Should we charge our customers to use credit cards?
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Dear Your Business Credit,
My parents own a convenience store and as they get older, I'm gradually taking over. They only started taking credit cards recently, and only with a $10 minimum purchase (and I already know that wasn't OK before but now is). I'm looking at the whole question of accepting cards, and if so whether to keep a minimum and how much. Can you help me, please. -- Sven
These are great questions to be asking.
I ran them by Rob Bertke, senior vice president of product management at Sage Payment Solutions, and there's not a cut-and-dried answer. He says there are pros and cons to establishing a minimum purchase for credit card transactions.
As you know, your business gets charged for credit card purchases by your merchant account provider. Let's say you accept Visa and MasterCard, which typically cost less to process than American Express.
"Credit card rates from Visa and MasterCard generally include a per-transaction fee," Bertke said in an email. "So, if a particular card type carries a 10-cent transaction fee, the percentage of costs for the merchant can be very high if the transaction amount is small."
Say your customer buys a soda and a pack of gum totaling $2. If you have a 10-cent transaction fee, letting the customer use the card in this scenario would cost 5 percent. Adding the regular interchange fee -- the amount a merchant pays the credit card processor -- could bring the cost of this sale to around 7 percent, according to Bertke -- so you'd be paying 14 cents to process the transaction. "To avoid this high cost of handling small-dollar transactions, some merchants will have a minimum transaction amount," he said.
If your parents' store does a high volume of small transactions, such fees can add up quickly. That may be why they initially required a minimum purchase.
However, there's a flip side to setting a minimum on credit card transactions: the frustration that it can cause customers.
"Many customers don't carry cash much of the time," Bertke notes. "Inconveniencing or even turning away a customer when he wants to buy something could mean he won't be as likely to patronize that merchant when he plans to spend more. Customers generally don't expect minimums for credit card purchases."
If you've ever found yourself far from an ATM when you needed to buy something -- and had your credit card refused by a store with a minimum -- you'll know exactly what he means.
As you mention, it is legal to impose a minimum purchase under the law and to charge an added fee for processing credit cards.
In the past, Visa and MasterCard did not allow these penalties for card holders. "A merchant attempting to implement minimum amounts or charge an extra fee for a credit card transaction would run the risk of Visa or MasterCard pulling the merchant's right to accept credit cards at all," Bertke says.
However, that has changed. In July 2010, a provision of the Dodd-Frank Act went into effect, allowing merchants to set a credit card minimum purchase of up to $10, as long as they treat all cards the same.
In addition to setting a minimum charge, merchants may also charge a surcharge to accept credit cards. Charging customers extra for credit card transactions became legal in January 2013 as a result of a federal court case that challenged Visa and MasterCard's right to forbid such surcharges. "Visa/MasterCard lost this fight and a merchant is now allowed to add minimums or fees without the possibility of losing the right to process credit cards," says Bertke.
Of course, customers may not like it if you opt for these measures.
"Consumers are very likely to be angered by minimums and extra fees for what is a significant convenience for them, and they'll typically vote with their feet by selecting vendors that don't penalize them for using cards over cash," he says.
As for your question about whether to accept credit cards at all, it's important to study the habits of your customers and set up a payment system that will make it convenient for them to buy things from you. In some businesses where patrons usually pay with cash, you won't suffer much lost business if you stop accepting credit cards.
But if your parents' regulars have grown used to paying with credit cards, be prepared from some complaints if you stop accepting them. If there's an ATM in the store or within a block or two, there may be less blowback than if customers have to travel a mile to withdraw cash.
At the same time, you have to weigh any grousing against the cost of maintaining a merchant account that lets you accept the cards. The contract your parents signed when they set up their merchant account will tell you what it's costing the store. If the fees seem high, make sure they're not overpaying. For a sense of what other merchant account providers charge, check out CreditCards.com's sister site, MerchantAccountGuide.com.
Paying attention to what your customers want is one of the most important things you can do to build your business. Don't be afraid to ask some of them how they would feel if you stopped accepting credit cards. You don't want to find out after discontinuing them that they've voted with their feet.
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