Drive for rewards pushes old-style gas cards in ditch
One-company gasoline credit cards fall from favor
By Steve Holt and Connie Prater | Updated: August 17, 2010
A generation ago, gas credit cards issued by oil companies were widely used by American drivers. For many people, the gas card was their first venture into the world of credit cards.
Today, those limited use, high-interest-rate cards show signs of, well, running out of gas, according to oil industry and payment system experts. "It's a simple, easy-to-understand product that people have gotten to know, but that is in decline," says David VanWiggeren, U.S. card marketing manager for BP oil company, which operates 11,000 BP/Amoco stations nationwide.
Instead, a new breed of hybrid gas cards has emerged -- issued by banks instead of oil companies, brandishing Visa and MasterCard logos (called co-branded cards) and chock-full of reward, cash back and rebate incentives designed to keep consumers swiping at the pumps.
A CreditCards.com review of the top 29 gas cards found that the majority now offer rebates and discounts, annual fees are less common and most give consumers the flexibility to use the credit cards anywhere they like -- not just at gas stations (See gas card comparison chart).
Rebates range from 1 percent to 10 percent of gas and other purchases but also come with restrictions for redeeming rewards. Among them: Discounts apply to only certain grades of gasoline, purchases must be made inside the store rather than at the pump or require signatures in order to document the sale or rewards may be redeemed only at certain gas stations.
Transformation at the pump
What's behind the transformation in how Americans pay for gas? Experts point to a number of recent developments, including:
• Pay-at-the pump credit card swipers that accept multiple brands of credit cards, debit cards and prepaid cards have brought more payment choices. New technologies are being developed to help consumers get pennies off per gallon when they pay at the pump.
• Rising gas prices and an abundance of large, gas-guzzling SUVs and minivans have made it common for families to pay $50 to $75 to fill a gas tank, depending on the size of the tank, the octane selected and the price per gallon. Gasoline purchases are becoming a greater share of family budgets. Recent polls have shown Americans are hooked on gas and unwilling to cut back on spending no matter what the price at the pump.
• Competition from general purpose credit cards that are aggressively marketing rewards cards featuring rebates, airline miles and cash back incentives for items on which consumers spend the most money each month. In many families these days, that's often the gasoline bill.
• Oil companies got out of the credit card business and sold their gas card units off to banks and financial services companies such as Citi, JPMorgan Chase and GE Money, which have the expertise to better market credit cards and handle billing and collections.
Losing the wallet fight
In the fight to be the first credit card consumers pull from their wallets, oil company gas credit cards (known in the industry as proprietary cards or private label cards) often lose out to general purpose Visa, MasterCard or American Express cards. The reason: Traditional gas cards limit the choice of where to buy gas while general purpose cards can be used practically anywhere for all types of purchases -- not just the gas station.
"For the foreseeable future, there is no reason to think that consumers will be motivated to go back to a proprietary deal unless the gasoline retailers figure out a way to add value to those cards that will motivate me to switch my behavior," says David Robertson, publisher of "The Nilson Report," a payment card industry newsletter. According to Nilson, ExxonMobil led the industry in total volume of sales involving credit, debit or prepaid cards. Shell, BP, Chevron, Citgo and ConocoPhillips are in the top six.
The gas credit cards of old have steadily declined in use over the last 15 to 20 years, notes Robertson. The number of active credit card accounts for proprietary oil company credit cards declined 5 percent and 7 percent respectively in 2006 and 2005, according to payment card data compiled by Nilson.
By contrast, the volume of gas payments increased for consumers using Visa and MasterCard (9 percent), American Express (7 percent) and Discover cards (12 percent) between 2005 and 2006. The fastest growing card payment method in 2006? The PIN-based debit card. Gas sales for these cards grew by 26.3 percent between 2005 and 2006, according to Nilson.
Driving toward the lowest price
Another reality driving consumers away from loyal reliance on one gas card for fuel purchases: the search for cheaper gas prices. While having a proprietary gas card may build customer loyalty, it limits consumer choice on the roadways, say industry observers and consumer advocates.
-- Mark Viertel
"Very few people are brand-loyal anymore like they used to be," says Mark Viertel, vice president for marketing at Autogas Systems Inc., an Abilene, Texas, company that pioneered pay-at-the-pump software for gas stations in 1986. "People wouldn't go anywhere but Texaco to get their best fuel or Chevron to get their Techron additive or whatever, but that's changing."
He adds: "Now, they look at the price sign, and most consumers know that most fuel comes from the same rack, in most cases. Consumers see that price all the time, so they're focused on it."
Viertel maintains that price so drives consumers' spending habits that they will often resort to doing "irrational things."
"They drive 10 blocks to save three cents on a gallon of gasoline," Viertel says, adding, "not realizing they've burned up any savings by driving 10 blocks."
