Convenience fees for accepting credit cards are evil. Almost as evil as rebates.
One of the joys of running a business is having customers that pay you. They arrive with any number of payment forms. If you want to get paid, you have to juggle accepting different payment types with costs of doing such.
Unfortunately, some businesses lure you in with a “pay by credit card” promise when, in fact, you have to pay extra for the “convenience” of this service.
Small Businesses
Large stores will accept credit cards for what would seem any amount, even less than a dollar. Why? Because the cashier is just an employee. These front line folks probably don’t even know what a merchant account is or how it works. They feel no pain like you (the business owner) do at the killer fees you have to pay to process a credit card transaction.
Don’t use the excuse that you are a small business to slap a “convenience fee” on a customer. I’ve seen my share of handwritten notes taped to cash registers indicating a 25 cent fee will be applied to orders under $5. You’ve probably seen these too.
If you have such a sign on your register, consider that it may be a violation of your terms of service with the credit card companies.
As a small business owner, I know that you have to pay the merchant account and processing handlers per transaction. When you run that low dollar purchase, your fees are a higher percentage of the total than a more expensive purchase.
Nevertheless, you walk a fine line between alienating customers and violating the credit card companies’ terms of service. Neither option seems like a good one.
Online
Credit card processing is the backbone of e-commerce. Unfortunately, some government and utilities insist on charging a “convenience fee” for paying online.
I know they are just passing along their fees to the customer. But the customers don’t know that. They are just hit with a 3-4% “fee” that greatly increases their out-of-pocket expenses.
Take a look at the savings you’ll get from accepting credit cards online and they will offset the overhead of paying for people to open envelopes and manually process payments received by mail.
Just Say No
If your offline business deals with lots of transactions around a low dollar amount, maybe you shouldn’t take credit cards to begin with.
My wife reminded me of Amy’s Ice Cream here in Austin. Not only do they have “legendary” ice cream but also have an ATM in the corner of their store for your “convenience!”
There is a fabulous Mexican restaurant, Julio’s, in town that only accepts cash. The food is so good that it doesn’t matter, they are always packed with people.
Naturally, a “no credit cards” policy may be a barrier to some customers. However, if your product is superb and your service is excellent, people will come back and bring their friends, cash in hand.
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Josh Delsman
March 18, 2009
On the contrary, actually. I think that I, as a consumer, would pay a little convenience charge (be it a reasonable one) for a company to accept credit cards. There are far too many companies out there which don’t, especially offline companies which are located in large cities. It just flabbergasts me.
Joe Rawlinson
March 18, 2009
Josh,
You bring up a good point that as more and more people use credit cards instead of cash, businesses need to accept those forms of payment or be without business.
Visa and MasterCard, for example, forbid accessing surcharges for customers that want to pay with their cards.
A great customer experience in the case you describe would be for the merchant to accept credit cards without the extra fee. This lets the business comply with their merchant account’s terms of service and provides you with the convenience you desire.
Charles Sipe
March 19, 2009
I agree that charging a convenience fee can be deceptive. Often times the customer thinks they are paying one price without realizing the business charges for a convenience fee. When this happens to me I get pretty annoyed and then make a mental note to not go there anymore. Although I also understand the situation of the small business owners, because the merchant account fees are pretty outrageous. It would be nice if the credit card companies had some competition.
Joe Rawlinson
March 20, 2009
Charles,
I agree that more competition would be great. It seems that the credit card companies increase their fees every year and those just get passed down to me via my merchant account.
R. Wallani
March 31, 2009
Hi,
I am a convenience store owner. I have an average swipe cost of 46 cents. A bag of 99 cents doritos cost me 76 cents. I only make 24 cents to begin with, if someone uses debit or credit, my cost for the bag of chips just went to $1.22. How can I sell the chips for 99 cents which is printed on the bag?
Joe Rawlinson
April 3, 2009
R. Wallani,
You are in a tough business. There is a great article here about what you can and can not do:
http://www.creditcards.com/credit-card-news/merchants-who-violate-credit-card-terms-1275.php
One suggestion in that article is that you give a discount to those that pay with cash. Other stores impose a minimum purchase policy for all purchases (you can’t discriminate against only credit card holders).
Samantha E.
