PORTLAND, Ore. — Gas prices tend to generate a lot of social media attention no matter how they're trending, but some recent posts about prices in Portland have highlighted a particular gas price scenario that many Oregon drivers have likely encountered: some gas stations will advertise two different prices for the same kind of gas, depending on whether a customer pays in cash or with a credit card.
The credit card prices are always higher, and some commenters questioned whether the practice is legal.
THE QUESTION
Is it legal for Oregon gas stations to charge different prices depending on whether a customer pays with cash or credit?
THE SOURCES
THE ANSWER
Yes, it is legal in Oregon and all other states for gas stations to charge different prices for credit and cash transactions. Federal law gives businesses the right to offer discounts to encourage customers to pay with cash.
WHAT WE FOUND
Credit card network companies like Visa and MasterCard collect processing fees from merchants every time a customer swipes their card to pay for something, which means retail businesses earn slightly less net profit from credit card transactions than they would if those same purchases were paid in cash.
Some small businesses and even a few larger ones don't accept credit cards because of the fees, but that can be a risky strategy in an era when plastic is ubiquitous and increasingly few customers carry cash. Most businesses are left with a choice of absorbing the credit card fees themselves or finding ways to pass them on to customers.
The most straightforward way of passing it down is to add a surcharge for customers who use credit cards, but a few U.S. states ban or restrict the practice, and credit card network operators also used to prohibit participating businesses from doing it. Those restrictions triggered a major legal battle in 2005, and the case ended in a settlement that opened the door for surcharges nationwide. A few states still have restrictions, but some of those laws have been blunted by court challenges.
The National Association of Convenience Stores (NACS) celebrated the court case victory, but the industry group also predicted that the terms of the settlement would still discourage many businesses from adopting surcharges.
Gas stations seem to be the exception, but according to Gabriel Zirkle with the Oregon Fuels Association, the higher prices for credit cards aren't a surcharge. Under what the industry calls a two-tier pricing model, the credit card price is the standard or regular price listed on the gas pump, and the cash price is a discount applied to the original rate.
That distinction matters, especially in places where there may be local restrictions on surcharges, because federal law specifically protects the right of merchants to offer discounts to encourage customers to pay cash.
The average consumer is also more likely to react negatively to a fee for credit than a discount for cash, NACS spokesman Jeff Lenard said, and since approximately 75% of gas station transactions are paid by swiping cards, most station owners aren't going to want to risk annoying a majority of their customers.
Why gas stations?
Regardless of the method, why is it that gas stations seem to be more aggressive than most businesses when it comes to recovering credit card fees? According to Zirkle and Lenard, there are two main reasons: First, gas prices tend to fluctuate a lot more than other consumer goods. And second, customers pay very careful attention to those trends.
"Consumers are incredibly price sensitive when it comes to fuel," Lenard wrote in an email. "People will drive five minutes out of their way to save 5 cents a gallon."
Many credit card companies charge retailers what's called a blended fee for transactions, Zirkle explained, which is technically two fees bundled together. The first part is a flat rate fee that gets charged every time a customer swipes their card, while the second is a percentage fee based on the total value of the sale.
The flat rate fee is why customers might sometimes encounter minimum purchase requirements if they pay with credit at small independent convenience stores — if transaction is too small, the flat rate fee could eat up a lot of the store's profit margin from the sale. Gas stations don't have that problem, but they can get tripped up by the percentage fee.
"Our product in particular has ups and downs, and we're working on very slim margins," Zirkle explained.
If the price of gas per gallon were to double, the percentage-based credit card fee would also double — but most gas stations wouldn't be able to mark up the price enough to double their own margins to compensate, because the market is too competitive.
"Everybody plays a game of chicken, if you will," Lenard said. "Nobody wants to be the higher price."
What about debit cards?
Customers tend to think of debit cards as precisely equivalent to cash, Zirkle said, because they draw funds directly from a user's checking account at the point of sale — but the truth is they still carry transaction fees, which is why it's more common for gas stations to put them in the credit card price tier.
Debit cards are issued by banks but they're still connected to the same processing networks that credit cards use, so they still incur transaction fees for businesses. In some cases the debit fees are lower than credit fees due to an upper limit imposed by an amendment to the 2010 Dodd-Frank Act, but the federal regulations only apply to about 60% of debit cards, according to an NACS article — the other 40% have fees that are more in line with credit card fees.
Assuming an average price of $3 per gallon and an average fill up of 10 gallons, the credit card fees for a gas station would total out to around 7.5 cents per gallon, according to the NACS article. The debit card fees would total out to about 2.4 cents per gallon — but only for the debit cards that are covered by the federal rules. Debit cards overall are used in about 46% of all sales at the pump, according to the article, with credit used in another 29%.
Oregon law doesn't prohibit businesses from charging debit card transaction fees on customers, but it does require them to clearly communicate the existence of the fee to customers in advance. That issue landed the parent company of the gas station chain ARCO in hot water a few years ago, when an Oregon consumer successfully sued the company for failing to adequately warn customers about a 35-cent fee that it was charging on debit purchases.
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