Credit card fees swipe at profits

Many options and many rules confront small businesses looking to trim costs

Source: Atlantic Merchant ServicesJanuary 21, 2013 

  • Credit card transaction fees Interchange fee: Fee paid to the company that issues the credit card to the consumer. The rate depends on factors that include the business type, the transaction amount, the method of entry and type of card. Dues and assessments: Fees paid to the credit card company. Visa charges merchants 11 basis points, (one basis point equals one-one hundredth of 1 percent) and $0.0195 per transaction, plus a variable acquirer access fee. MasterCard charges 11 basis points and $0.0185 per transaction. Discover charges 10.5 basis points and $0.0185 per transaction. Processing cost: Fees that go to the merchant service. The merchant service sets the rates. Debit card processing fees The U.S. Federal Reserve limits banks with more than $10 billion in assets to charging a debit interchange fee base of 21 cents per debit transaction and one-twentieth of 1 percent of the sale. The Federal Reserve also gave banks the authority to add an additional 1 percent if the bank met certain fraud standards.

— Personal Defense & Handgun Safety Center in Raleigh charges two prices for the same gun – one price for cash, check and debit, another for credit.

In the past, the price tags on store owner Mike Tilley’s merchandise showed cash prices only and included a line stating that the store charged a 3 percent fee for credit cards. Because of the credit card surcharge, Tilley received a cease-and-desist letter from Visa explaining that while he could offer one price for cash, debit and checks and another for credit cards, he couldn’t penalize customers for using credit, Tilley said.

Small business owners who accept credit cards face a complex exchange system with layers of fees. Some business owners, such as Tilley, offer incentives, including rewards programs and discounts, for customers who use cash, but have to be careful not to violate the rules of credit card companies.

That burden, however, could be shifting. New companies have simplified the credit exchange process. And a class-action anti-trust lawsuit against Visa and MasterCard could bring changes to credit card rules.

The proposed settlement, which was announced in July but hasn’t been finalized, includes changes that would allow merchants to include a credit card surcharge in states, including North Carolina, that don’t ban the practice.

Also, Visa and MasterCard have agreed to pay $6.05 billion to retailers, reduce their rates by one-tenth of 1 percent for an eight-month period, and allow merchant buying groups.

Houston Barnes, a business strategy consultant and founder of Barnes Law Firm in Durham, questioned the practicality of businesses switching from rewarding people for paying cash to penalizing them for using a credit card.

“It seems like a nuance difference,” Barnes said. “But when it comes to consumer behavior, I think there is a very big difference.”

Under the gun

When Tilley opened his Tryon Road store in 1996, less than 20 percent of his business was done through credit cards. Now, credit and debit card purchases make up about 90 percent of his business.

Visa and MasterCard credit, debit and prepaid cards generated $2.9 trillion in U.S. purchase volume in 2011 – a 9.9 percent increase from 2010, according to The Nilson Report, a payment industry trade newsletter.

Tilley said he typically charges a 10 percent markup over what he pays for merchandise, and offers cash incentives to avoid passing credit card fees to customers.

“If I give the credit card company 3 percent, … it really hurts,” Tilley said.

Tilley pays credit card fees of about 2.5 percent to 5.5 percent of the sale, he said. The fees include an interchange fee, which goes to the bank that issued the card used; dues and assessments paid to credit card companies; and processing fees paid to the merchant service, which facilitates transactions between businesses, banks and credit card companies.

Various factors determine the interchange fee, including the classification of the business, the transaction amount, the type of card used and the method of entry into the authorization system.

Some companies use technology and apps to give business owners other credit card service options. For example, Square provides services to merchants that banks and companies are emulating, said David Robertson, publisher of The Nilson Report. Square offers a credit card reader that plugs into iPads, iPhones and Androids, and the company charges its customers either 2.75 percent per swipe or a flat fee of $275 per month.

Business owners should calculate which service is financially beneficial. If a business has a lot of debit card purchases, it could be paying more than it should, Robertson said.

Roberto Copa Matos opened Old Havana Sandwich Shop in Durham two years ago using a standard credit card machine, but switched to Square four months ago. The service is easier for Matos to understand and will ultimately save the shop about $3,000 to $5,000 a year, Matos said.

To pick a merchant company

Atlantic Merchant Services representatives suggest that small businesses use banks and other business owners for guidance on finding a reputable merchant company.

If a merchant company offers a deal, use the Internet to research the company, said Lawrence Sarmiere, sales partner with Atlantic Merchant Services, which Tilley now uses. Also, find out how long the company has been around, and ask who will serve as sales representative. Ask the representatives about their work experience.

Credit card rules often change, so a reliable and informed merchant is key for small businesses, said Jerry Savage, president of Atlantic Merchant Services.

About four years ago, Tilley changed merchant companies to take advantage of what he thought was a good deal.

Tilley paid about $3,000 for new credit card equipment. Also, deposits, which used to come the next business day, were delayed, Tilley said.

“When you are floating money seven to 10 days sometimes, it makes it really tough,” Tilley said.

Tilley closed his bank account to prevent the now-defunct company from charging his account.

“It took me more than a year to get it straightened out,” Tilley said.

Bridges: 919-829-8917

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