I had lunch in a local restaurant yesterday and as the final bill was delivered to the table, the waiter made a point of highlighting something on the printed bill.
4% Processing Fee on All Card Transactions.
The restaurant is now ADDING an explicit percentage fee to any bill payed by credit card.
Despite a huge number of Americans doing almost entirely without cash and splitting purchases between debit and credit cards, most Americans don’t really understand how the entire credit card system actually works – logistically or economically – between cardholders, merchants, card banks and settlement networks. For this discussion, the economics are the critical piece.
Card HOLDERS have the illusion of purchasing a $100.00 item at a merchant, walking out of the merchant with $100.00 in “value”, and not paying the $100.00 until their next statement is both generated (might be 30 days away) and due (typically about 27 days from statement date). At a minimum, the card HOLDER gets the benefit of the “float” on that $100.00 for up to 58 days before actually paying it. Of course, that’s if they pay their balance in full each month. If balances are not paid in full, of course the card HOLDER is paying from 20-28% APR on balances and that $100.00 purchase is costing them much more than $100.00 over time.
Card holders also get extra fraud protection from that “float period.” Card holders can dispute any charges hitting a card and typically not pay for the amount until the dispute is settled one way or the other. If their card is physically stolen or electronically compromised and used in other purchases, the card holder can dispute the charge and the card BANK will chase down the transaction with the offending merchants. If the charge is fraudulent, the BANK eats the loss. (If a debit card is compromised, you are SOL – funds leave the account IMMEDIATELY and are lost if the transaction was fraudulent.)
Let’s ignore the segment carrying balances and just focus on those paying off balances in full each month.
The card HOLDER may also be getting benefits like
- extended warranties on appliances and electronics
- “points” back on purchases typically at the rate of 1% redeemable as coupons or cash that can pay off balances
- additional points back for purchases in segments with business affiliates of the card BANK (maybe dining, airfare, hotels, etc.)
Okay, so for a customer paying nothing in interest, how is the card BANK finding dollars to pay for those discounts and extended warranties? By squeezing the MERCHANT for a share of each purchase. Historically, that processing fee is between 1.5 and 2.0 percent of the transaction. (For some less popular cards like Discover, fees might be 2 to 3 percent.) For a $100.00 purchase, the MERCHANT only collects between $98.00 and $98.50 dollars.
Why would they settle for not collecting the entire amount? Partly because handling cash poses its own risk with errors, employee theft, external theft and extra security logistics onsite to house thousands of dollars required for everyday business. Partly because accepting checks is HIGHLY prone to fraud and a predictable number of check payments will result in write-offs (for small amounts), extra settlement costs to recover from temporary bounced checks or legal fees for attempting to collect large amounts. Those cash/check losses are probably VERY well understood by retail sector so a business owner knows EXACTLY how much it would cost to not accept credit cards.
So why would merchants start adding a specific surcharge for credit card payments? Especially a 4% fee? Apparently, merchant bank fees have actually been as high as 3.5% and may be going up. What could be driving the ever-higher fees and their exposure to customers?
- opportunism targeting inattentive consumers who have shunned cash?
- new benefits / “rewards” being given to cardholders?
- increased losses from transaction fraud?
- increased costs of AVOIDING transaction fraud through purchase trending, etc.
- merchants fed up with creeping fee hikes that make them look like the bad guy
Maybe all of the above?
Consumers would be wise to think through their categories of spending and the instrument used for that spending. If more merchants in more sectors start applying surcharges for credit card use, consumers need to think of how that will jack up their cost of living.
Is it worth paying a 4 percent surcharge on a $299.99 television to get a double warranty? Maybe. That would be $12.00 spread over the life of the television which might last 10 years without incident or might break in a month and be completely disposable.
Is it worth continuing to purchase $600 in groceries per month and pay an extra 4 percent? That’s $288 over a year. Sure you might have earned “points” on that extra surcharge worth 1% or $2.88 but that’s a loser financially. Paying via debit in a grocery store might be preferable to avoid such surcharges given that you are typically in physical possession of your debit card and it isn’t taken out of your sight to scan and possibly skim.
Do you want to use your debit card at a restaurant you’ve never visited before where the waiter takes your card back to a counter in the kitchen to run your transaction? Maaaaaaaaaybe not…
The key point here being that as tectonic plates shift in the financial and payment industries, even those who never carry a balance and are used to treating credit cards like a free convenience rather than a loan shark need to think through the particulars now. The point here is also that even if all merchants are NOT explicitly separating out these higher fees so consumers can choose to pay or avoid them, these fees are IN the system and can easily inflate costs by 1-2 percent across huge swaths of the economy in very “sticky” ways.