As a provider of integrated merchant accounts or credit card processing services, Sintel Systems is always working to bring value to our customers. To that end, here is a summary of some recent thinking on merchant credit card fees.
No Free Lunch
Do you know why merchant account fees cannot be guaranteed? Or why merchant account fees seem to have gone up?
According to Sintel’s TheTechGuy, “… you may want to point the finger at every person who uses a credit card and ‘boasts about getting points.”
Most consumers don’t realize who pays the account fees on those credit cards that pay rewards points or cash back: the merchant.
“If you are a store, you want to pay the lowest fees on processing credit cards. But do you know what really affects the fees you pay? The answer is most likely in your wallet.”
When you use your credit card at your favorite frozen yogurt store and are promised 2% cash back, it’s not the credit card company but the merchant who takes the hit — paying not only their processing fees, but your points as well.
TheTechGuy does the math: “Let’s assume that your favorite restaurant or pizza shop has a base of 1.65% they were promised by their merchant account provider and then you place an order over the phone, paying with your 2% rewards card. Now the pizza shop owner has to pay 1.65% + 2% + another 1% for card-not-present fee and they end up paying 4.65%.”
It was probably tempting to opt originally for the “lowest fee hook,” but “they are probably getting poor service on top of it … using a premier processor with good service and fast processing and your average customer is getting 2% cash back, then the merchant is naturally paying about 4.5% in fees.”
FAQs on Charging the Customer
Can your business pass along credit card fees to your customers?
There are two major entities in the credit card transaction process: Companies like Visa and MasterCard, who collect a fee for the right to use their networks (however, they share no credit risk), and the banks which provide the actual funds to the merchant on behalf of their customers, collecting the majority of fees involved in merchant account fees.
On July 13, 2012, San Francisco-based Visa, MasterCard, and several large banks reached a $7.2 billion settlement with retailers who have long accused the credit cards and associated banks (Chase, Bank of America, Citi Group, and Wells Fargo) of price fixing credit card payment processing.
With the settlement, retailers are now free to openly charge their customers for using credit cards. But not so fast; you should research whether your state has a surcharging restriction, and if you want to consider any surcharges, we advise that you consult with legal counsel to determine whether your practices comply with relevant state law.
As for assessing a surcharge on both credit and debit card purchases, the answer is a flat No. The ability to surcharge only applies to credit card purchases, and only under certain conditions. Merchants cannot surcharge debit card or prepaid card purchases.
Small-Ticket Businesses Like FroYo Take a Debit Card Hit
Recent legislation “intended” to provide relief from high debit card fees for retailers accepting Visa and MasterCard debit cards has turned out to affect small-ticket retailers like frozen yogurt shops the opposite way.
The Dodd-Frank Wall Street Reform and Consumer Protection Act — and more specifically, the Durbin Amendment — changed fees charged on debit cards from $0.04 + 0.90% to $0.22 + 0.05%.
Naturally, this is beneficial if the transactions are over $10; however, small-ticket items like frozen yogurt stores and low-check-average restaurants which sometimes process over 50% of their transactions via debit cards saw rate increases to over 4-5%.
Let’s do some math:
Average ticket: $7.00
Total credit card transactions: 800
Total sales: $5,600
Debit Card Transaction: 50% or 400
Debit Card Fees: $0.22 x 400 + 0.05% x $2,800 = $102
Credit Card Fees: Assume 2.5% x $5,600 = $140
Total Fees = $102 + $140 = $242
Effective Rate = $242/$5,600 = 4.3%
In the current climate, you may see merchant account resellers making false promises to lower rates to these retailers. In reality, no merchant account provider can guarantee a rate. Even if they lacked evil intentions, how could they predict what type of cards your customers would present?
The naked truth:
Can your Point of Sale company change this fee? NO
Can your bank change this fee? NO
Can your merchant account provider change this fee? NO
How is it that others are quoting you lower rates? Recent experience with bankers has revealed that in many cases they are simply unaware. They don’t truly study your statement to see where the fees are coming from. It’s important to press them on this issue until you get a satisfactory answer.
Ask them, “How can you guarantee me a rate when under the Durban Act, Visa/Debit transactions are charged a set fee?”
Even in their contract they give you, they do not spell this out because they say it’s part of interchange and they have no control over it. Make sure you distinguish between “Debit Card” and “Visa/MC Debit Cards.
FAQs on Lowering Debit Card Fees
1. Aggressively offer gift cards. Why? If your average ticket is $7.00 with debit cards and if a person buys a $20 gift card, it cuts down on the number of transactions. This also establishes loyalty.
2. Thinking of charging an extra fee? You can’t. The ability to surcharge only applies to credit card purchases, and only under certain conditions. U.S. merchants cannot surcharge debit card or prepaid card purchases.
3. Do not accept debit cards. Don’t be fooled by a promise of lower merchant account fees. Would you trust someone who promised to lower your property tax rate?
3. In case of frozen yogurt, raise your per-ounce price by $0.01.
Judge Rules for Debit Card Fee Relief
In August, 2013, US District Judge Richard Leon rejected the Federal Reserve’s decision on debit cards swipe fees in NACS vs. Board of Governors of the Federal Reserve System, 11-cv-02075, U.S. District Court, District of Columbia.
The lawsuit was filed by the National Retail Federation, the Food Marketing Institute, and NACS (formerly the National Association of Convenience Stores). Miller Oil Co., a residential heating and air company based in Norfolk, Virginia, and Boscov’s Department Store LLC, based in Reading, Pennsylvania, claimed that fees the Fed set under the Durbin Amendment (a provision of the Dodd-Frank legislation) has “substantially harmed” merchants.
The group further complained that the “The board’s final rule permits banks to recover significantly more costs than permitted by the plain language of the Durbin Amendment and deprives plaintiffs of the benefits of the statute’s anti-exclusivity provisions.”
As part of his 58-page ruling, Leon wrote, “The Board [Federal Reserve] has clearly disregarded Congress’s statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction.”
Unfortunately for retailers, Leon’s ruling will allow for the existing regulation to remain in place until new standards are in place.
Sintel forms lasting partnerships with our clients that you simply can’t get from a POS reseller, allowing larger franchises to grow and providing startups the foundation for future growth from the very beginning by acting as a franchise incubator. Our expertise can help you avoid common pitfalls of entry into this thriving but complex industry — including the rapid pace of transactional change.
If you are interested in learning more about Sintel’s POS systems and how our knowledge and support can impact your future success, call us for a complimentary phone consultation.
Sintel Systems is the only full-service provider of tailored Point of Sale systems across retail, restaurant and service industries, including frozen yogurt shops, pizzerias, sushi restaurants, cafés and retail stores.
As a single source for business solutions, our experienced, knowledgeable team negotiates the complex POS landscape for you to enable you to find the right POS system for your business and budget. Hardware – Software – Support