Stroll into the Ula Café, a neighborhood coffeehouse in Jamaica Plain, Mass., and you might notice an unusual sign prominently posed on the cash register. The note informs customers that every time they pay with plastic, it costs the coffee shop about 25 cents. Please, asks the sign, reserve use of your credit cards to pay for purchases of $10 or more.
“When our average transaction consists of coffee and a muffin or a sandwich and a drink, a great bulk of our credit-card purchases comes up under $10,” says owner Kate Bancroft. “Considering that each card transaction costs us up to 25 cents, there isn’t a lot of room for profits,” she says.
As credit-card acceptance continues to spread, so does the toll on vendors who accept the cards. That’s because merchants who accept plastic as a form of payment don’t receive the full purchase amount. Instead, a portion of each credit and debit card sale gets re-routed to the merchant’s bank, the cardholder’s bank and the network that processes those transactions. In 2008, merchant-paid swipe fees amounted to $62.7 billion, up 3% over the previous year, according to the Nilson Report, a payment industry web newsletter.
Some of these fees are on the rise. The domestic credit-card interchange rate — a transfer fee set by issuers such as Visa (V) and MasterCard (MA), but paid to the cardholder’s financial institution every time a Visa or MasterCard payment product is used — rose from between 1.25% and 1.91% in 1991 to between 0.95% and 2.95% in 2009. MasterCard’s rate also jumped from between 1.30% and 2.08% to between 0.90% and 3.25% last year, according to a recent Government Accountability Office report about credit cards. Processing fees have also been added to debit-card purchases, which in the past, were free for merchants to process.
Why the widening gap in the interchange rate? The GAO’s interchange rate fee analysis concludes that several of the networks’ higher interchange fee rates increased during this period. At the same time, rates on other cards, which had lower-cost incentive rates for sectors that previously did not take cards, also increased. (Note that debit-card purchases, which account for roughly 70% of Visa transactions in the U.S., were not included in the GAO study.)
What’s more, small businesses are feeling the price hikes the most, as larger firms are better able to negotiate with issuers for more attractive terms. “If you’re a Wal-Mart, you’re going to get a great price on any type of terminal fees or premium,” says Conrad Sheehan, founder and CEO of mPayy, a mobile and online payment service. “But if you’re a three-store coffee shop or boutique, you’re going to be a price taker; you’re going to pay statement fees, deposit fees and the like,” he says.
Shawn Miles, the head of global public policy at MasterCard, agrees with that charge. “What we tend to see with large volume merchants’ acquirers is some tend to charge a little less and some charge more,” he says. “A large merchant may pay 1.5% plus flat fee; a small merchant may pay 3% to 4%.”