Credit Card Processing Blog

Payment card industry rules prohibit merchants from charging consumers a fee for making a payment with a bank card. Compliance with this requirement ensures that both the cards and their users are not discriminated against at the checkout. However, there are loopholes, some of which are easier to define than others. For example, merchants can offer discounts to customers using other (non-card) payment methods (e.g. cash), which is straightforward enough.

But then we have an allowance made for a “convenience fee,” which is not nearly as clear-cut. It does constitute a clear surcharge to payments made with bank cards and yet, industry rules permit it. Why? Well, credit card companies and associations don’t have much of a choice. Let me explain.

What Is a Convenience Fee?

Industry rules state that merchants that offer an “alternate” payment channel (mail, telephone and e-commerce have been given as examples of such channels) are allowed to add a convenience fee to the transaction amount. If that definition sounds nebulous to you, that is because it is nebulous. Still, let’s see if we can decipher it.

If we are to make any sense of the convenience fee, we should begin by asking who, in practice, is charging it. Think about it for a moment. The most prominent examples are the federal and local governments (charging it for things like taxes and parking tickets) and huge utility companies (adding it to your gas or electricity bill, if you want to pay by credit card). In fact, I can’t really think of any other examples, although I’m sure there must be.

What does that tell us? I don’t think it would be a stretch to infer that the convenience fee has been more or less imposed on the Visas and MasterCards of the world. I mean, could they really have told the federal government that it was not allowed to add a convenience fee to a tax payment made by a credit card? After all, by law the Internal Revenue Service is required to collect the full amount of any tax owed, which precludes the deduction from it of a processing fee. Utilities, on the other hand, are monopolies, so they can (and many still do) opt to only accept non-card payment forms, if the card companies insist on collecting a piece of the payment amount. They own their customers who cannot go anywhere else.

Convenience Fee Rules

So faced with the inevitable, the card companies have chosen to make the best out of an unwinnable situation and have allowed convenience fees to be charged under certain circumstances. These rules state that convenience fees must be:

• Charged for a bona fide convenience in the form of an alternative payment channel outside of the merchant’s customary payment channels.
• Disclosed to the customer as a charge for using the alternative payment channel.
• Disclosed before the transaction is completed and the customer is given the opportunity to cancel it.
• Added only to a card-not-present transaction.
• A flat or fixed amount, regardless of the transaction amount. A percentage-based fee may only be charged for consumer tax payments.
• Included as a part of the total transaction amount.
• Applicable to all forms of payment accepted in the alternative payment channel.

Visa and MasterCard attempted to dissuade utilities from charging a convenience fee by introducing a special merchant category code (MCC) that offered preferential interchange rates (it’s funny that there isn’t a special MCC for the government). Only utilities that agreed to not charge convenience fees could qualify for this special treatment. I don’t know how many have signed up for the program, but anecdotal evidence suggests that it has not been hugely successful.

The Takeaway

If the distinction between a convenience fee and a surcharge that runs against the rules is still fuzzy to you, well, all I can say is that it seems to have been meant that way. The bottom line is that it would be close to impossible for ordinary businesses to legitimately charge such a fee. But more importantly, would you want to do it, even if you could? I can think of few things that could be more annoying to an e-commerce shopper than an unexpected fee that pops up at the last moment when she’s ready to check out. There must be a reason why only monopolies and the government would want to do it, right?

Image credit: R3views.com.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

Back in early June we wrote about a Nevada Senate bill that was intended to collect $400,000 every six months from taxi companies operating in Clark County, which includes Las Vegas. The cab drivers of the nation’s casino capital were being penalized for charging additional $3 to customers who were paying their fares using a credit or debit card. At about the same time, San Francisco cab drivers were out in force protesting in the streets against a five-percent fee they were being charged for each card payment they accepted. Here in Boston last year taxi owners sued the city for $1 million over the requirement prohibiting them to operate their cabs, unless their point-of-sale (POS) terminal was operational.

The list goes on and I could add to it a clever ploy used by NYC cab drivers to “suggest” to customers that 30 percent is the “reasonable” tip rate for credit card payments. But the point is clear: cab drivers really, really don’t like credit cards (or debit cards, for that matter). I’ve been told that in person more than once and I’m sure many of you have heard it as well.

