Small business owners have it tough, especially when it comes to merchant services, the accounts, software, and associated fees used to accept debit and credit card purchases. To help offset some of the fees and charges, you may have seen that infamous sign by the register reading, “Minimum purchase of $10 on all credit card transactions.” Are the messages on those signs really legal? It’s important to know what the rules are with regard to credit card purchase requirements as well as the rights both you and your customers have when making a purchase.
Where did the credit/debit card rules originate?
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act merchants are legally allowed to impose a minimum purchase requirement up to $10 per purchase for those consumers paying by credit card. Why? There’s a significant price difference paid by businesses for credit card processing versus debit card charges from merchant services vendors. Credit card purchases can cost a business anywhere from 2 to 4 percent of the purchase price. For a $100 purchase, with fees as high as 4 percent, that small business owner is paying $4 in fees (i.e. losing $4 profit on the transaction). Swipe fees on debit cards are a stark contrast of $.21 per transaction. The debit purchase fee is capped by Dodd-Frank so it cannot rise any higher. These fees are also part of newer legislation that may be reduced even further in future years as it was federally capped at a higher amount than originally proposed in the House bill.
So, the short answer is yes, you can charge a minimum purchase on credit card swipes, but the next question is, should you? There is backlash for requiring a minimum purchase, especially when you look at who your typical customer is and how they spend. Millennials, the youthful set of Americans born at the turn of the 21st century are coming into their own spending power right now – and they use credit and debit cards for everything. From a soda at the gas station to their travel purchases, a majority of their purchasing is done on plastic or the newer Apple Pay/Android Pay cellphone purchasing. Ask a Millennial if they have cash in their wallet and odds are the answer is no. Millennials don’t travel with cash, shop with cash, or even make a habit of having cash nearby, it’s all stored in the cloud within their banking institution’s electronic banking services. Will your customers, like the Millennials, carry cash enough to make a purchase if they aren’t spending the minimum required to pay by credit card? Will your minimum purchase requirement be the tipping point between making a sale and turning off the customer from ever returning? Possibly. Now enter your business’ value proposition and whether your customer values your business enough to overlook the requirement.
A local hairdresser has seen the same clients for over 20 years and has never taken credit or debit card payments in the entire lifespan of the business. Do her customers wish she accepted electronic payments? Of course. Do they still keep coming back with cash or checkbooks in hand? Yes they do. Why? Because they value the personalized service she provides more than the slight inconvenience of withdrawing cash from the ATM before a hair appointment. Will this business model survive into the next generation’s (Millennials and Generation Y) approach to shopping and making purchases? Odds are, no. The lesson here is that what may work for existing customers may not work for younger more electronically driven consumers coming down the pike. Our hairdresser may need to finally step into the 21st century and implement a merchant services agreement with her banking institution. If she fails to meet the changing needs of her customers she may risk losing them altogether. Whether she is willing to change her business model is yet to be seen.
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Copyright 2016 by Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, a PASBA member accountant, located in Londonderry, New Hampshire.