Blog June 25th 2020

Problems at the Pump: 5 Complexities of Debit Routing for Convenience & Fuel Retailers

Truly optimized debit routing arrangements can save merchants millions of dollars a year: however, routing is extremely intricate, with numerous pitfalls preventing merchants from minimizing costs.

Author Image

Elley Frost

Chief Executive Officer

Industries throughout the retail world are feeling the impact of suboptimal arrangements, but for Convenience and Fuel, there is added complexity as debit transaction volumes continue to rise – heavily accelerated by the COVID-19 pandemic. In this blog, we explore the unique debit routing considerations Convenience and Fuel merchants need to be aware of, to drive savings and minimize costs.

Debit routing – Since the 2011 Durbin amendment, by using a processor’s debit routing solution, merchants have been able to route their debit transactions via a choice of networks available on each debit card – resulting in more competitive fees.

1. Pre-authorization

Filling up a car with gas isn’t a typical retail experience. Not only can customers purchase gas and other goods from a convenience store attached to the gas station, but they can also pay at the pump without ever having to go in-store.

The latter involves a more complex payment process, requiring a pre-authorization order before the pump is activated for use. As the full transaction value is unknown until the customer has filled up, the processor will authorize a pre-determined amount – typically around $99. This means at the Point of Sale (POS), processors will send a message to the customer’s bank account, checking they have enough in their bank account to cover the determined amount.

This adds additional difficulty when it comes to debit routing. Pre-authorization incurs an added fee for merchants, as it requires additional communication between the POS and the issuer, via the network rails.

If merchants aren’t fully aware of all the costs associated with processing transactions – and how these differ between the pump and in-store – their debit routing is highly unlikely to be optimal. Routing purely based on switch fees could see significantly higher costs by attracting high pre-authorization fees, despite the network having competitive interchange and switch rates.

2. Two Points of Sale

Having two POS environments, where customers can pay for products in-store or outside at pumps, debit routing for convenience and fuel retailers even more intricate. In-store purchases tend to have low Average Transaction Values (ATVs) – where typically customers purchase small, low cost items – and don’t often require pre-authorization. Whereas transactions at pumps, which are typically 40-50% of transaction volumes in the industry, often have higher ATVs.

This raises the question of whether the same routing solution would be optimal for the two different POS environments. A network with lower interchange and switch fees, but higher pre-authorization fees, might be optimal for in-store: but it could be less cost-effective for processing transactions at pumps. A merchant’s processor might not even offer this consideration.

When looking at routing, the two different POS environments, unique to the convenience and fuel industry, need to be looked at exclusively – with decisions based on what’s optimal for each environment rather than as an entity. This will allow merchants to make the most of the opportunities of optimal debit routing. With many ‘dynamic’ and ‘smart’ solutions failing to accommodate this complexity, truly optimizing debit routing is far from straightforward for merchants in this industry.

3. Unregulated Cards

Due to interchange fees only being regulated for cards issued by banks with over $10 billion in assets, a large number of debit cards – issued by smaller banks – are subject to higher, unregulated interchange fees and therefore have different considerations when it comes to routing optimally. These banks are often found in more rural areas, making routing more complex for merchants operating in these regions, such as convenience and fuel retailers.

Consumer footprints tend to be broader in this industry – with gas stations located in both cities and more rural locations. For example, New York state has a more than 95% rate of regulated cards while Mississippi only has 29.25% regulated (Fig 1), so large merchants operating in both regions – including particularly remote parts of those regions – will face a lot of complexity.

For merchants who operate across the U.S., routing in one location might not be as optimal or achievable in another region, particularly during the COVID-19 pandemic. We saw far higher unregulated volumes during the pandemic, due to rural areas being less affected and easing out of lockdowns sooner, with some states never even going into lockdown. Texas, for example, was one of the first states to pull out of their stay at home order on April 30th. Merchants with a high volume of unregulated cards must consider the total cost of those transactions to route optimally – considering interchange, and not just switch fees.

