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Credit Card Processing Fees and Me

July 20, 2012
Nothing is free and certainly the cost of swipping credit cards or using consumer financing programs isn't. Last year slightly over 73% of our sales were paid for with credit cards or via our consumer financing program. Our processing fees averaged 2.25% of those sales making them about 1.65% of our total sales. It sure would have helped if that expense could have gone into our profits instead.

Years ago, we used to sell pool supplies. To say this was low profit would be understatement. A 100 pound drum of granular chlorine cost us around $69. Due to competition, we had to sell it for around $75. Between the cost of labor to unload a truck, the warehousing cost, and labor to put into client’s vehicles, we were losing money. To make matter worse, everyone wanted to use their credit cards to pay for the chemical. At the time we were paying around 2.5% in credit card processing fees which came to over $1.85 per drum. Whatever profit we had, was eaten up by that fee.

We thought we could make up the loss by charging our customers the processing fee as a separate line item on our invoice. As it turns out, our contract with the credit card processing company specifically forbade us from charging customers a premium for using a card. However, we were allowed to offer a cash/check discount instead. This meant we had to add the processing fee cost to our selling price. When we advertised the product, we showed our price without this fee added in and called it “our cash and carry price.” Although this worked, it was very convoluted and we were constantly reminding sales associates not to say we charged a premium for credit cards.

I mention this because of a recent article I read in the on-line version of The Wall Street Journal which discussed the effect these “swipe” fees had on a furniture store in Minneapolis. Even though swipe fees generally run between 1.5% and 3% nationally, the furniture store owners  said, “The costs associated with accepting plastic amounted to more than their profit and represented their third biggest overhead expense last year - - - after rent and payroll.”

The article goes on to say that a lawsuit brought by retailers against card networks and numerous issuing banks is due for trial in September and may be settled before that. If it is, there is a potential for a temporary reduction in interchange fees. But, and this is more to the point, retailers may finally be allowed to start charging a credit card usage fee to their customers. So, a five piece group that is marked on the floor for $2,000 could have a $50.00 or more processing fee added to it if the consumer decides to use plastic.

Like other retailers and analysts the WSJ reporter spoke to, I am not so sure adding a surcharge is the way to go. Unless every retailer adds the surcharge, I feel the card holder is going to be antagonized by any retailer who does. My customers get ticked off enough when we tell them we don’t accept American Express. I can just imagine the fireworks if we were to tell them they are going to have to pay extra if they use Visa, Master Card, or Discover.

A less disruptive technique would be to offer a cash discount in addition to requiring a minimum purchase to use a credit card. By the way, the latter will only be possible if the settlement of the pending litigation forces processing companies to allow that in their contracts. We have found offering a cash/check discount at time of payment is attractive to some consumers. It is funny how many of them turn down the discount because it is too small. Funny because if I tried to add the same “too small” amount to their invoice, they would carp and complain about it.

Many large retailers (read Wal-Mart or K-Mart) have negotiated their processing fees to be much less than what we “mom and pop” stores pay. Some argue processing fees should not be a percentage of sales; rather, they should be a flat fee. I would argue that whether retailers pay a flat fee or percentage of sales, the credit card processing companies will structure the new fees so that they make as much, if not more, than they make now. I say this because according to the WSJ article, the banks and processing companies argue the “fees are justified because the money pays for efforts to keep fraud costs down and card acceptance helps boost sales for merchants. They also note there are costs associated with handling cash and checks.” Sounds like a defensive position that is unlikely to be changed.

There is no question times are tough. It is a sad day, though, when a line item like credit card processing fees which are 1.65% or our total sales wipes out our profit. Remember when profits were 10% or more of sales. Oh, for the good old days.

Yours in confused retailing, Bruce