Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes “Your Business Credit,” a weekly column about small business and credit, for CreditCards.com.
Dear Your Business Credit,
I am looking into opening a gas station. I’ve noticed a few gas stations that don’t accept credit and debit cards. Does it make sense for me to accept credit cards or should I go “cash only?” — Future owner
Dear Future owner,
Given how challenging our economy has been the past few years, you’re very wise to ask questions like this.
The No. 1 argument for accepting credit cards at a small business — whether it’s a gas station or any other type of retail business — is that they make it convenient for your customers to spend their money with you. That can be a powerful argument in favor of accepting plastic.
The country’s 123,289 convenience stores that sell fuel account for 80 percent of all U.S. gas sales. Among them, there’s widespread acceptance of credit cards, according to the National Association of Convenience Stores (NACS). Almost three-quarters of the transactions (72 percent) are done by either debit card or credit card. At some stores, 100 percent of payments are made this way, according to NACS.
The main reason many such stores accept credit cards is because it ultimately makes them more money, says Trish Wexler, spokeswoman for the Electronic Payments Coalition in Washington, D.C., a payments industry organization. She notes that extra sales outweigh the credit card fees, which average 1.5 percent to 3 percent of the total sale price per purchase. “A customer who pays with a credit card or debit card will spend more than if they pay with cash,” she says. “If I have a card, I’m going to fill up and go into the convenience store. I’m going to get a cup of coffee and a gallon of milk. It’s clearly to the retailer’s benefit. ”
Many consumers who don’t come in to buy extras just want to get out quickly. They would usually prefer to use a card at the pump than have to wait in line to pay an attendant with cash.
That said, there are some arguments in favor of going cash only. When you are selling a commodity such as gasoline, often the only thing that differentiates you from competitors is a lower price.
Accepting credit cards does add to your overhead and reduces your ability to lower prices, since you must have a merchant account and pay the fees that come with it. Credit and debit card fees averaged 5.7 cents a gallon in 2011, according to the most recent figure published by the NACS. The average gross margin on a gallon of gasoline in 2012 was 18.4 cents per gallon, or 5.1 percent, according to the convenience-store association. When you subtract the other costs of running a gas station, the profits you earn from gas may be very low — which is why so many gas stations sell sodas and snacks and such. Across the convenience store industry, credit card fees totaled $11.1 billion — far exceeding industry profits of $7 billion, according to the NACS.
Some consumers may be more willing to pay cash if you can pass along the savings that come from refusing credit cards. According to a 2013 survey by the NACS taken when gas averaged $3.30 per gallon, 71 percent of consumers say that price is the most important factor in shopping for gas. Forty-six percent say they would be willing to pay with cash to save money at the pump. Federal laws, as well as the merchant account agreements of MasterCard, Visa and American Express, all allow merchants to pass along discounts if customers pay with cash, checks or debit cards, Wexler says.
A lot depends on your customers’ spending habits, though. Harlan Platt, professor of finance at Northeastern University’s D’Amore-McKim School of Business in Boston, believes that passing along savings of 5 cents a gallon at today’s high gas prices “is not likely to counterbalance the number of consumers a gas station would lose by not offering the ability to use a credit card.”
Since you aren’t in business yet and don’t know your potential customers’ habits, it would be a good idea to do market research in your local area. Do most of the gas stations in your area accept credit cards? If so, chances are, there’s a strong economic argument in favor of doing so, too.
Meet CreditCards.com’s reader Q&A experts
Does a personal finance problem have you worried? Monday through Saturday, CreditCards.com’s Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.