April 20, 2009
While a cash discount would seem nice, it’s really not going to sold R. Wallani’s problem. If someone doesn’t have the cash, they just don’t have the cash and they’ll still use their debit card for that bag of chips. The good part about accepting cards is that it usually ends up with a higher ticket value. Not many people will come in a buy just a 99 cent bag of chips. They’ll also get a soda to go with it, and maybe a candybar. By this time, you’ve covered your processing fee and made a profit on the transaction. But if that person only had a dollar in their pocket (I rarely carry cash anymore after my husband was mugged and had $200 in cash taken from him at a truck stop), they wouldn’t have been able to buy those other things. I hate when merchants charge processing fees. It means they either didn’t read their processing agreement or don’t care about it. Neither are the type of person I feel should be running a business as they are either immoral or inattentive.
Joe Rawlinson
April 21, 2009
Samantha,
You’re not the only one that feels distrustful of businesses that bend or break these rules. Indeed a great environment for a customer to do business is a place of honesty and transparency.
Carl Cardless
July 1, 2009
I prefer not to use cards for anything because of these hiddin fees. You know prices are higher if these fees are not paid solely by cardholders. Cash customers like myself are getting ripped off!
Maximara
November 5, 2009
Convenience Fees are in reality what the credit card companies charge the merchant (called Transaction fees). Not only are the Transaction fees a percentage of the item’s total cost but there are generally a per transaction fee on top of that. Visa and Mastercard are the cheapest with Discover and American Express being the most expensive.
Most merchants that use credit cards have these Transaction fees already factored into their prices so you are paying for a credit card even if you don’t use one. The merchant that denotes a Transaction fees for credit cards likely thinks they are being honest with their customers by passing the cost of using credit cards directly to them rather than hiding it by upping ALL their goods by that percentage.
Alan
November 18, 2009
RE: “Large stores will accept credit cards for what would seem any amount, even less than a dollar. Why? Because the cashier is just an employee. These front line folks probably don’t even know what a merchant account is or how it works…. Unfortunately, some government and utilities insist on charging a “convenience fee” for paying online.”
Most public and cooperative utilities are not in business for a profit. In fact, they categorize as “non-profit” or “not-for-profit” organizations that are there to do one thing… provide utilities for their customer base. These and other government or publicly owned organizations are not in business for a profit, as the aforesaid “large stores” tend to be. These utilities do not typically have capital set aside for investing in these types of services. It is usually the utility customer who comes to the utility acknowledging the need for a convenience fee to allow them to pay by card. The customer then gladly pays for the “convenience” of being able to use a card over the Internet or IVR. Especially customers whose home offices reside in other states or even other countries.
To be fair, the merchant fees are not the only charges incurred for providing electronic card payment. There are IVR telephone and Web site interface setup and hosting fees, which double as sort of a virtual cashier that must be paid for. No one would begrudge a cashier a salary or even an hourly wage for the service they render. Likewise, these electronic interfaces must be paid for by someone. When a not-for-profit utility has their own customer base begging for pay-by-card capability, the only feasible solution many times is the convenience fee method. Those customers who prefer not to pay the fee do not have to use that convenience and may still pay by drop-box, mail-in payment or walk-in to pay over-the-counter.
Joe Rawlinson
November 18, 2009
Alan – good points about the extra costs of processing credit cards. Those are very real and must be paid by someone.
Oless
November 25, 2009
Alan, regarding the extra costs involved in processing payments online versus in person. While they are definitely not zero, they are also considerably lower than the costs of hiring cashiers.
It costs less for the business to accept payments online as opposed to in person. Guaranteed. So if they accept credit cards in person with no extra charge, but charge a “convenience fee” online, well, that’s just there to improve their bottom line simply because they can. True, it is more convenient to pay online, but the marginal cost of doing this to the business is next to nothing. If more people paid online and the company would need to hire less staff for payment processing, the company would end up saving significant amount of money. And pocketing the “convenience fee”, of course.
Dan
January 14, 2010
I am a small business owner who has implimented a small transaction fee on credit card purchases. I do not want to raise my rates for all my customers as to make more money. I wish to keep my prices low. I am only interested in at least getting the credit card customer to cover the small expense of what it costs me to be able to accept their card. We do take money orders with no transaction fee for those who may not want to pay with cash.
