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Pay-by-Plastic pumps up gas prices in U.S.

American Government Special Collections Reference Desk

Pay-by-Plastic pumps up gas prices in U.S.

April 30, 2005

"People are not paying with cash anymore," Alex Demir stressed when asked about rising gas prices.  Increasingly, they opt to pay with plastic.  The payment method involves no transaction fee, is safer than cash if lost or stolen, and is more convenient.  The plastic Debit and Credit Cards also mean people, if they choose to, can pay at the pump and skip making the trip inside the station.  No wonder its use is on the rise.

Demir is the owner-operator of the Shell gas station that changed over on Thursday from what used to be a Texaco.  He expects pump prices to hit $2.50 a gallon before levelling and the sticker shock wears off.

Demir estimates he passes along in the form of higher gas prices a nickel per gallon due to the surcharge he incurs from processing electronic purchases.  Each time a buyer uses plastic to make a payment, he submits the receipt to a bank to process for having the money credited into his account.  The bank keeps 3% of the total amount of his transactions as a processing surcharge, or fee.

When the use of plastic was first gaining acceptance in the gas pumping business, people who used plastic paid a higher price, about 3 cents a gallon, when at the time gas cost about a dollar a gallon.  Then advertising campaigns offering "Credit same as Cash" started, and changed the business standard to where now all stations charge the same, regardless of cash or plastic payment.

"The banks are making a lot of money on this," Demir says.  Now that the price of gas has more than doubled, the fees banks collect on processing these plastic transactions has more than doubled too.  The entire transaction banks use to process these payments is electronic, involving hardly any labor at all.  But the processing fee remains unchanged, which means a fat paycheck for banks.

Now maybe he and other gas stations will go back to offering a discount for cash.  Processing plastic transactions is a variable cost to Demir over which he has no control when his pump prices are "Credit same as Cash".  The use of plastic directly affects his profit margin by the 3% processing fee.

When asked about high gas prices from suppliers, he dismissed the notion with a wave of his hand.  "They control everything," he said.

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