Well, this morning I read about the most recent development on that front. This one comes from Chicago, where taxi operators have “quietly” filed a proposal, which, among other things like penalizing riders for vomiting, aims to reimburse cab drivers for the expense of accepting bank cards, the Sun-Times tells us. I think that this latest expression of the taxi world’s displeasure with credit cards merits a revisit of the contentious subject.

What Do Chicago’s Cabbies Want?

The Sun-Times reports that cab drivers have filed a petition with the Chicago City Council, requesting that fares are raised by 22 percent and that a $1.50 charge is assessed to customers using bank cards for payment, the euphemistically called “convenience fee.” There is more:

Cabbies also want the city to impose a $1 fee for every additional passenger, a $50 fee for fraudulent credit card transactions and a $75 “cleanup fee” for inebriated passengers who lose their lunch in the back of a cab.

We are not told precisely who is to be assessed with the proposed $50 credit card fraud fee. After all, the passenger who fraudulently used the card is unlikely to be convinced to make good on his debt, not least because he is unlikely to be found. The authentic cardholder can hardly be expected to cover the loss either, so I really wish the newspaper gave us more details on that. But let’s take a look at the convenience fee.

The Convenience Fee Issue

So why do Chicago cabbies want to charge a convenience fee? The Sun-Times:

Budzynski [cabdriver Thaddeus Budzynski is the lead petitioner] justified the credit card fee on grounds that drivers who accept plastic get charged a 5 percent processing fee and lose time and fares doing it.

OK, a five percent card processing rate is truly exorbitant and cab drivers have every right to feel cheated and seek to be compensated for it. However, the focus of their outrage is misplaced and it is not their customers who should be footing the bill. Let me explain.

The typical rate for a card transaction processed at a taxi would hover around 1.7 percent plus $0.20 for credit cards, give or take, and could be lower for debit cards. That is what the payment processor would charge the cab company. However, the cab company charges its drivers five percent for the same transactions, as Budzynski testifies and as the SFGate reported earlier this year. The difference is collected by the cab company as profit. So it doesn’t seem right that the customer should be asked to pay for the cab company’s surcharge.

The Takeaway

Back in June we wrote that the five percent issue “is a case of self-inflicted pain” for the taxi industry. It is truly outrageous that cab drivers should be charged such a high card acceptance rate, right on par with semi-legal businesses that can only take cards through offshore processors, because no U.S. provider would work with them. Yet, the exorbitant fees are not their customers’ fault and the drivers should bring themselves to confront the real culprit here – the cab companies.

Image credit: ITP2P.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

Suddenly it looks like the owner of the cupcake store of TechCrunch Jay Donovan’s story hasn’t made such a clever business decision by selecting Square as her credit card processing provider after all. It turns out that a Square competitor could be processing her cupcake payments at a rate that is lower by more than one percent, losing even more money than Jack Dorsey’s start-up in the process.

Intuit GoPayment, the Square competitor in question which has just partnered up with Verizon, has also dropped the fixed per-transaction component of its processing fee, which seems to be the current fad in the mobile payments world, even though that makes no sense at all.

What GoPayment / Verizon Customers Get

Here is what GoPayment’s blog tells us about the pricing details of their Verizon offer:

For Verizon Wireless customers, the GoPayment credit card reader is free after you’re approved for a GoPayment account and you file the mail-in rebate, which refunds to you the $29.97 purchase price. We’re also making it easier for Verizon Wireless customers to get started with a discounted service plan for the first two months. This is a great deal for those of you who expect to process a higher number of credit card payments. Under this offer, you’ll spend just $12.95 a month and pay the low rate of 1.7 percent for swiped transactions.

Of course, we’re still offering our basic service plan as well, which has no monthly or cancellation fees and offers a 2.7 percent discount rate for swiped transactions.

Intuit tells us that GoPayment is available to “everyone,” even as their Terms & Agreement explicitly states that the “use of the Services is subject to your being affiliated with a merchant that has an active Intuit Payment Solutions merchant account.” So GoPayment is not exactly available to individuals, as Square is, but the lack of fixed monthly service and cancellation fees, combined with the lower processing fees, makes it the better choice for small businesses.

Why Is the Per-Transaction Fee a Big Deal?

Now back to the per-transaction component of the processing fee. As I’ve pointed out in my cupcake post and before that, Square is losing money on transactions below a certain threshold that varies by card type. For regular Visa and MasterCard credit cards, the threshold is about $8.50, give or take, and it is higher for special card types, such as rewards, commercial, business-to-business, etc. Square’s break-even threshold is lower for debit card transactions, but once the interchange limit goes into effect in October, that one too will rise above the one for regular credit cards.

