Small businesses facing swipe fee charge dilemma

A recent settlement with the world's two largest credit and debit card payment processors allows companies to change the way they deal with certain types of transactions, but that may put many small businesses in a tough position.

As a result of the settlement between payment processors Visa and MasterCard and numerous retailer groups, small businesses are facing a considerable dilemma over how to approach the newly-allowed credit card surcharges, according to a report from the Wall Street Journal. The $7.25 billion agreement allows businesses of all sizes to levy credit card customers fees large enough to cover what they pay in interchange charges, but small business owners know they walk a fine line with customer trust.

On the one hand, even the smallest companies that accept credit cards pay as much as tens of thousands of dollars in swipe fees annually, and these can eat into profits considerably, the report said. By passing these fees, which can run anywhere from 1 to 3 percent of a total purchase price, on to credit card customers (they're prohibited for debit card use) they would be able to negate those losses and more easily turn a profit. This is especially true in the case of smaller purchases.

"We have people that will pay for a $1.50 soda on a credit card," Luan Schooler, owner of the Portland, Oregon, specialty foods store Foster and Dobbs, told the newspaper. "In those circumstances, we are losing money – or making so little, it wasn't worth selling it in the first place."

But on the other hand, small business owners who charge this type of fee risk turning off consumers who choose to use credit, and may see some shoppers head to competitors which do not apply this cost to credit card purchases, the report said. However, it does offer these customers the more practical advantage of receiving a benefit for completing transactions with less-expensive payment methods such as cash, check or debit.

The real benefit of the settlement
However, experts say that while much of the focus in the settlement has been on the ability of merchants to start charging these fees, there are other, more practical rewards that haven't been deeply explored, the report said. For instance, it gives small businesses the ability to negotiate the fees they pay to transaction processors themselves.

Put simply, it seems that charging consumers more for their credit card use will lead to fewer shoppers doing so, and therefore give leverage to merchant groups, the report said. Payment processors make their money from the fees they collect, and therefore, fewer transactions would translate to smaller incomes. This would likely be unappetizing to these companies, and would therefore make them more willing to negotiate lower fees overall so that retailers don't start applying these charges en masse.

"Even if only a few merchants surcharge, everyone will benefit," Craig Wildfang, a top lawyer in the original lawsuit and partner at Robins, Kaplan, Miller and Ciresi LLP, in Minneapolis told the newspaper. "It will have a downward pressure [on fees]."

However, 10 states prohibit the charging of theses fees for credit card use, and they tend to be population centers, including California, Florida, New York and Texas, the report said. As a consequence, millions of shoppers might not even have to deal with these higher costs.

Interestingly, another recent agreement between merchant groups like the ones in this settlement and major payment processors allowed retailers to alter the way they deal with credit card interchange fees in a slightly different way. Instead of being able to charge more to those who paid with credit cards, they were instead given the option to give a discount to those paying in cash. The upshot of this is that by giving a discount for cash purchases similar to what credit card customers would face in these new fees, they would essentially be remediating fees in the same way by slightly raising their prices, which many had done to offset these transaction charges anyway.

Higher costs for credit card customers, only if they are elevated between 1 and 3 percent of current prices, can lead to larger amounts of debt, which in turn may be more difficult for consumers to handle. When credit card balances grow out of control, it can endanger both your finances and your credit score.

A large portion of that rating is made up of the amount of debt you carry at any one time, so a great way to raise your credit score is to simply make efforts to reduce the amount you owe on all accounts. Generally, it's believed that you can max out that aspect of your credit rating by keeping balances at or below 30 percent of your total allowable limits.