One of the main reasons I decided to do this was because of refunds. We sell a service, not a product. For example, a customer may come in and use their credit card to pay $300. My merchant account charges me a set card swipe fee and then a percentage of the amount charged. Now it could be the next day or even the next month, the customer asks for a refund because they do not need the service for some reason. Now I refund the $300. I end up losing money ! Depending on how often this occurs, this may be a sizeable financial loss.
Big companies and corporations I do not think are affected by this. Probably for two reasons. 1.) Their prices/profits are most likely high enough where this would not hurt them. 2.) The quantity of what they sell may be high enough where they wouldn’t even see a loss. Example: If they do 200 profitable transactions in a day and they take a loss on maybe 20 of them. They still have 180 positive money making transactions which easily covers any losses they may have taken.
My buddy does this with car sales. He may lose like $4000 on 2 or 3 cars, but he made a good amount of money on the 12 other ones he sold !!
Joe Rawlinson
January 15, 2010
@Dan – You’re right. The smaller the business and sales volume, the more the credit card fees hurt. Returns, as you note, are very real and the overhead of the credit card processing has to be absorbed by the business. I’ve had some success with Paypal, Amazon Payments, or Google Checkout that seem to refund even their fees when you have to refund a customer. However, your situation may not allow those payment processors.
Alan
March 1, 2010
Oless – When you say the costs of taking credit card payments is considerably lower than paying for a cashier, I have to wonder how much research may have been provided to you. An everyday example from the utility world may help put it in perspective.
Let’s say a 50,000 member electric cooperative has 1% (500) of its customers pay their bills online without a convenience fee — the utility would pay all associated transaction fees. Online credit card payments carry about a 3% rate of the total transaction amount. With an average payment of $100 per month ($600,000 total), the utility winds up paying 3% over the course of a year, or $18,000.00.
That’s just to let ONE PERCENT of their customers pay their bills online. Having been a cashier in college, I do believe this at least rivals the average salary of a cashier. The national average for online utility payments is around 5%, so throw in another 4% paying online, and your utility has just paid $90,000.00 in the last year to let those customers pay with a credit card. Clearly it’s not as cheap to take credit card payments as it may seem. And those are just the credit card fees themselves. We haven’t even begun paying for the media for taking those payments that have to be in place, like a bank draft, Web site, or telephone IVR interface.
As I pointed out earlier… utilities are usually non-profit or not-for-profit and simply charge the customer according to the customer’s usage shown by their utility meter. The utility simply provides the medium to get the product (electricity, gas, water, etc) from the wholesaler to the customer and typically do not have “bottom lines” to improve. Apart from personal incomes of utility employees, utility charters do not allow operation as a profitable entity as a corporation like Abercrombie and Fitch or Sony would. The utility would find it difficult, just as you or I would, to invest in new ways of providing services regardless how affordable those services may be compared to alternative methods. You’re “buy-one-get-one-free” coupon does little good if you can’t afford the first object to begin with.
Now imagine you’re a utility who can’t afford to include credit card payments in your budget, yet your members demand online bill pay via credit card. They even tell you they would gladly pay to make it happen. What do you do? The convenience fee model is actually a win-win situation made possible by the demand of utility customers themselves. I agree, convenience fees from for-profit organizations like my favorite antique dealer are not only strange, they also go against nearly every credit card merchant agreement to date. But for not-for-profit organizations they provide an opportunity not possible otherwise, and the credit card companies’ concession to them for the utility industry as of late is ample evidence of that.
Deanna Green
March 11, 2010
We are a small business that accepts credit cards. We also offer charge accounts for customers. Our problem is more and more customers are paying their charge accounts with credit cards each month, we are talking $5,000 charges here, which is eating us alive in charges from the credit card companies. Can we limit our acceptance of credit cards for time of purchase sales only and not accept them for “charge account” payments?
Mike Rennie
May 5, 2010
Why would the fee be a percentage of the total sale? I paid my tax bill online and that fee was $40-ish on a quarterly tax bill of $2300-ish. Why would that transaction require more effort or technology than a $50 transaction?
Joe Rawlinson
May 5, 2010
Mike – the effort for the transaction is the same. It is all about making money and the percentage fees allow the credit card companies to do exactly that.