How Much Does It Cost Businesses To Allow Credit and Debit Card Payments?

Transaction Machine

Image courtesy of hin255 / FreeDigitalPhotos.net

Imagine going through a fast food drive through, and seeing a sign stating that you will be charged a service fee for each order. If that wasn’t odd enough, the sign goes on to say that your $0.39 will be refunded if you pay with credit card, cash, or gift card. That’s exactly what a long time EOD reader reported to me via email recently, and after some internet searching I found that a company that owns 20 Taco Bell and KFC restaurants across the Midwest has indeed implemented this policy. If you were reading carefully, you should have come to the same conclusion the reader did.

The only method of payment that will cost you the $0.39 service fee is using your debit card.

This policy had me scratching my head. I knew merchants had to pay a fee for each transaction made with a debit or credit card,  but I didn’t know how much.  So,  I decided to do  some investigation hoping to uncover something that would explain why these restaurants would charge customers extra for using a debit card.

Credit Card Fee:

There are two different fees that are charged to the merchant for each transaction:

  • Discount Fee: A fee of around 2% of the purchase price. This is the fee charged by the credit card issuer for the privilege of offering credit cards as a method of payment. It’s one of the ways that credit card issuers make money from their product.
  • Transaction Fee: A fee of between 15 and 75 cents is charged to obtain permission to deposit the money into the merchant’s account.

Debit Card Fee:

With that information, let’s calculate the potential fee difference for a $10 fast food purchase:

  • Credit Card: 2% of transaction ($0.20) + Transaction Fee (let’s use $0.50) = $0.70.
  • Debit Card: $0.21 + 0.05% ($0.01 rounded UP) = $0.22.

On the surface it would appear that the use of a credit card at a fast food restaurant would be far more expensive for the merchant. However, I did find this gem in one of the articles I dug up regarding debit card transaction fees:

“The rule exempts financial institutions with less than $10 billion in assets from the debit interchange fee limits.”

I wonder if there’s smaller banking institution in the region of the country where these restaurants are located that a high percentage of the population happens to use. If the banking institution was except from the debit card interchange fee limits, they could be charging a much higher rate resulting in debit card usage being more expensive.

Whatever the reason they implemented this policy, it may be illegal.

One of the restaurant owners explained that new regulations that took effect at the beginning of the year which allows them to do this. This is untrue. In fact, the current laws state that merchants can indeed impose a surcharge of up to 4%, but ONLY when the method of payment is a credit card. Merchants have this option, but in practice, it’s just not done. Customers would simply walk out and take their business somewhere else that did not impose a surcharge.

I’m guessing it won’t take long before some government regulatory agency catches wind of what’s going on and shuts it down. But in the mean time, if you run across a merchant that tries to push a service charge on you for using your debit card, put your plastic back in your wallet, and kindly tell them you’ll be reporting them.

The good news is there’s a simple way you can guarantee yourself to never have to worry about the math above, or any kind of inconvenience of paying surcharges for using a particular form of payment; Pay Cash.

Cash is King. Always has been, and always will be.

Have you ever been charged a surcharge for using any kind of method of payment?

About Travis

67 Responses to “How Much Does It Cost Businesses To Allow Credit and Debit Card Payments?”

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  1. I know some government entities, such as licensing offices, charge a fee if you use a credit card. I’ve also been to small businesses that simply do not accept any credit card transactions. I have not seen a place that has charged extra for debit card transactions, though. You’re absolutely right that cash is king.

    • Travis says:

      I’m not surprised that the government would do something like that….heck our local government center just started accepting credit / debit cards as payment methods. Before I wrote this article I would have been surprised to hear business would not accept credit cards….but now I’m not. I can see how the costs can add up – in addition to the per transaction fees, there are setup fees and quarterly fees that are sometimes charged to merchants too – they definitely pay for give us the ability to pay with plastic!

      • Glenn Baer says:

        Cash is not king! Every credit card I use has a cash rewards benefit. Any time I pay cash, I pay more because there are usually no cash rewards for paying cash.

