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A Thing
Issue 06:08:02

Industry Update

NAOPP kicks off teleseminar program

Online gambling under scrutiny, again

MasterCard accentuates the positive (earnings)

Goodies abound at BPS sales conference


Industry Leader:
Scott Rutledge

A strong and independent spirit

Rising gas prices, interest rates hit vault-cash providers

By Valerie Killifer, Reporter,

GS Advisory Board:
Weathering a rough climate


America the penniless?

By Patti Murphy

Technically challenged? Bring in an expert - now

By Biff Matthews


Street SmartsSM:
Advice to newbies: Take it slow, think big picture

By Michael Nardy

The skinny on chargebacks and disputes - Part I

By Ross Federgreen

Payment process patents: A threat to freedom of commerce?

By Adam Atlas

A new take on lead development - Part II

By Jason Felts

Are you getting what you deserve?

By Tom Della Badia

The zen of zip

By Joel Rydbeck

New Products

The back-office toil Terminator

Aircharge merchants go BlackBerry-picking

Company Profiles

Direct Technology Innovations Inc.


Dripping faucet or fresh air: Which one would your customers liken to you?



Resource Guide


Gas pain: No silver bullet in sight

Nine ways merchants
can ease the pain

  1. Require prepay.
  2. Implement Address Verification Service at the pump.
  3. Set pump preauthorization limits at $50 (or $75, maximum)
  4. Implement velocities at the pump.
  5. Monitor, analyze and manage chargebacks.
  6. Add prepaid phone cards to merchandise offerings.
  7. Use window merchandising and pump screens to advertise in-store promotions.
  8. Add bill-pay to in-store services.
  9. Reduce overhead and speed transaction time by switching dialup lines to broadband

If you've got gas station clients, you may want to hang out a therapist's shingle as a sideline. Some of the best assistance you can offer these days may be an ear to bend. Why?

Because merchants are feeling the proverbial "pain at the pump" as much as their customers. To make your task a little easier, we will offer some tips to share with your petroleum clients.

Unless you've been mushing a dogsled through the Alaskan wilderness for the past 18 months, you already know that gas prices have burst through new highs and stayed there.

The situation was made temporarily worse this month when BP shut part of its Alaskan pipeline to make urgent repairs.

U.S. gasoline prices were 34% higher in June 2006 than they were a year earlier, according to the July report from the Bureau of Labor Statistics. The seasonally adjusted annual price on gasoline rose 52% in the first six months of this year.

In mid-August, average prices for regular gas hovered at $3.04 a gallon nationwide, according to AAA. That was an increase of $0.07 a gallon over the previous month.

Drivers keep filling up despite the increases. Gasoline consumption is up 1.44% for the four weeks ending Aug. 4, compared with the same four weeks of 2005, according to Peter Beutel, President of Cameron Hanover, an energy-risk-management consulting firm.

Excepting heating oil and diesel, "American consumers are paying $385 million a day more for energy than they did three years ago," while they have drawn down savings and equity and stashed their fuel debts on plastic, Beutel said. He predicts prices will top out soon.

Squeezed on all sides

Higher wholesale prices put the squeeze on gas stations. Many merchants maintain a constant margin on a gallon of gasoline, rather than use percentage-based pricing, lest they be accused of price-gouging. When the cost of a gallon rises by a dollar, interchange fees take a progressively bigger bite out of that margin.

Petroleum retailer Bill Douglass spoke for the merchant community when he told the U.S. Senate Judiciary Committee in July that convenience stores paid as much in interchange fees last year as they earned in pretax profits, and that interchange continues to take a bigger bite out of profits as gas prices rise.

"My own fees this year are up 33%," Douglass said, testifying on behalf of the National Association of Convenience Stores (NACS). He is the Chief Executive Officer of Douglass Distributing, which operates 15 petroleum/convenience stores in the Dallas/Fort Worth area.

Tom Burns, Senior Vice President of ISO Development for Orion Payment Systems, pointed out that with the cost of processing, merchants' margins are not increasing as the dollars involved in gas purchases rise. He said merchants "feel they are paying more now than they ever have, and it is becoming more expensive to take credit cards."

According to Rick Brennes of the Brennes Jones Group, the processing fees mean many independent gas stations are selling at or below cost.

Cindy Fencl, Chief Operating Officer of Petroleum Card Services, agrees the low margins are a threat. They "can pretty much break mom and pop," she said. "Three cents a gallon on a 20-gallon ticket isn't much."

"My credit card processing, including the infamous interchange fee, represents 11.4% of my gross profit," said Stewart Spinks, Chairman and CEO of Spinx Co., which owns 120 stations in the Carolinas.

