Finance for Small Businesses
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Who really pays for credit card transactions? Before long, you may be able to charge customers directly for their credit card transaction fees.
These potential credit card payment changes are the result of a proposed court settlement between plaintiffs largely in the retail, restaurant and medical sectors (including Walgreen Co., Safeway, Inc., Kroger Co. and a multitude of small businesses) against defendants Visa and Mastercard (and several banks). While a federal judge in the New York area must still approve the proposed settlement—which has been in and out of courts for roughly the last seven years—the changes delineated in the litigation include:
The large settlement amount is of little concern to entrepreneurs. The $7.25 billion will be divvied up among the plaintiffs that invested the most in the litigation—small business owners who joined the suit are expecting several hundred dollars apiece. And the temporary discount will mean reduced operating costs for many businesses large and small, but eight months and 0.1 percent off won’t move the needle.
Having the flexibility to impose a surcharge on your customers who prefer plastic presents the biggest change for the business community. Whether your ability to pass the cost on to consumers and reveal the credit card fee will hurt or harm your business remains the question.
Many business owners, particularly retailers, have vocalized their disapproval, usually citing that the credit card companies make out the best in the long run.
Management of America's largest retailer, Wal-Mart, observed that credit card companies can still raise transaction fees—or as they refer to them, “hidden swipe fees”—in the future, which will force Wal-Mart and most businesses to raise prices in order to compensate. The retail giant’s executives are also upset that the proposed settlement will prohibit future anti-trust litigation, which generated $3 billion for Wal-Mart and a group of retailers in 2004.
While entrepreneurs don’t bank on anti-trust litigation against large-scale credit card companies as a key source of revenue, many small business owners share the concern about escalating swipe fees.
Because of Wal-Mart’s, Target’s and other large retailer’s opposition, the settlement’s approval as-is stands on shaky ground. But as the ability to implement credit card surcharges is likely to prevail in the finalized settlement, now is the time to evaluate your business’s surcharge stance.
The idea of passing on credit card swipe fees to your customers probably sounds appealing, but it may prove a detriment to your business. In fact, even if the settlement is approved, it will remain illegal to introduce credit card surcharges in the following ten states: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.
For small business owners in the remaining 40 states, the ability to exact a 1 to 3 percent credit card transaction fee presents an interesting problem. In theory, instituting the surcharge can help you reduce operating costs while tacking a negligible amount to your customers’ purchases. But consider these points:
While every business owner’s clientele varies, most oppose paying new fees, especially on larger-ticket items. Yet business owners can’t be expected to entirely eat the cost of credit card fees. In order to cover the fees without alienating credit card-happy customers, consider these tactics as you reevaluate your company’s credit card policy:
Offer Cash and Debit Card Discounts. As a general rule, providing discounts rather than assessing fees makes for happier customers. Many gas stations offer lower prices for cash transactions, and there’s no reason your business can’t either. Offering 1 to 3 percent off for cash or debit card purchases rather than adding 1 to 3 percent for credit card purchases will give your customers a sense that you provide incentives they can take advantage of, not penalties they’re stuck with.
Establish a Certain Dollar Amount for Surcharges. The proposed settlement forbids business owners from deeming certain items or people as surcharge-free—that is, you can’t assess a surcharge on soda but not on bread, nor can you waive surcharges for preferred clients. You must also state the surcharge price at the point of sale. You can, however, decide whether or not to include a surcharge based on the total purchase price if the policy is clearly stated. For many small businesses, particularly those dealing with many low-cost transactions, creating a policy that assesses surcharges for transactions under $10 or $20 can help you recoup the credit card fees without alienating customers who prefer the security of credit cards when purchasing more expensive items.
Be Upfront and Consistent. Whatever policy you develop, the onus to ensure customers are aware of it falls on you. Be sure signs at the entrance, near the point of sale and the language on your eCommerce website clearly communicate your credit card policy. And if the proposed settlement does gain approval, you will need to communicate the exact charge for any credit card transaction.
No matter what the final settlement includes, investing a little time to prepare for a new credit card policy will help you remain compliant and stay in the good graces of your customers.