Credit Card fees are cutting into gas station owners' profits

The Virginian-Pilot

As Hampton Roads residents struggle with record gas prices, station owners like Jason and Julie Im are feeling the pinch as well.

More and more customers are relying on credit cards to pay for their gas, driving up the fees that the Ims pay to their bank and major credit card companies.

These payments – known as interchange fees – are charged by a merchant’s bank as well as by the banks that issue credit cards. In the United States, the typical fee per transaction ranges from 2 to 4 percent.

“It used to be $800 or $900 a month for the fees,” Jason Im said. “Now, it’s $2,600.”

Because fees are paid on a percentage basis, higher prices at the pump mean the Ims pay more, even though their sales volume has dropped from 50,000 gallons a month to 37,000.

Gas stations have always been a low-margin business, with owners making just a few cents per gallon. Their main profits usually come from maintenance work – the Ims have a garage attached to their station – or from sales of drinks, food and other goods.

Last week, for example, the Ims – who have owned their Shell station on Granby Street in Norfolk next to the Lafayette River for 20 years – bought gasoline at the wholesale equivalent price of $3.88 and put it on sale for $3.99, an 11-cent markup. A federal gas tax per gallon of 18.4 cents and state taxes – in Virginia now 17.5 cents per gallon and North Carolina 30.2 cents – are included in figuring the wholesale price.

But when customers pay with credit cards – and 80 percent of those at the Ims’ station do – anywhere from eight to 10 cents per gallon gets eaten up by interchange fees.

When gas was $2.50 a gallon, the interchange fees left the Ims with a five- or six-cent margin. Now, they’re lucky to break even on each gallon.

Dee Knight, who with her husband owns a BP station on Tidewater Drive in Norfolk near Interstate 64 , said they’ve run into the same problem.

“It’s eating us up,” Knight said. “People think we’re getting rich along with the oil companies, and it couldn’t be further from the truth.”

Jeff Lenard, a spokesman for the National Association of Convenience Stores, said that stations got about one-third of their profits in 2007 from gas sales. He said that number is down sharply in 2008.

Most of the 115,000 convenience store operators in the United States are similar to the Ims or Knights and have just one or two stations.

Jeff Miller, president of Norfolk-based Miller Oil, is also trying to find ways to keep his stations profitable. His company owns 37 outlets and serves as a distributor to about 60 more owners, including the Ims.

Miller Oil buys about 100 million gallons of gasoline a year and paid $2.5 million worth of interchange fees, twice what the company paid two or three years ago, he said.

“We have some sites where credit card fees are more than the margin we’re making,” Miller said. “It’s our biggest expense behind rent.”

Nationwide, some station owners are looking for ways to get more customers to pay with cash, which leaves the entire profit margin intact.

Miller said some of his stations in Florida are experimenting with a discount of five cents a gallon for cash payments. He’ll wait and see how it goes before he tries it here in Hampton Roads.

Miller, who serves on the trade association board, and merchant groups complain that Visa and MasterCard set the rates and then give merchants a “take it or leave it” option. The two companies control about 80 percent of the U.S. credit card market.

A pair of bills introduced recently in the U.S. House of Representatives and Senate would order the credit card companies and merchants to bargain on interchange rates. If the two sides could not agree on a rate, then an arbitration panel appointed by the Department of Justice and Federal Trade Commission would weigh in and decide.

“The insidious part is that the higher the price goes, the more the customer relies on credit cards and the higher the fees,” said Miller, who is a strong supporter of the bill, as is the convenience trade association.

Merchants argue that the percentage-based rates don’t make sense. They say it costs a bank the same amount of time and money to process a $20 transaction as it does to record a $200 payment.

Several years ago, Australia ordered credit card companies to cut down the fees, a move that merchants here cite as a positive example.

Credit card companies say the lower rates have led to fewer card options and higher prices.

Trish Wexler, a spokeswoman for the Electronic Payments Coalition, which is made up of banks and the major credit card companies, said the fees are needed because they allow banks to take on fraud risk and other credit card operations. She said the bills are an attempt by merchants to pass credit card costs on to consumers.

Interchange fees are included in the merchant service fee that merchants pay to their banks. Visa argues that if the merchants think the fees are too high, they can negotiate with their local bank to get a lower rate.

The Ims hope to rely on maintenance profits and sales inside their convenience store to ride out this period. They also hope that their gas customers, alarmed over higher fuel costs, will realize that they and other small station owners are struggling with high prices, too.

“We used to get our mortgage or rent paid for out of the gas (profits),” Jason Im said. “Now, we break exactly even when we sell with credit cards.”

 Jacob Geiger, (757) 446-2643, jacob.geiger@pilotonline.com