"Frankly, I have ... a loss of $507,000 for the first six months of this year," he said. His card processing fees are up 35% this year and will probably be over $4.8 million total. His ISO will see only 4% of that.

Seeking relief through lower fees

Independent gasoline retailers - the only stations served by ISOs - are pinched further by brand-name competition. Fencl said the major oil brands have reduced their credit card processing fees to help their branded locations, and this has spurred many independents to price shop on credit card processing services.

"There is a lot more volatility in the market because [merchants] are anxious for price savings," Fencl said.

"We're watching a rash of uncharacteristic behavior because [they] are just looking for some relief. We've had a few stop taking credit cards at the pump."

Some clients, lured away by promises of a 1.49% processing rate by competing ISOs, have come back to PCS after discovering that rate does not apply at the cardholder-activated terminal (CAT), she said. ISOs can alleviate this problem by making sure, when quoting rates, that they quote the pay-at-the-pump, or CAT, rate.

Another problem these prodigal sons report: finding out after they've switched that their new processor doesn't support debit and fleet cards. Andrew Hackler, CEO of PCS, said, "People offering these rates do not have the ability to integrate the full offering."

Possibly adding to merchants' problems are cash-strapped consumers who cannot afford to pay upfront. NACS estimates that 60% to 70% of all gas customers are now paying with credit, up from 54% in 2004.

One of Orion's petroleum merchants reported that consumers now prefer their credit cards to debit. "I don't know how much of a trend that's going to be, because check cards were growing dramatically," Burns said.

The dual-pricing mambo

The dominance of credit at the pump has encouraged some station owners to discount for cash. Burns said a gas merchant asked this month if he could implement two-tiered pricing: He wanted to discount $0.08 for cash because his margins are only $0.03 a gallon. (Visa rules do not prohibit merchants from offering a discount for cash transactions.)

Some of PCS' gas station clients are discounting, according to Fencl. "But most don't have the convenience of cash acceptors," she said. Installing them to save on short-term high gas prices would be cost prohibitive; the expense could not be recouped within two years, Hackler said.

Still, merchants feel pinched when they lose desirable cash-paying customers to the cash-only station around the corner. BP-owned cash- and debit-only Arco stations often function as the neighborhood spoiler, with prices on regular gas sometimes $0.10 cheaper than nearby stations.

Arco's PayQuick terminals accept cash, do not take credit, charge a $0.35 fee to debit customers and do not process debit cards through either the Visa U.S.A. or MasterCard Worldwide networks, according to Arco spokeswoman Cindy Wymore.

In urban areas, discounting for cash gives stations an edge when Web sites devoted to posting the lowest pump prices advertise their names and locations.

The Forest Park Exxon franchisee in Glendale, N.Y., tried a cash-discount strategy last June. But a visitor to posted July 4, 2006, that the station had discontinued its cash pricing.

The station tried cash discounting due to high gas prices. Although cash customers liked dual pricing, the plan meant losing about 20% of credit customers, said station Manager Elvin Gorif.

Some cardholders thought dual pricing was illegal and reported them: Twice, the city's Department of Consumer Affairs showed up to verify the signage complied with local law.

The station returned to single pricing after Exxon insisted. That meant dropping the credit price and raising the cash price by $0.04 per gallon.

According to Gorif, at a $0.10 margin per gallon, the station, which pays 3% in fees on credit card transactions, loses money on those sales.

He pays $0.04 to $0.05 per gallon on the pool margin, depending on the ratio of cash to credit sales. At the end of the day, "we're making $0.06 a gallon," he said.

As an Exxon franchise, the Forest Park station doesn't have to worry about one of the independent gas retailer's biggest new headaches: chargebacks. Exxon takes responsibility for any losses stemming from cards used outside at the franchisee's pump.

Just say charge it ... back

Chargebacks are on the increase, due to two main problems: stolen cards and Reason Code 96. The latter occurs when a single gas purchase on a Visa card exceeds $50. Visa U.S.A. rules permit an issuing bank to charge back the entire sale when it exceeds this limit, even though the cardholder does not challenge it.

"If you did that in a ski mask, you could at least get charged with a felony," said Gray Taylor, Vice President of Research for NACS.

"The injury is when [banks] hit you with a Code 96 for [a purchase of] $70. Some markets, at $0.07 margins, have to sell 1,000 gallons to recapture that."

