How Merchants Deal with Rising Credit-Card Costs

Stroll into the Ula Café, a neighborhood coffeehouse in Jamaica Plain, Mass., and you might notice an unusual sign prominently posed on the cash register. The note informs customers that every time they pay with plastic, it costs the coffee shop about 25 cents. Please, asks the sign, reserve use of your credit cards to pay for purchases of $10 or more.
"When our average transaction consists of coffee and a muffin or a sandwich and a drink, a great bulk of our credit-card purchases comes up under $10," says owner Kate Bancroft. "Considering that each card transaction costs us up to 25 cents, there isn't a lot of room for profits," she says.

As credit-card acceptance continues to spread, so does the toll on vendors who accept the cards. That's because merchants who accept plastic as a form of payment don't receive the full purchase amount. Instead, a portion of each credit and debit card sale gets re-routed to the merchant's bank, the cardholder's bank and the network that processes those transactions. In 2008, merchant-paid swipe fees amounted to $62.7 billion, up 3% over the previous year, according to the Nilson Report, a payment industry web newsletter.
Some of these fees are on the rise. The domestic credit-card interchange rate -- a transfer fee set by issuers such as Visa and MasterCard, but paid to the cardholder's financial institution every time a Visa or MasterCard payment product is used -- rose from between 1.25% and 1.91% in 1991 to between 0.95% and 2.95% in 2009. MasterCard's rate also jumped from between 1.30% and 2.08% to between 0.90% and 3.25% last year, according to a recent Government Accountability Office report about credit cards. Processing fees have also been added to debit-card purchases, which in the past, were free for merchants to process.
Why the widening gap in the interchange rate? The GAO's interchange rate fee analysis concludes that several of the networks' higher interchange fee rates increased during this period. At the same time, rates on other cards, which had lower-cost incentive rates for sectors that previously did not take cards, also increased. (Note that debit-card purchases, which account for roughly 70% of Visa transactions in the U.S., were not included in the GAO study.)
What's more, small businesses are feeling the price hikes the most, as larger firms are better able to negotiate with issuers for more attractive terms. "If you're a Wal-Mart, you're going to get a great price on any type of terminal fees or premium," says Conrad Sheehan, founder and CEO of mPayy, a mobile and online payment service. "But if you're a three-store coffee shop or boutique, you're going to be a price taker; you're going to pay statement fees, deposit fees and the like," he says.
Shawn Miles, the head of global public policy at MasterCard, agrees with that charge. "What we tend to see with large volume merchants' acquirers is some tend to charge a little less and some charge more," he says. "A large merchant may pay 1.5% plus flat fee; a small merchant may pay 3% to 4%."
By contrast, American Express's discount rates are primarily set by industry and charge volume, says Christine Elliott, a spokeswoman for the company. "In other words, the more volume with AXP, the lower the rate," she says.
To negotiate, merchants should sit down with their bank -- or, in the case of AmEx and Discover, a third-party acquirer -- over their "merchant discount" rate, which may include service fees such as transaction processing, terminal rental and customer service. However, the interchange rate set by Visa and MasterCard, which they say varies between 1% and 2% based on the type of business a merchant runs, purchase amounts, payment product type, processing technology the merchant uses and region or country, is generally unmovable.
Ms. Bancroft, for example, was unable to get a reduction in fees from her bank, and has stopped accepting American Express, widely viewed as the most expensive card network. (According to the company, AmEx charges 2.54% per transaction without any flat transaction fee.) Other owners have raised prices or installed credit-card minimums and surcharges that, in some cases, violate their credit-card agreements.
Tyler Balliet, the president of The Second Glass, an events company in Boston, recently instituted a surcharge on sponsorship purchases and ticket sales even though some credit-card networks say the practice violates their rules. "We just had to do what all the big guys do: We passed our fees on to consumers," says Balliet. "We try to minimize this fee, [which is attached to the company's shipping and handling charges], but if we ate that, we'd have to raise ticket prices anyway."
Although Balliet was able to pass on his card-processing fees to his customers, many other small businesses have shied away from the practice as the fear of turning cost-conscious customers away with higher prices loomed large during the downturn. Many other owners want to avoid retribution from the credit-card networks. Although AmEx and Discover don't expressly disallow surcharging, both Visa and MasterCard do. Possible penalties include fines and the loss of their ability to accept Visa and MasterCard cards.