Friday, October 21, 2005

More Windfalls At The Gas Pump (Forbes) - Liz Moyer, 10.21.05, 6:00 AM ET

Oil companies aren't the only ones reaping windfalls from soaring oil prices. Banks and finance companies that specialize in credit cards are enjoying double-digit gains in the fees they make for processing card payments, largely because rising gasoline prices are forcing consumers to reach for plastic at the pump. And these same companies are also taking a bite out of gas retailers.

How so? Banks charge gas retailers a percentage of the transaction amount to help cover the costs of processing the payment and other costs. This is called the interchange fee. A year ago, when gas cost $2.03 per gallon, banks got about 5 cents per gallon in interchange fees--based on a 2.5% rate per transaction. Now, with gas at $2.72, banks are raking in closer to 7 cents per gallon. And gas tanks haven't gotten any smaller.

JPMorgan Chase (nyse: JPM - news - people ), one of the largest issuers of credit cards in the U.S., said on Wednesday that operating profits from card services rose 43% in the third quarter. It cited higher fees from merchants as one of the factors. At Bank of America (nyse: BAC - news - people ), debit card purchase volumes were up 28% in the quarter, while revenue from debit cards was up 29%.

The use of cards for gas purchases is also on the rise.

Last year, consumers charged or had debited some $177 billion for gasoline, according to the Nilson Report. Some 47% of that was charged to MasterCard or Visa. American Express (nyse: AXP - news - people ) and Discover each had barely 4% of the market. Now, with profit growth slowing in the card business, the biggest card issuers are stumbling over themselves to offer new cards with more lucrative rewards programs--all designed to get consumers to use plastic instead of cash.

Citigroup (nyse: C - news - people ) this week unveiled a new line of cards that have no annual fees and no late fees, featuring big incentives (like 5% cash back) when the cards are used at gas stations and drug stores. "The issuers are competing in a real slugfest for customers, and the rewards programs are at the center of it," said David Robertson, publisher of the Nilson Report.

Interchange fees help offset the costs of rewards programs. Of course, retailing groups are screaming mad about the ballooning sizes of the interchange fee, and some are trying to get the mammoth card associations to lower or suspend them.

Multiple lawsuits are pending in U.S. courts, brought by retailing associations and trade groups seeking to lower or eliminate the fees. Similar suits in Australia have been successful, and retailing groups in the U.K. are agitating for the same changes there.

Mitch Goldstone, an online merchant, blogger and lead plaintiff in a class-action lawsuit over such fees against MasterCard and Visa, says they are just too high. He has made it the central theme on his Web site,

According to the National Retailing Federation, card issuers made some $25 billion last year on interchange fees alone, with $17 billion of that going to banks that issue under the MasterCard and Visa logos.

Meanwhile, retailers haven't been able to raise prices to keep up. Gas stations, for example, are struggling fiercely under competition to keep prices low (as lawmakers watch them for signs of price gouging). This means the higher percentages on the fees the retailers pay to banks are chipping away at the pennies they make in profit per gallon.

"It's an unearned byproduct of the rising price of oil," contends J. Craig Shearman of the National Retail Federation.

Goldstone even attempted to get MasterCard and Visa to cut consumers (and merchants) a break after Hurricane Katrina by suspending interchange fees entirely for gas retailers. After last year's tsunami in Indonesia, the associations did suspend interchange fees on donations made with plastic to the Red Cross. But this time the associations are not budging. "Interchange fees are not reflective of gas prices," said a spokeswoman for MasterCard.

It's not likely that the gas stations will win. They could refuse to accept cards or start charging less for purchases made with cash, but consumers are so in love with plastic that those tactics probably wouldn't work.

"Banks have done such a good job at ingraining the rewards programs," said Scott Valentin, an analyst at Friedman Billings Ramsay. "Merchants don't have to take credit cards, but most merchants are afraid to do that."