One processor reported to NACS that its chargebacks went up "four-fold" due to Reason Code 96 after gas prices rose 30% last year, Taylor said. Based only on anecdotal evidence, NACS believes the chargebacks are being generated by a few, isolated banks, including smaller ones, who may be using the loophole to improve their bottom line.

A petroleum chain reported that it was hit by hundreds of thousands of dollars in Code 96 chargebacks for a single month in the last quarter of 2005, Taylor said. That merchant persuaded some of the banks to withdraw those charges.

Brennes said Code 96 chargebacks are a "real hot issue" with petroleum merchants. Some of his clients had any Visa transaction over $50 charged back.

"I suspect it's a [bank's] collection method for slow-pay cards," he said. As a result, Brennes' ISO has advised all its gas stations to set the pumps at $50, require reauthorization after that, and make up for lost revenue via in-store sales.

Not all petroleum ISOs are seeing increased Code 96-generated chargebacks. "We haven't seen any change in chargebacks," Fencl said. PCS strategizes to control chargeback occurrences at the 3,000 stations it services.

"We are very vigilant that they have velocity check," preventing a card from being authorized more than twice in a 24-hour period and making the station less vulnerable, she said. If an unusual level of activity pops up, such as excessive charges coming through at 2 a.m., PCS calls the station to ensure the activity is legitimate.

And PCS was proactive in getting certification of the Address Verification Service on standard pump equipment using a key processing platform, Hackler said.

The limitations of limits

With retailers' ability to set pump limits, the solution to chargebacks would seem simple: require reauthorization for amounts above $50.

However, most petroleum merchants report that customers never bother with a second transaction. The limit costs the merchant higher sales on all cards, not just Visa.

MasterCard Worldwide permits sales up to $100 at self-service, cardholder-activated terminals, although it protects the merchant/acquirer for authorization-related chargebacks only up to $75.

Pumps set beyond $75 generate transactions that are deemed nonqualified by Visa and subject to downgrades, Fencl said.

And a second authorization is arduous for debit customers who keep their bank accounts at low-tide levels. A second debit within a short period can mean a hold on $100 to $150 for a matter of days, even if they only put in a few bucks each time.

Credit card Associations say they charge back for Code 96 violations because history has taught them higher-dollar-volume fill-ups are likely to be theft, said Jeff Lenard, NACS Director of Communications.

"The merchant has to understand ... it's for their safety, so that someone doesn't pull in with a flatbed truck and empty their underground tanks," Burns said.

Because service station CATs are card thieves' favorite places to test plastic, the use of stolen cards at the pump is on the rise, some ISOs report.

Visa imposed a limit to protect merchants from greater losses. (The card Association did not respond to a request for more information.)

"The unattended terminal keeps the merchant vulnerable," Brennes said. "In any dispute, he's going to lose because there's no signature."

Visa's preauthorization maximum, or "off-limit," of $50 gives the retailer a measure of security against fraudulent cards, but is too low for many gas purchases, Fencl said.

On the other hand, if retailers set their pumps to $75, they will not be subject to downgrade by Visa, but payment may not be guaranteed if the cardholder is over his or her limit. Most retailers set their off-limit at $75. Yet, in some neighborhoods, a $75 hold would put some debit customers in overdraft territory.

Spinx Co. increased its limit to $75 early this year and immediately began seeing an uptick in Code 96 chargebacks, now averaging about $2,000 a month, Spinks said.

Visa has given no indication it might consider raising Code 96 limits a bit to accommodate today's higher gas prices.

Pushing the envelope

While most stations cannot make a go of a dual pricing system, Spinks found the key to making it work was giving debit cardholders the same discount he offers cash customers.

He can do this because he negotiated a small fee discount with his ISO on debit transactions. The strategy has enabled Spinx's 40 self-branded petroleum/convenience stores to create a niche market.

Many of Spinks' customers chafe at the $75 holds placed on their accounts. Spinks' relationship to his ISO is quite friendly. But he's aggressive with banks or credit unions that charge overdraft fees due to holds initiated at Spinx locations.

He tells the institutions, "If you're not going to reimburse them, I'm going to reimburse them, accompanied by a letter" providing the customer with names of banks that clear holds within hours.

To further reduce costs, Spinks has convinced one petroleum brand under which he owns franchises to allow him to switch from the brand's processor to his own lower-cost ISO/processor. He will test this at 10 locations to ensure his costs drop before converting all 40 stations.

Spinks encourages ISOs to be more friendly with debit by offering a discount. He also wants ISOs to offer merchants a rate on loyalty-card processing that is competitive with the rate he pays on debit cards. He thinks such a card could make customers loyal to Spinx Co.

Article published in issue number 060802

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