Want to buy a new shirt from your friendly neighborhood small business? In some cases, be prepared to pay out 2.5% more as a “financing” fee because you’re using a credit card. Enjoying that meal at the local diner? Better have cash or you could be subject to the same fee. Grabbing a bag of chips and a soda at the local convenience store? Oops … Unless you’re prepared to spend a minimum of 10 bucks you can’t use your credit card, sorry.
I’ve always been irritated by these practices. And I know I’m not alone. Who carries cash any more? Why are we, the customer, being shamed because we choose to buy something using what has become a standard form of payment over something that’s clearly a thing of the past?
Merchants have been fighting the credit card companies about these fees for years. And now they’ve won. This past week, Visa and Mastercard ended their battle, and now future fees will probably be lower for consumers that use some cards, particularly the ones that offer fewer rewards. But did these businesses really win? I’m not so sure. Be careful what you ask for.
Because thanks to this “victory”, these businesses are complicating things even more for the consumer and themselves.
Fees will probably be layered based on the card used and some business owners may even find themselves rejecting some cards altogether because the fees are too high. The average consumer carries about four credit cards, according to some studies. Up until now all were treated equally. But no longer. Can I use this card to buy a packet of chips or that card? Will merchants now provide a list of cards that are acceptable to them? Will I be penalized otherwise or turned away at the door?
By making things more difficult for your customer, you’re risking the sale. Or a future sale if the headaches of doing business with you outweigh the benefits. And you’re increasing your costs to account for the different cards used and fees charged and for what you’ll probably pay your point of sale system provider to help you do this.
Small business owners complain about the high merchant fees charged by credit card companies, and yet it’s those very same small businesses who heavily rely on these services. According to the National Bureau of Economic Research, credit card payments (and usage) by small businesses increased from $10,000 a month on average in 2020 to $24,000 a month by April 2022. About 55% of small businesses surveyed said they used a corporate credit card in the past 12 months.
The settlement will probably have a rewards boomerang effect on these very same businesses. Credit card companies use merchant fees to establish partnerships with thousands of businesses so that their customers can enjoy more products, services and travel perks by using their cards. Some cards offer as much as 1% to 5% back at office supply stores and on internet, cable and phone services, as well as at gas stations, restaurants and other locations. Others have partnerships with brands such as Google Workspace, ZipRecruiter and Lyft that offer ongoing credits and price reductions on their services specifically to small businesses.
Talk about biting the hand that feeds you. These services and programs will probably be rolled back, or made more expensive. And it’s the small business owner who will be penalized.
Limiting awards also means limiting revenue. Many studies have shown that consumers tend to spend more at a business when using their credit card. Credit card rewards programs also include countless small merchants offering their wares. By participating in these programs, these small business owners enjoyed introductions to new customers that never would have known about them otherwise.
Finally, who are we kidding? Do we really think Mastercard and Visa aren’t going to make up for these costs elsewhere? Of course they will. They’ll charge higher annual membership fees to the business owners who enjoy these perks and increase late payment and penalty fees or special charges for things like fraud investigations which are paid by – you guessed it – business people. They’ll raise interest rates on foreign transaction and cash advance fees that are also paid by businesses, or pass down higher costs to their partners like banks and other financial service providers, who will in turn pass these costs to their customers who are – ready? – business people.
If you run a retail shop or a diner, isn’t it easier to just calculate how much the merchant fee costs as a percentage of your total revenues and then spread out a small price increase among all your products, where the impact would be barely noticed? Will a customer care if they’re paying $12.50 or $12.75 for a burger? No. Will they raise an eyebrow because you’re charging an additional fee on top of the entire bill because – gasp – they don’t use cash? Yes, they will.
Small businesses are deluding themselves when they say this credit card settlement is a victory. All this does is create more costs, not less.
