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Many gas stations have different prices in credit card purchases and cash purchases. The customer pays a slightly higher price with credit card purchases. On the other hand, if a customer uses cash or gift cards, the (lower) cash price applies.

So I will first go to a grocery store to purchase a gas station gift card with my credit card (and thus get the cashback from my credit card company), then use this gift card to purchase gas (thus enjoying the lower cash price for the gas). It's a bit troublesome, but if I need to shop in the grocery store anyway, I do not mind purchasing a gas station gift card from them.

I don't see how the gas stations benefit from this. With different prices, they are encouraging me to purchase their gift cards using my credit card from a third party. But it costs a few cents to manufacture a gift card with the package and I assume the third party also gains some small profit in this purchase. So the gas station ends up with a smaller profit.

Is my analysis correct, or did I miss anything here?

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  • 6
    Most people simply won't do this, so it doesn't have any effect on the gas stations. If everyone did this, you'd see a change pretty quickly.
    – barbecue
    Sep 24 at 22:18
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    Not everything is eligible for cashback (for example, cash advances, postage, coins). You may want to check your cardholder agreement to see if gift cards are exempted from cashback.
    – DrSheldon
    Sep 25 at 1:25
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    @barbecue probably not actually, they'd most likely love people trying to "game" the system in that way because a large percentage would inevitably not use some to all of the value on the card.
    – eps
    Sep 25 at 5:29
  • There's also an aspect of it promoting brand loyalty, similar to why places give you free things for downloading their apps or discounts for using their loyalty card (particularly for groceries)
    – eps
    Sep 25 at 5:35
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    @eps I think merchant's just like people "gaming" the system to save a few %, because they just keep buying their stuff and spending more and more and feeling really clever for hacking the system at the same time.
    – Džuris
    Sep 25 at 8:10
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It's not completely risk free - what happens if you lose the gift card? In addition, the gas company isn't losing anything - it's the grocery store where you bought the card that eats the 2% merchant fee for the gift card. They most likely make up for it with slightly higher prices on other items. The 2% on gift cards simply isn't material to them.

Plus, studies show that people tend to spend more when using credit cards than cash - I don't know of any specific studied for gift cards, but I expect the psychological aspect would be similar. The grocery store might also be hoping that you'll spend a little more in their store rather than coming in just for the gift card.

Could you churn a few bucks? Probably. You'd save 2% on the gas and get 1-2% back on your card. If you spend $100 per month in gas you'd net a $3-$4 gain.

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  • Thanks for the answer! At least the gas station need to pay for manufacturing the gift cards, right?
    – Zuriel
    Sep 24 at 2:34
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    Grocery stores wouldn't sell gift cards if they lost money on every card they sold. Most likely, the store gets to keep a little of the money for themselves, with the remainder going to the gas station.
    – Simon B
    Sep 24 at 10:32
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    I doubt the actual card costs more than a few cents to produce.
    – chepner
    Sep 24 at 12:06
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    @Zuriel I would expect them to get slightly less money, but they would get it in advance, which helps their cash flow. They will also rely on a small proportion of the gift cards getting lost, or expiring, in which case they get to keep the money.
    – Simon B
    Sep 24 at 15:01
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    Y'all forgetting most of these stores are franchises bound by contract to accept the gift card at whatever terms the brand cooks up. The 'they' getting all the upside and the 'they' getting all the downside aren't the same entity.
    – Affe
    Sep 24 at 22:22
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If you buy a Marathon (or any other brand) gift card, you're giving the merchant cash now. Most people don't spend their gift card immediately so the company gets to use that cash as working capital until you redeem it. Many people also end up with gift cards that have a small amount left on them that linger in their wallets for quite a while. If you buy $47.30 worth of gas on a $50 card, it is a pain for most people to use up the remaining $2.70. So the company will often get to use that capital for a long time until state laws require them to treat it as unclaimed property. Plus, having a particular company's gift card in your wallet makes you relatively likely to use that brand rather than looking around to see if someone else has a better price.

Using a Marathon gift card at a Marathon station will generally have lower merchant fees than using a credit card. The reason gas stations charge a lower cash price is that it costs them a few percent of the transaction amount to run the payment through the card network. If they don't have to pay that overhead, they're willing to give you a better price for paying cash. If they know that they're going to pay less to run the gift card, they're willing to give you the cash price.

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  • Indeed, seniorage is the bomb!
    – Fattie
    Sep 25 at 15:04
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In addition to other reasons, this can be an example of market segmentation: making each customer pay as much as they are willing to.

By spending some time going through the gift card route, you separate yourself from the people who value their time more than the small saving. The gas station gets more money from "spenders", while not losing the business of the "savers".

This is similar to discount vouchers: making the customer spend a little extra time to indicate that they really care about the lower price.

--

But remember not to hoard too many gift cards: if the company goes bankrupt, the gift cards are usually worthless.