4. Fluctuating ATVs

Fluctuating oil prices are a common occurrence in the convenience and fuel industry. This was particularly prevalent when the pandemic saw states throughout the U.S. introduce lockdown and working from home measures – in our Retail Payments Review, we saw ATVs fluctuate significantly alongside oil price from February to May. Merchants not keeping on top of their debit routing arrangements could have potentially seen their routing tables no longer being optimal, due to ATVs being the largest variable impacting optimal routing solutions.

However, this issue is not isolated to the pandemic alone. Continuous changes to fuel prices ultimately mean a less stable ATV – resulting in merchants with static or suboptimal routing paying higher fees than their peers with truly optimized, flexible routing. For example, the largest part of a fee is the % element of interchange. Therefore, if merchants have a massive spike in ATV – the least expensive network could move to the fourth or fifth least expensive.

Additionally, as previously mentioned, the ATV at the pump is generally higher than in-store. Consequently, convenience and fuel merchants need to ensure their routing is flexible and can accommodate these varying transaction values with truly least-cost routing.

5. Incentives

Finally, relationships within the payments supply chain are common. Not only can ownership structures create a conflict of interest, we often see incentive agreements in place. These can add further complexities and costs for merchants trying to create optimal debit routing arrangements: whether it’s incentives merchants have agreed with the networks themselves, or incentives processors have put in place to derive financial benefit from routing more transactions down a specific network’s rails.

Some merchants may find their processors are routing in their own interests rather than for the benefit of the merchant. In fact, through our own projects with large retailers, we have found contracts containing no obligation whatsoever for processors to route optimally – allowing them to make these deals with the networks that ultimately result in higher costs for merchants.

This is a problem faced by retailers across all industries. However, with convenience and fuel merchants also juggling the complexities explored above, these conflicts of interest make optimal routing almost impossible without the right insights into relationships, transactional data, and negotiation power.

Alternatively, merchants may be tempted by an initial large financial benefit by agreeing their own incentives. However, beware the big check: a large upfront sum or periodic rebate from networks, as an incentive to route more transactions down their rails, can be tempting – but this rarely delivers the same value of truly optimizing their debit routing arrangements.

Merchants can also agree incentive deals with the networks to provide lower fees, based on metrics such as volume tiers or availability vs. routed ratios. Large, market-leading merchants will often agree multiple incentives with different networks, commonly with different metrics for each one. As a result, these incentives can be extremely difficult to manage effectively and, if not monitored correctly, they can put the merchant in danger of high costs.


Convenience and fuel retailers face a number of unique challenges when it comes to debit routing – in addition to the complexities seen in the wider retail industry. Ultimately, merchants who fail to fully optimize their routing will incur higher fees than their peers – and miss out on the opportunity to drive significant cost savings, at a time when many merchants in the industry are in need of a cash boost after the pandemic.

Incentives certainly add an additional layer of complexity for managing routing. However, if implemented and tracked effectively, ensuring continuous performance against different network KPIs, they can drive real financial benefit. It’s just a matter of taking control of your arrangements.

At CMSPI, our dedicated team of payments experts are supporting some of the biggest names in the convenience and fuel industry to maximize the value in their debit routing. Powered by our in-house Debit Optimization Tool (DOT), we can provide unrivalled visibility into your current arrangements and incentives. Our consultants work closely with retailers, and their supply chain, to ensure every transaction is routed optimally, and that each incentive is delivering the full financial benefit available.

We’re entirely independent from the payments supply chain, empowering us to work solely in the interest of our merchants. With unique insight into market leading rates across different transaction types, industries and locations, we can benchmark your arrangements to ensure you are paying truly minimized costs on an ongoing basis.

“Having conducted multiple projects with many of the biggest retailers in convenience and fuel, we often find that the industry faces a number of challenges and complexities above and beyond those seen in the wider retail space. As a result, optimizing can be difficult – and our independence, insight into market-leading rates, and proprietary DOT software have proven fundamental to helping our clients achieve that optimization.”

Cameron Klingensmith

Payments Consultant,

See what Smarter Payments Intelligence can do for you.

Get in touch