Unraveling the Card-Processing Conundrum

//October 6, 2006

Unraveling the Card-Processing Conundrum

//October 6, 2006

Inscrutable fee structures haunt small businesses that want to accept plasticBIZ SPOTLIGHT – SMALL BUSINESS

Before starting his own home-inspection company, Mark Panetti had what seemed like a simple question for companies that process credit-card transactions: How much would it cost to process a bill for $299, the price of a basic home inspection?

Even after listening to the explanations, Panetti, who launched Marlton-based Summit Professional Home Inspections in September, was rarely certain of the fee. “It’s a very roundabout, ‘it depends,’ kind of answer,” he says.

Large companies can command low processing fees based on their high volume of transactions. But small businesses such as Panetti’s often remain unsure whether they’re getting a good deal—or even what deal they ended up with.

Processing fees run from a low of 1.5% of a sale to a high of near 5%. Charges can vary based on the type of credit card and on factors as seemingly minor as whether a card is swiped through an electronic reader or a clerk types the information in.

“If it’s not keyed in just right or in the correct sequence, then there’s extra charges,” Panetti says.

Those charges are becoming a larger portion of the bottom line as plastic increasingly wins out over cash at the register.

“The point of view of retailers is that it’s expensive to process the cards,” says Tony Bruce, an independent accountant in Cherry Hill. “But again, it may be a necessary evil. More and more people pay with credit cards, with all the incentives that the end user is given.”

Restaurants, for example, used to be primarily cash businesses, says Deborah Dowdell, president of the New Jersey Restaurant Association. Now, she says, between 80% and 90% of patrons pay with credit cards, upping the fees that restaurants must shoulder.

“That particular line item is getting larger and larger every year,” she says. Efforts to cut the cost are hampered by the complexity of the fee structure. “Even if you try to shop, it’s often very difficult … to compare apples to apples,” she says.

Tom Budd owns The Barnsboro Inn in Gloucester County. He says he pays more than $1,500 a month in card-processing fees, double what he was spending about five years ago. His sales, however, are roughly the same.

“My costs go up without any increase in volume,” Budd says. “Any budget line that has that characteristic is a concern.”

Budd blames the increase in fees on two factors: the rise in credit-card use and the proliferation of reward and signature cards, both of which are more expensive to process than standard credit cards. Reward and signature cards offer gifts and other incentives for holders to use them more frequently.

While the cards deliver benefits to their users, Budd says they don’t bring any advantages to restaurants and other retailers. He has even pondered accepting only regular cards, but says he quickly dropped the idea as unworkable and unfair to customers caught in the middle.

Retailers’ complaints have led to antitrust lawsuits against credit-card companies and processors, as well as calls for caps on the fees. The U.S. Senate held hearings on the issue in July. There, executives from the credit-card industry argued that the lawsuits had no merit and that merchants have benefited from a proliferation of cards that make payments easier. They said price caps would only hurt consumers by raising their costs.

Still, some card companies have begun taking steps to make their rates more transparent. MasterCard, for example, plans to publish the interchange rates that apply to U.S. merchants. The interchange rate is the basic fee for accepting credit cards before other charges are added by the various parties involved in the transaction, such as the card’s issuer and the retailer’s processing company.

“The merchant community believes that having access to our rate schedule will provide additional transparency to the process, so we are pleased to be able to accommodate their request,” says Joshua Peirez, group executive for global public policy at MasterCard, which is based in Purchase, N.Y.

Meanwhile, Princeton-based card processor Heartland Payment Systems has introduced what it calls a merchant bill of rights, outlining how it thinks small- and mid-size businesses should be treated by the industry.

“There’s a lot of unfair practices in this business and large merchants are protected because they have large purchasing departments that stay on top of card-processing programs. Small- and mid-size businesses are at a great disadvantage because they don’t have those internal resources,” says Nancy Gross, marketing director for Heartland. “It’s a complex business,” she adds.

The 10-point bill of rights calls for greater clarity in the fees charged, better customer service and tighter security in electronic transactions. Heartland itself strives to make its charges as clear as possible, says Joseph Crivelli, a spokesman for the company.

Regardless of whether Heartland’s push for clarity becomes standard practice, the effort appears to be helping the company itself. Panetti and Budd have both turned to Heartland for card processing.

“Heartland has a much more straightforward price to it,” says Budd, who enjoys special rates available to members of the New Jersey Restaurant Association.

Panetti, meanwhile, got an answer to his question. He said he pays Heartland about $7.80 on a credit card transaction of $299. About 35% of his customers pay with plastic.

“I felt like I got a very good deal,” Panetti says.

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