One of the largest costs for me as a small business owner are my credit card fees. Over the last year our businesses received as much as 80% of all our revenues through credit cards. As consumers demand more points and freebies, the cost is passed on to the businesses through fees. Some of these point cards cost our business over 3% of the transaction. I am charged different rates for over 50 different types of cards depending on what the user is signed up for. I cringe every time I see an airline card passed to me as I know that my profit margin just took a hit. As it may seem like just a cost of doing business, imagine the excitement of selling $15000 in product, receiving the payment in an airline credit card and knowing that a $400 credit card transaction fee comes with it.
Over the last year we have negotiated down our rates and have started pushing debit card usage to bring down the overall rate to 2.2%. Why push debit cards? Debit cards only cost 1% and therefore can save us a ton of money if they put in their 4 digit code. With over a million dollars in credit card sales the 1.5 percent difference adds up. You would think that the consumer would like to save a local business 1.5 percent, but we find that they don’t for one reason. The banks don’t want them to. The banks tell them it’s safer to use the credit and give them points and free gifts for using their credit cards because they get a piece of the fees businesses pay. It’s in their best interest to have consumers use credit cards. It’s a fight we can’t win but we realize it’s a necessary part of business and the positives of having the money in your business account in 48 hours,the security of the transaction, the ease of payment, the overspending of the consumer, all make up for the rising fees. But that is about to change thanks to family friend Dick Durbin. According to Bloomberg
Visa and MasterCard, the world’s biggest payment networks, plunged more than 10 percent in New York trading yesterday after the Fed proposed capping so-called interchange fees at 12 cents each. Currently, the networks charge merchants an average of 1 percent of the purchase price, regardless of cost, and pass that money to banks that issue cards.
The change, if approved by the Fed after a public comment period, would wipe out most of the $16.2 billion in revenue that debit cards generated last year for U.S. lenders, including Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co.
“These credit-card giants and banks are imposing fees that are in no relation to the actual cost of processing, and the retailers and merchants have no way to bargain or even resist these increases,” U.S. Senator Richard Durbin, the Illinois Democrat who pushed for the caps, said in an interview. “This new law brings the Federal Reserve into the picture and changes that dynamic.”
The average debit interchange fee last year was 44 cents per transaction, or 1.14 percent of the purchase price, according to a draft of the proposed rules. The Fed staff outlined plans that recommend setting interchange at 7 cents or 12 cents, a reduction of 73 percent to 84 percent. Initial Wall Street estimates yesterday pegged the cut as high as 90 percent.
The proposed reductions would align U.S. interchange rates more closely with other countries, including Australia and the 27 nations of the European Union. Visa Europe Ltd., operator of the Continent’s biggest payments network, agreed to cut the fees to 0.2 percent as part of a deal to end EU antitrust action, the European Commission said last week. MasterCard agreed to the same rate last year.
Of course the banks, VISA, and Mastercard are upset and says it will harm consumers. The only harm it will cause is the loss of all the rewards, points, and cash back that consumers have gotten used to receiving. All of which have been paid for out of my and other business owners pockets. While this only applies to debit cards, it should start a strong trend towards realistic rates and take away these needless rewards. For those people that feel this is just another case of the wealthy taking money out of the common person and putting it in their own with this I reply. Something that you receive for free is a gift and gifts should never be expected or assumed. Especially when the person giving the gift is using someone else’s money to buy the gift.
That is excellent news – sad that the EU is the impetus rather than just honest business ethics, but whatever works… Maybe Paypal, Sedo and others will be kind enough to reduce their rates as well
🙂
Shane,
Thanks again for your blog – informational as always. I do have a comment about Debit vs. Credit cards, and I’ll tell you why I now always choose Credit over Debit.
Last year, my wife’s business Debit card was cloned and used at foreign ATM’s over a holiday weekend to withdraw almost $10,000 from her business account. While she eventually got the bank to refund her money, it took almost 3 weeks and the bank made it clear that it was not required by law to refund losses on a debit card. Banks are required to limit liability to $50 on a credit card.
Needless to say, to protect ourselves from future losses, we ALWAYS state Credit Card if we have to use a Debit Card for any transactions.
While nothing is 100% secure, If the US would just join the rest of the world make the switch to “chip and PIN” based card technology the incidence of card cloning would be slashed (along with losses). Legislation to add credit card protections to debit cards could help… although I don’t see either of those happening anytime soon.