amount if the retailer is denied payment in this situation, but the bank, not the retailer, keeps the additional money. With low gasoline margins, a handful of these chargebacks can wipe out the day’s gasoline profits.)
Debit and credit cards also create concerns related to data security, and retailers take steps to protect their customers. One way is to ask customers at the pump to enter a 5-digit ZIP code associated with their credit card before fueling. The concept is that someone who has a stolen card is much less likely to know the ZIP code associated with the card, especially at a store near a highly trafficked road, where people could be coming from a much greater distance than the immediate area and a specific ZIP code.
This information is not used for marketing purposes, as it often is in other retail settings where customers are asked for their ZIP code or phone number. It is purely to verify the owner of the card.
Thieves often test cards to see if they are still “live” at places where they don’t have to engage in a face-to-face transaction, such as the gas pump and risk having the card confiscated. After a successful test, the thieves may then try it at retail locations. So, by requiring a ZIP, it may limit options for the thief are limited. And it could also reduce gas costs. A 2011 analysis for the California Senate’s Judiciary Committee explained that credit card companies provided financial incentives to use ZIP code verification at the pump. The credit card processor may view these transactions as less risky and may opt to offer discounts to stations requiring ZIP verification.
If customers do not enter their ZIP code or enter an incorrect one, the pump will not dispense fuel.
Unfortunately, this adds a level of inconvenience for law-abiding customers. And it can be even more inconvenient for visitors travelling from other countries, especially Canada, which has a 6-digit postal code that is a combination of letters and numbers. But there are some workarounds besides going inside to get the pump authorized. One other option suggested by some experts is for Canadians to enter the numbers in their postal code, plus an additional two zeroes. So, if a Canadian billing address is H2W 1L2, the customer would enter 21200.
With data security a growing concern, there are continuing actions to address data security. Many larger retailers were subject to new Payment Card Industry (PCI) Data Security Standards beginning January 1, 2015. These “level 1” retailers are the first wave of retailers that must implement new controls. Retailers that process fewer transactions will be phased in to also conform over a multi-year period.
In October 2015, card issuers were required to replace traditional credit and debit cards that have magnetic stripes on the back with new cards featuring EMV technology. EMV (an acronym for Europay, MasterCard and Visa) requires that embedded chips be used in cards, a practice common in the rest of the world. The chips in these cards, when used in conjunction with PINs (known as “Chip & PIN”), have reduced fraud in other countries. However, the credit card companies and banks in the United States intend to issue cards without PINS, which will likely undercut the security benefits of the new cards.
Retailers will face added costs in upgraded their terminals and software to accept EMV. And retailers who didn’t upgrade by October 15, 2015, may be liable for the cost of fraudulent purchases. However, very few retailers were able to meet the October 2015 deadline. According to the National Retail Federation, only 8.5% of all retailers were EMV ready in January 2016. The card issuers also are behind—only around 40% of consumers had the new cards in time to meet the first EMV deadline. One argument that has been raised by card issuers: the benefits don’t justify the costs.
The deadline to comply at gas dispensers, which are much more sophisticated than other payment terminals because they both dispense product and accept payments, was not until 2017. However, in December 2016, Visa Inc. delayed its deadline for installing EMV chip-card readers in U.S. gasoline pumps from 2017 to 2020 after retailer discussions made clear that they would not have enough time to complete the multibillion-dollar upgrades.
In addition to Visa, MasterCard made a similar announcement saying that it too is modifying the automatic fuel dispenser liability shift date from October 2017 to October 2020.
The card companies said that the automated fueling dispenser segment would need more time to upgrade to chip because of the complicated infrastructure and specialized technology required for fuel pumps. For instance, in some cases, older pumps may need to be replaced before adding chip readers, requiring specialized vendors and breaking into concrete. Furthermore, five years after announcing our liability shift, there are still issues with a sufficient supply of regulatory-compliant EMV hardware and software to enable most upgrades by 2017.
It is important to note that these challenges to get dispensers compliant are not of retailer creation, but a result of late specifications, certification complexity and supply chain constraints, rather than a lack of resolve to adopt EMV. It also appears that the announcement does not clearly delay liability in retailers who experience higher fraud rates or those accepting foreign issued cards.
Retailers also are concerned about costs outweighing benefits. The process of “dipping” a card with a chip is about 3 to 8 seconds slower than swiping a card and that poses a challenge for convenience stores, where speed of service is essential.
Another major concern is that these cards don’t reduce the likelihood of stolen cards being used. Because PINs are not required with these cards, there is no process in place to validate whether the person using the card is a legitimate card user. These cards also don’t do anything to address fraud with online purchases. However, retailers are now liable for this fraud, even with stolen cards that they cannot verify.
If PIN isn’t required for EMV, the card issuers’ concern may become a self-fulfilling prophecy. Meanwhile, retailers want proven fraud-reduction measures like PIN included because they currently pay more of the costs associated with fraud than the banks do, especially at the pump. With EMV, retailers will want to see if the swipe fees that they pay will decrease, since the card companies have long argued that the cost of fraud was a major component of swipe fees.
Estimates put the cost of retailer compliance for EMV at $35 billion. The global research firm IHL Group has called this cost “the single biggest tax being levied upon [retailers] since Y2K.”
The big difference between Y2K and EMV is that the costs associated with Y2K were to fix a potential problem—and the costs associated with EMV are causing problems.