Abusive Fees? Give Me A Break!
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sometimes I can read an article and just tell myself that the person writing the article has no idea what they're talking about. However, when an article is so clearly biased against a certain industry, it seems to me a response is necessary. I came across an article from Computerworld titled, “Home Depot (NYSE: HD) fights abusive credit card fees with PayPal system.” While I knew that Home Depot had a partnership with eBay's (NASDAQ: EBAY) PayPal division, I believe the article assumed that the reason Home Depot and PayPal struck this partnership was connected to debit and credit card transaction fees. In reality it's much more likely that Home Depot is looking to make paying easier for their millions of customers.
A Home Depot spokesperson said that part of the reason for their choice to partner with PayPal was because the, “PayPal system is fast, secure, and convenient – all at a lower transaction cost.” While I'm sure this is true, the writer of the article made several points that I don't believe were warranted. First, the argument was made, that retailers don't like the fees they pay to banks for the ability to accept major credit cards. In addition, the comment was made that fees for debit and credit cards range from “1.5% to 12% per transaction depending on the size of a store or chain.” I can honestly say I have no idea where the upper end of these numbers came from. Having worked for a large financial institution for over 10 years, I dealt with thousands of small business owners. The most I've ever heard a business owner paying to accept credit cards was maybe 3% or 4%. In doing some research, I found that, “in the U.S. the fee averages approximately 2% of transaction value.” I can also say, this fee varies widely depending on the type of credit card that is being accepted, and whether the charges occur in person or not.
Having looked at merchant statements for multiple small business owners, normally the cheapest type of card acceptance is an in person debit swipe of a Visa or MasterCard. I've even seen larger retailers with a higher number of transactions be charged as little as 1.2% for this type of fee. Traditionally speaking, Visa and MasterCard have the lowest transaction fee, with Discover and American Express coming in higher. The rates are usually set based on number of transactions and average ticket size. A company with smaller tickets and more transactions generally will get a lower percentage rate. It's not hard to understand why, as there is normally a fee per transaction and with more transactions the merchant provider makes more money. The point is, suggesting that small businesses sometimes won't accept credit cards because of a “12%” transaction fee just doesn't seem to be happening.
In fact, for most small business owners accepting credit cards is just part of running their business on a day-to-day basis. According to a Chicago Tribune article, “when it comes to credit cards, it's well established in the field of behavioral economics that people who use plastic are unconsciously willing to spend more than those who pay with cash, a phenomenon known as the credit card premium.” In fact, small business owners should understand that if they don't accept credit cards, they are likely losing business that they don't see. Just because their customers are not actively telling them that they would prefer to pay using plastic, doesn't mean that prospective customers are not walking away before ever transacting business. This same Tribune article indicated that consumers look at the benefits of a product or service when paying with plastic, versus a focus on the cost when paying in cash. While business owners are not allowed to charge more for credit card payments, they are certainly allowed to offer a discount for cash payments. However, accepting credit cards is going to become harder to avoid as new technology continues to evolve.
One piece of this evolution is the previously mentioned PayPal system. Customers with a PayPal account can use their cell phone and a PIN number to make a payment directly from PayPal. The service doesn't require the customer carry a piece of plastic, and they still have the option of either funding their PayPal account from their bank, or choosing a connected major credit card. In addition, Google (NASDAQ: GOOG) is pushing forward with their Google wallet technology. Google wallet is designed so that consumers can use multiple payment methods by carrying only their cell phone. As cell phones, and in particular smartphones, become more ubiquitous, more consumers are likely to ask if the establishment accepts payments using some of this new technology. In the same way that customers may not choose to revisit a business that doesn't accept a particular credit card today, a business not using this new technology tomorrow may also see customers walk out and not come back.
Intelligent business owners understand that their customers want multiple options when it comes to paying for their goods or services. While some will complain about the fees that they're charged to accept credit cards, even paying a 3% or 4% fee for a transaction is better than no transaction at all. Businesses looking for a way to build in the cost of accepting credit cards to their product or service can easily contact their merchant representative or call center. These resources can give them a breakdown of the percentage and type of cards their accepting and the average cost. The bottom line is saying that merchant fees are “abusive” is just not the case.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend eBay, Google, and The Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.