The break-even threshold is much higher for GoPayment’s “High-Volume Plan,” as high as $60 or so for regular Visa credit cards and even higher for MasterCard. Now, this plan does come with a monthly fee, which will protect them from losing money from low-volume accounts, but our cupcake store would certainly be a money-loser, even though their transactions will be processed at a lower interchange and the break-even threshold will also be lower.

The Takeaway

I really have no idea why Square, GoPayment and their competitors are falling over one another in their rush to dispose of the fixed transaction fees. I understand that their overarching priority right now is to grow as quickly as they possibly can, but this is a strategy that will inevitably need to be adjusted at some future point or other. If their plan is to reintroduce the fixed fee or to set a minimum transaction fee later, I think they will discover that the merchants that will be affected by such a change will not like it and push back hard against it.

The issue will become even more acute in October when the per-transaction component of the debit interchange fees will rise to $0.22 and the break-even threshold for small-ticket debit transactions will rise quite substantially. Perhaps Square and GoPayment will be forced to redo their pricing models sooner than they would like.

Get a personalized credit card rate for each of your transactions!

Get the lowest possible credit card processing rate for each individual transaction! Our interchange-plus pricing model gives you:

• Processing rates calculated separately for each transaction to ensure that not a single one of them is overcharged.
• No more mid-qualified and non-qualified fees.
• No fixed monthly fees.

It’s been quite some time since we’ve written anything about Square, Jack Dorsey’s mobile payments project, but I read something interesting this morning that simply had to be commented on.

The story in question involves a sleepy Midwestern suburb, cupcakes (fantastic ones at that), the biggest U.S. payment processor, credit card fees and, of course, Square. It’s a great story and I had a lot of fun reading it, as I’m sure many others did too. However, I suspect that I had so much fun for a reason that completely escaped the author’s notice.

The Cupcake Story

So TechCrunch’s Jay Donovan tells us about Fantasy Cupcake’s search for the best credit card processing provider. This aptly-named killer cupcake maker (take Donovan’s word for it, not mine) is located in Canal Winchester, a suburb of Columbus, Ohio.

The fun began shortly after Leah Dotson, the owner, chose Square as Fantasy Cupcake’s processor. A procession of smug bank representatives beat a path to Fantasy’s door, armed with flyers and credit card processing proposals that were sure to be far better than Square’s. “We’ll give you 300 bucks if we can’t beat your current merchant rate plus give you $100 to switch to our service,” one of them tells Dotson, only to make an ignominious retreat shortly after she sees Square’s pricing sheet (and keep her $300 in the process!).

Having fun yet? Wait, it gets better. Donovan has actually posted the pricing proposal submitted by a Huntington Bank / First Data representative. Here it is:

By comparison, Square charges a qualified rate of 2.75 percent, with no other fees. Donovan has excluded both Huntington’s and Square’s non-qualified rates, I guess for the sake of simplicity, which is fine, as I don’t think it takes anything away from the point he’s making, which is as follows:

In the end, a First Data merchant agreement would have amounted to almost $800 per year in additional fees for Leah vs. Square’s simple 2.75% rate structure and no additional fees. Forget the POS hardware purchases and statement fees and just think about that $.15 transaction fee. That’s 1.2% plus $.15 on every single transaction vs. Squares flat rate of 2.7%. When you think about the fact that the majority of Leah’s sales are under $3.00, it really adds up. That’s roughly $.21 in fees for that $3.00 order vs. $.08 using Square.

Then there are the PCI, service and terminal fees. By the way, the type of terminal this merchant needs costs $100 – $200, depending on the make and model, and $32 per month for two or three years is way over the top.

So yes, Square is indeed the better option for Fantasy Cupcake and Dotson has made the right decision. But what makes me smile is that Donovan is unwittingly making fun of the wrong payment processor here.

A Few More Successes Like This One…

When Square dropped the per-transaction component of its qualified rate back in February, we analyzed its fee structure and concluded that:

[F]or regular credit cards, Square’s break-even threshold would be at about $8.50. In other words, the start-up would be making money from processing larger transaction amounts, but losing money on lower transaction amounts.

For rewards and other special credit card types the threshold is higher, while for debit cards it is lower. What that means in our cupcake story is that Square is losing money on the majority of Fantasy’s transactions (which Donovan tells us average $3 per sale).

