credit card: how much does the merchant pay?

Factual Questions
1

About a year or so ago, my city installed new parking meters. People who have trouble keeping a few coins on hand like them, because they can pay with a credit card.

Given how many merchants set minimum purchase limits for customers who are paying via credit cards, it’s interesting to realize that most of these parking transactions are for approximately a dollar.

Question:
how much is the fee that the city (or the private company to whom the city has outsourced parking-space management) pays to the credit card company for this transaction? I was under the impression that the fee is typically a fixed amount plus a percentage, comparable to that of PayPal (2.9% plus thirty cents). This would eat up a huge portion (around 1/3) of the typical parking-meter transaction. Is it possible the city/contractor has a better deal worked out with CC companies?

2

Merchant fees are somewhat dependent on the company. I was an asst controller for a hotel that was small time (a few hotels) and our merchant fees with the same bank (Bank of America) were higher than when I was at another hotel with thousands of locations world wide.

You have to shop around. Bank of America may be good for one business, Citibank may be lower for other businesses

It also depends the type of business, the level of protection and the amound of fraud expected.

I’ve never worked with a governmental agency so it may be different. For instance merchants aren’t allowed to pass on the cost of the fees to the customer but the federal government exempts itself. This is why if you pay your federal taxes with Visa you pay an additional fee. Walgreens or Walmart couldn’t do that.

3

I can only speak to a very narrow experience, but as a Pennsylvania city of the 3rd class, the city I do IT consulting for is required to pass on those fees to the customer. At least that’s what our legal bureau determined.

To me as a businessman, if someone owes you $x and they pay you $x then that person has paid in full. If you lose a portion of that in the course of collecting the money (i.e. credit card merchant fee) it’s a cost of doing business. Not so, at least for my city. Legal said that if a resident owes $x in taxes the city must collect $x in order for it to be paid.

4

The transaction fees paid by the merchant to the card data processor are negotiated. But this portion of the fee is minor compared to the rates charged by the interchanges (Visa and Mastercard). These fees vary depending on various factors, including the average size of a transaction, whether a card was swiped vs. card not present, historical chargeback rates, etc. But I would estimate these to be within the 2% to 4% range. I know that Amex charges more than Visa and Mastercard.

5

Who pays the fee to the interchange? In my company we suffer a 1.25% fee for a credit card transaction, this goes to the bank.

6

Until recently, any merchant that had a minimum purchase requirement was violating their contract with the credit card company.

7

It is paid on your behalf through the card processor. Your bank probably has a relationship with one of the major processors: Paymentech or First Data. Depending on the size of your business, you may be in a pool of similar-sized businesses that have a joint agreement in which you pay a fixed percentage. I assume that in your business, you actually swipe a card and get a signature? These rates are lower, since there’s less risk to the card issuer.

The Visa and Mastercard interchanges are basically just partnerships amongst the large card issuers, who are primarily banks, and who operate under one Card Agreement, which is not available to the public, btw. In my company, we tried for years to gain transparency as they were hiking our rates, to no avail.

Amex and Discover are stand-alone companies that issue their own cards, and their card agreements are easier to manage.

8

I also noticed recently that gas stations are advertising lower rates for cash payments. I haven’t been involved in dealing with the card companies for a few years, but this was a bid no-no in years past (for obvious reasons).

9

3 to 4 percent is what I’ve seen.

10

As others have noted, the fees are indeed a “per transaction” flat fee plus a percentage. Merchants also have a whole range of other fees that we get stuck with if our average transaction amount is too small or we run too many (or too few) transactions, and so on. The 2% to 4% estimate Jackknifed Juggernaut gave is pretty good. We often get quoted numbers well below 2%, but they don’t reflect the final reality.

No longer true. There are different “levels” of Visa card. The basic card (which few people have anymore) is a lower fee, but if you use a Visa rewards card, the merchant is paying for those rewards, and we often end up paying as much as Amex or even more.

It’s hard to do a direct apples-to-apples comparison between Amex, Discover, Visa, and Mastercard because there are so many variables. One may have a lower monthly fee and per-transaction fee, but a higher percentage, for example.

11

If the conservatives really wanted to help small business they would limit credit card fees. Companies like Amex have high fees because they issues rebates to the card holder. This money comes right out of the bottom line, and those who don’t pay by credit card are subsidizing those who do.

ETA: Or alternately, allow a surtax on purchases paid for by credit card.

12

When I was running a small retail organization, we were paying a fixed fee plus about 2%. There was also a monthly minimum, if we didn’t have sales, we got socked anyhow. So, if someone charged $100 to buy something, we’d get a statement that showed the $100 and then subtracted (say) $3 in fees, so only $97 went into our bank account.

The rates vary based on the credit card (Visa and MasterCard were lowest; we didn’t take Amex because it was way higher) and the bank, and also on the size of the organization and the amount of monthly cash that goes through.

13

All of you are saying things that are correct, even when they conflict and that’s because it is widely negotiable. This is one thing I learned working for one of the largest hotel companies in the world. The bigger you are the more negotiating power you have.

Amex is usually higher than VS/MC (not always) because they fight tooth and nail for their customers. If you have a major item and you fear something may go wrong, use AMEX, they fight for their customers and deservedly so, you pay for that card.

As others noted, governments will exempt themselves, and allow them to pass on fees.