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If everyone only purchased the gift card, and then used it up completely at the pump, then the gas station would not benefit from this. If every one of those people would have paid the extra CC fee outside had the gift card option not been available, then the station would even lose a little bit by offering this.

However, many people do not only do that. Getting someone to step inside of the gas station and walk to a cash register has great value, since there is a good chance of an additional sale for food, drinks, lotto, and miscellaneous items along the way. Some estimates have 70% of a gas station's profit coming from inside sales.

Given the number of people who only use CC at the pump and never step foot inside of the station, if you get just some of them to go inside and potentially purchase something, that's a good business strategy. If they don't use up the gift card on the same day, that's also good for the company as they get an interest free loan (which adds up over many people). And since some people may lose or never use all of the balance of the gift card, overall profit margins increase.

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    As an example of gas being a low profit margin, recently gas stations within one New Mexico county were told that they could either sell hard liquor OR gas. Most (all?) stopped selling gas. Sep 24 at 22:00
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A large portion of money spent on gift cards is not used

A quick google search of "what percentage of gift cards are not used?" shows from between 3% to 20% of gift card balances are never spent.

So the merchant gets the money spent on the gift card now, and a significant amount of that money is never actually redeemed.

An additional point, is that the customer has locked in that money to only be spent at that one particular vendor. So a gas customer is now locked into going to that particular brand of station, even if the customer later decides that another might be more convenient or selling at a lower price.

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  • Yes, that lock-in is exactly why companies cheerfully eat the overhead costs of gift cards. Also if a company goes bankrupt, gift card holders are only general creditors, i.e. unlikely to get paid more than pennies on the dollar. Sep 27 at 5:01
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Another point is that AFAIK (I've never actually seen a gas station gift card) only major brands offer gift cards. By selling you that gift card, they've locked you into buying gas from one of their stations, at which the price generally will be significantly higher than the unbranded generic gas from the convenience store.

Taking your picture as an example, say Chevron has gift cards, Marathon doesn't. Buy a Chevron gift card, and you pay 10 cents more per gallon.

There are also cards that regularly offer a higher cash-back on gas purchases. One of mine (Chase Freedom) quite often gives 5%, which is nearly twice the 10 cent price difference.

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  • I don't get the connection, why does a Chevron gift card cause you to pay 10 cents more per gallon? Do they surcharge the gift card, or do you mean Chevron is overpriced generally and charges 10 cents/gal more to everyone? Sep 27 at 0:48
  • @Harper - Reinstate Monica: Yes, as you can see from the picture (or could, it seems to have been deleted :-(), the Chevron station charges 10 cents/gal more than the Marathon station, regardless of whether you pay with cash, credit card, or gift card. (My experience is that the difference is often 20 cents/gal or more.) So if you buy a Chevron gift card, you (or the person you gave it to - after all, it's a GIFT card :-)) pay more per gallon than if you'd bought gas at the cheaper station.
    – jamesqf
    Sep 27 at 4:17
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The Reason for gas stations charging higher prices for credit card payments is, because of the payment gateway account type (merchant type).

When the bank or a gateway provider issues merchant-account (with the swipe machines) to accept card-payments, merchant could select the merchant type ;

  1. fuel/gas (bank fee added on top of listed price) or
  2. other common items (bank fee will be absorbed by the merchant)

However which ever type they select, merchant agrees that, they pay the bank fee + visa/master network fee for every transaction. The total varies around 2.25% to 3.5%. You have to keep in mind that Banks around the world charges different rates.

In a typical shop environment, ( eg : payments at your grocery shop ) the gateway is setup in such way that the merchant has to absorb the charge. That means, only the listed price is charged from your card.

But, fuel/gas sales has a very low margins, Thus the account is setup in such way that bank and network charges are added on top of the listed price. so that the price charged from your card is listed price + bank fee + network fee. which is little higher than the cash price.

then the issue arises when someone buys items other than fuel

in this scenario, even-though you are paying for an item other than fuel, merchant does not have any means to change the charging mechanism. That means gateway account does not have any options to switch between:

  • fuel/gas or
  • other items

at the time of swiping your card.

Therefore any swipe you make at the gas station will be charged with extra percentage added on top of the listed price, because the fees are added by the system.

Update 1 : In some cases they display the prices separately with the add charges. A Sunoco station , on June 14, 2021.

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    That's not a thing in the United States, here they just charge a different price per-gallon for the gas; the candy/smokes/chips/beer are the same price cash or credit. Sep 27 at 0:47
  • In the US, even when you buy both gas and convenience store stuff, the purchases are generally separate transactions. You swipe the card at the pump, put the nozzle in the filler, latch it on, and then either go inside for other purchases, or (if it's busy, and you're polite) move the car to parking as soon as it's full.
    – jamesqf
    Sep 27 at 17:45

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