So I’m not sure if the Square guys are having as much fun as Donovan and Dotson understandably are.

The Takeaway

The point is that Square’s decision to drop its per-transaction fee places it in a very vulnerable position. The start-up is already losing money on most small-ticket transactions, as seen above, even as it charges a very high percentage rate on both qualified and non-qualified transactions.

At the same time, as the number of Square’s competitors is rapidly increasing, so is the downward pressure on the percentage component of the processing fee. For example, just today we learn that ERPLY is now offering a Square-like service that charges 1.9 percent per transaction. Even though the ERPLY card reader costs $50 to buy, that would be a price well worth paying for merchants with a sufficiently high average ticket (the higher the ticket amount, the higher the weight of the percentage component and the lower the weight of the fixed per-transaction component of the processing fee).

So Square will eventually have to adjust its pricing structure in some way. I wouldn’t be surprised at all if the per-transaction fee makes a reappearance or a minimum fee is introduced, specifically to counter losses from processing small ticket transactions. Whatever their form, any future changes may not be as amusing to owners of cupcake bakeries or indeed, bloggers.

Accept credit cards at one flat rate!

Accept credit cards with our flat rate e-commerce merchant account with no fixed monthly fees! You will get:

• One rate for all types of MasterCard and Visa cards (including rewards, commercial, etc.).
• No mid-qualified and non-qualified fees.
• No merchant account application or set-up fees.

Just a month or two ago Capital One was the only major U.S. issuer who offered credit cards with no foreign transaction fees. Its rivals charged, and most of them still do, on average 3 percent of the transaction amount every time you made a purchase with your card outside of the U.S. That is, provided your card was accepted in the first place, but that is a different issue.

Suddenly several large U.S. issuers have launched cards with no foreign transaction fees, even as a new Federal Reserve rule is about to be enacted in July that will cut a large chunk off the revenues they collect from debit card transactions. What are we to make of that? After all, issuers were supposed to start jacking up fees elsewhere to make up for lost debit revenues. Well, they are and the no-foreign-transaction-fee thing seems to be more of a marketing ploy than anything else.

Who is doing it?

Cardhub.com has compiled a list of the no-foreign-transaction-fee credit cards currently being offered in the U.S. Capital One dominates it, issuing all but three of the listed cards. Let’s take a brief look at the new entrants.

I should first note that American Express‘ entry is a charge card, not a credit one. The difference is that users of charge cards are required to pay off the entire balance at the end of each monthly cycle. This is why there are no interest rates applicable to these cards. You may ask how AmEx is making money from cards with no interest rates. Well, beside the hefty $450 annual fee, AmEx is making money from the processing fees it charges merchants accepting its cards. Visa and MasterCard issuers don’t have this option, as the processor of a transaction involving their cards may be any other Visa or MasterCard member. So this is a special case.

Then we have two entries from Chase and one from Citi. These are very similar offerings. All come with no promotional interest rates on either purchases or balance transfers and all charge an annual fee, two of them after the first year.

A Marketing Ploy

The new crop of cards with no foreign transaction fees are all targeting high-spending consumers with very high credit scores. I am pretty certain that Chase and Citi have looked at the average amount of foreign transaction fees generated by the prospective holders of the new cards and have compared it to the average per-account fees generated from the promotional interest rates.

The issuers have probably calculated that the extra fees they will generate in the absence of promotional interest rates will make up for the lost revenues from foreign transaction fees for a few years ahead. But then, they can change the terms of these cards at any time they want, which just happened to my Chase Rewards card, making it much less attractive in the process.

The Takeaway

When it’s all added up, the new Citi and Chase offers are not nearly as competitive as the lack of foreign transaction fees may make them seem at a first glance. Quite apart from my hypothetical calculation above, none of these three cards has a particularly good rewards program. True, two of them offer a great initial bonus if you spent a certain amount within a specified time-frame. But many other new cards offer similarly attractive bonuses. And, while the no-foreign-fee cards’ rewards max out at three points for a spent dollar, many other new cards do so at a ratio of 5 / 1.

So what I will keep doing is using my best rewards card when shopping at home and take my Capital One when traveling abroad.

Get a personalized credit card rate for each of your transactions!

Get the lowest possible credit card processing rate for each individual transaction! Our interchange-plus pricing model gives you:

• Processing rates calculated separately for each transaction to ensure that not a single one of them is overcharged.
• No more mid-qualified and non-qualified fees.
• No fixed monthly fees.