Merchants are prohibited from charging minimums for credit card purchases by merchant agreements, but there is no enforcement of this in reality. If you report the merchant to Visa, Visa will tell you to take it up with the BANK that issued your credit card.

So if Acme Company has a $5.00 minimum, and I try to use my Visa issed by Citibank, and I complain to Visa Corporate, Visa says “Take it up with Citibank, they issued the card.” So if you contact Citibank, they’ll say “Well OK, we’ll look into it” and nothing is done.

In the early 90s I actually had Amex call a hotel I was working in and tell me we were violating their rules and they said, they’d take away our merchant number if we stopped. I can’t imagine anyone doing that today.

Finally don’t forget while credit cards can’t pass on the cost of fees to their customers they CAN issue discounts for cash.

Here’s an example

You can’t say:

Gas is $1.00/gal but if you pay with a credit card it’s $1.25/gal

This would be passing on the cost of the fee

BUT YOU CAN SAY

Gas is $1.25/gal, if you pay by cash it is only $1.00/gal

14

Do some large firms have accounts direct with the credit card companies? I sort of wonder how much of a 99 cent itunes song goes to the CC company in fees?

15

I suspect (but don’t know) that Apple is likely large enough, and has enough volume in small transactions, to negotiate a good rate. That said, I do notice that they hold onto the small purchases at least overnight, and sometime more than a day, and bundle them into a single transaction if you buy again in that time; so they’re clearly trying to minimize something.

16

Places that deal in tons of small transactions can also get plans like no per transaction fee but 10% of amount. This works well with things like the aforementioned Parking meters or iTunes type digital purchases. The high volume of transactions makes up for the small amount of each transaction.

17

Last time I checked my merchant agreement, adding a surcharge for using a credit card wasn’t allowed. However, giving a discount for using cash was ok, but you had to be very clear that the customer was receiving a cash discount (as opposed to not paying a CC surcharge).

18

Just this morning I was wondering how different the world of credit cards would be if all the charges that merchants have to pay were billed directly to the card holder instead. You want a rewards card, great, you can pay an extra .0003% on each purchase. You want a lower interest rate, okay, that’s an extra .0001% charge on each purchase. Hey, sick of credit, gonna just use debit, no problem YOU pay the 15¢ each time you enter your PIN and see how YOU feel about paying an extra 15¢ because you changed your mind about that candy bar you didn’t think you wanted. Back of your card is worn off and you didn’t call to get a new one and you can’t read the CVV code…Hey, there’s an extra $1 on your next Discover bill!*

My, not at work, off the top of my head, back of the envelope math says that each swipe costs us about 30¢-50¢. Think about how different credit card laws and credit card use would be if ever card holder had to pay 30¢-50¢ each time they swiped their card.

*Seriously, Discover (at least used to) charges A DOLLAR for a missing CVV on a keyed in card.

19

I’m curious as to why holds are put on debit cards for gasoline purchases at the pump. A woman of my acquaintance had her VISA debit card declined for a $15 store purchase even though she knew she had around sixty-something in her account. Turns out she had just bought $20 of gas at a 7-11 and VISA automatically put a $75 hold on her account. She found out about this when she called her bank the next day to find out what was wrong. She was also told that if she used her card inside the store rather than at the pump no hold would be put on her card. I can understand why putting a hold on a card for a certain amount would be a good idea for hotel rooms and rental cars where there may be reason for additional charges for damage or whatever after the fact, but $20 worth of gas is $20 worth of gas. So where’s the risk? And why does it not apply when paying at the counter? Anyone know?

20

From working in this field in the past, the merchant generally pays between 2%-5% of the amount.
Factors in that base rate are:
[ul][li]typical transaction amount. A home appliance store selling items for hundreds of dollars will get a lower fee than a coffee shop.[/li][li]Frequency of purchases. A grocery store, where customers come back every week or so will get a lower rate than a furniture store, where customers only buy every year or two.[/li][li]presence of card, verification by a clerk. Businesses selling mostly without the actual card present (mail order or online sales) pay a higher rate; sales where a clerk sees the card pay a lower rate (like pay inside at a gas station vs. pay at the pump; also why stores may have you swipe your own card, but then the clerk asks to see your credit card & id).[/li][li]businesses where each charge is verified (or declined) online in real time get a lower rate. (Nearly all of them, nowadays). [/li][li]businesses with a history of a lot of disputed charges pay a higher rate (even if the business wins most of those disputes).[/li][li]businesses with a history of chargebacks (actual refunded charges).[/li][li]businesses with a history of selling to customers who fall behind in payments pay a higher rate.[/li][li]businesses serving a more mobile customer base (like a pizza shop near a college campus) pay a higher rate.[/li][li]businesses selling mostly to poorer credit risks (rent-to-own stores, pawn shops, etc.) pay a higher rate.[/li][/ul]
This basic rate is set based on the typical sale of the business, but there are also fees charged that can change this. Merchants may be charged additional fees for failing to meet a minimum sales volume (number of charges) in a month; for having too many low-dollar transactions, and similar things. These fees can add up quickly!

But all this is negotiable.
For example, Starbucks typical sale is for a much smaller dollar amount than your local appliance store, but they have probably negotiated a better rate with the credit card companies. And merchants will pit the card companies against each other in negotiations – they will argue with AmEx that Visa is charging them a lower rate. Small local businesses may not have much negotiation power; they may have to just take the standard deal. But bigger merchants, or chains of them can make deals.