Pay it off each month
Another concern: Financial advisers warn that drivers should put gas expenses on credit cards only if they pay their entire balance off each month. Carrying a revolving balance means adding interest charges (and potentially late fees) to expenses that are already high and projected to get even higher as the economy stalls. Interest charges on revolving accounts also gobble up any savings earned from rebates and cash back incentives.
"Many gas cards can carry high interest rates if you carry balances, making that gallon of gas cost you $5 or more over time," according to Brad Stroh, managing partner of Bills.com, a website that helps consumers manage and pay their monthly bills. His firm advocates "paying off balances in full, and if you cannot afford to do that, then carry balances on cards with low interest rates or charge on cards that combine low rates with rebates on gas purchases."
Stroh adds: "Always prioritize your credit card balances based on which card has the lowest effective cost, since it's your hard earned dollars."
Chêz Dishman, an Austin, Texas, motorist, says she used to her parents' ExxonMobil gas card when she was in college. "I had to drive out of the way to get gas every time," Dishman says. Today, she's married and she and her husband use a Visa card that gives them both rewards and flexibility.
"We don't want to have a ton of credit cards," she says. "We have one we use for gas and another we use for birthday and Christmas gifts, but that's plenty of credit for us."
-- Chêz Dishman
She adds: "When you're driving around, and you're in a hurry, instead of looking for an Exxon or a Diamond Shamrock or whatever, it's just easier to go wherever you want to go."
When shopping for gas, she considers only two things: "Nearby and well-lit," she says. "I don't look for price. We go to the gas station that's close to our apartment."
At the pump or inside?
While car owners are deciding where to shop for gas, convenience store owners -- who operate the majority of gas stations across the country -- are hoping customers pay inside the store rather than at the pump but not with a general purpose credit card.
The reason: processing fees. When customers fill up using general-purpose credit cards such as MasterCard or Visa, gas station proprietors pay a processing fee (called an interchange fee) charged by the card companies. According to the Nilson industry report, more than half (53.5 percent) of the 2006 gas payment card sales were Visa and MasterCard transactions (see chart). Gas station merchants want to reverse the trend toward general purpose credit cards and hope to move consumers back toward proprietary cards, which carry lower merchant fees.
The National Association of Convenience Stores, a trade group that represents convenience stores that control nearly 82 percent of the fuel sales in North America, is exploring "ways to reduce those expenses, whether via legislation, litigation or innovation," says Jeff Lenard, the trade group's director of communications.
"There are companies that are looking at how to move more transactions to ACH debit, how to move traditional transactions to PIN debit, how to move credit card customers to cash customers via discounts. You name it, retailers are interested," Lenard says.
National Payment Card, a 3-year-old startup business, has launched a discount gas payment system that allows consumers to use their driver's licenses as a payment card. Doing so gives motorists a "rollback price" at the pump of at least three cents less per gallon than the posted street price. Consumers must first sign up for the program at the company's website and provide their driver's license number and bank account information.
AutoGas, the Texas software company, is developing technology to help revive the loyalty-driven proprietary gas credit card. The company's REGAL automated gas station payment system is used at more than 4,000 locations nationwide.
Earlier this year, AutoGas introduced a new payment system technology that allows consumers paying at the pump with proprietary gas credit cards to get pennies off per gallon, according to Viertel, the company's marketing vice president. Consumers who continue to use the gas credit card to fill up their tanks throughout the month will see even greater savings, Viertel says.
"For example, for the first gallon of fuel you pump and use that proprietary card as the method of payment, they will drop the price per gallon three cents, and then you start pumping at three cents below the street price," Viertel says. "When you've pumped 20 gallons, for example, for that calendar month, the next time you lift that nozzle, you'll now get four cents off per gallon. Once you've pumped your 40th gallon that month, you'll get five cents off per gallon, and so on and so forth."
AutoGas installed the technology in a limited number of fueling stations throughout 2008 and expects to up the number of sites by the end of August.
Pennies off at the pump
How can gas stations afford to knock so much off the street price for proprietary card users? When customers use a proprietary gas credit card at the pumps, commercial credit card processing fees are greatly diminished. Using AutoGas' technology gas stations will reward customers who pay with a proprietary card by passing along a portion of the savings from major credit card interchange fees.
Additionally, AutoGas' FuelRewards software enables customers to receive the same cents-per-gallon savings when they purchase items inside the convenience store. Viertel says bringing customers into the store to pay saves proprietors money in the long run, because stores are charged a smaller interchange fee for fuel purchased with a commercial card inside the store rather than at the less secure fuel island, where skimming may be a problem.
Will these measures be enough to win back customers like Dishman?
She says: "Right now, I think saving three cents per gallon -- What is that? A dollar? -- it's not worth seeking out that station all the time."
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CreditCards.com calculator: Which is better? Cash back or a low-interest gas credit card?
See related: "Coping with the gas pump," "Compare gas station credit cards," "Renting a car with cash or credit card? Expect to try harder," "12 tips for renting a car without a credit card," "Blog: 3 tips on buying gas"
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