        • Travis says:

          It all depends upon the person, Glenn……If a person makes purchases using a credit card to get the rewards, and then doesn’t pay of the balance in full and pays interest on it in excess of the rewards that person LOSES money on the transaction. I’m one of those people. For that reason, for me, cash IS KING, and always will be.

          • Kerry says:

            Governmental entities often have to charge you the fee, because otherwise the government would be not be collecting the full fine or fee, which they would otherwise be required to do by law. I would think that if they just paid the credit card fee as a “cost of doing business,” not only would they have to also waive the amount of the fee or fine legally so that you are considered to have paid in full, but absorbing the credit card fees would have to be specifically legally authorized and budgeted by the governing body. So in other words, most times the government might be required to charge you the fee.

  2. Sassy Mamaw says:

    Thanks for addressing this, Travis. I’m glad to know it’s a somewhat limited policy. I live in Indiana, and read the notice twice and still had to test it out to see if they would really do that. (They do!) Luckily, I don’t eat at Taco Bell or KFC very often, as they are tough on the calorie budget, as well as the financial one!

    • Travis says:

      It seems to be pretty isolated, Sassy Mamaw – let’s hope it stays that way. Let me know if/when they stop charging the surcharge…I can’t see it lasting very long!

      • Sassy Mamaw says:

        I will let you know. What struck me is that it only affected debit cards. The only notice I saw was small print on a sticker at drive-thru. I have seen this same notice at two different KFC’s in Central IN.

  3. I see this at gas stations all the time. I have seen as much as a $1.00 surcharge for paying with credit. Would it make better sense for the merchant to raise it’s proces a few cents instead of calling out a big surcharge?

    • Travis says:

      That surprises me too, Brian….I would think paying with credit (especially at the pump) would be a labor savings for the station too….but then again they probably want you to come in the store to buy other stuff. If I owned a business I would definitely raise my prices just a tad (spread across ALL my products) to make up for it. When you call specific attention to a specific fee, people usually take notice and complain. 🙂

  4. Very interesting Travis. Like DC said, I know of some government entities that will pass the credit card fee on to you as a customer and we’ve also seen some small businesses do the same thing. With our business, we’ve avoided taking credit cards altogether. It’s not worth having to deal with the fee and PayPal or check works just as good without any of the nasty fees. If I ran into something like this, I would take my business elsewhere.

    • Travis says:

      AND, the nice thing about PayPal is that your clients and attach their PayPal account to their credit account or bank account, right? The only downside is, there’s probably some portion of the population that doesn’t understand what PayPal is. Have you ever run into that?

      • Shun says:

        I just checked the paypal website and it shows a fee for all purchase transactions. The site says that all fees for purchase transactions will be paid by merchant. Is this true or did I miss how this can be done at no charge to the merchant through paypal? I am looking to start a small business and looking for ways to cut costs.

        • Bob says:

          Paypal just charges the party RECEIVING the money and and small sales, it can be a lot higher % than banks charges for credit card sales – a $10.00 sale using paypal usually costs the seller 60 cents in Paypal fees (6%)

          • Travis says:

            That seems consistent, Bob….as the Merchant is the receiver of the funds. I didn’t know the percentage, and 6% seems pretty high!

  5. I adore my credit cards, but If I can get a discount for using cash I’m all about it.

  6. Kim says:

    It all depends on your merchant agreement with the service that processes credit cards for businesses. With optometry, we get a pretty good deal through the optometric association so the percentage is less than the standard 2%, but it varies with all types of cards. Visa and MasterCard are usually better, but Amex tends to have a higher fee. Although, some high end reward cards charge the merchant a higher fee. Debit cards don’t charge a high fee if you use a PIN but non-PIN transactions are usually higher fees than credit cards. Like with all vendors, I would encourage small businesses to shop around for a processing company. Many give an entry rate or will match a quoted price. I don’t think credit card fees hurt big companies much at all, but I can see how Mom and Pop stores might suffer if they have small transactions that are paid with credit cards. Although as a business owner, I usually preferred credit cards over any payment type. The money is there the same day, while people bounce checks, and cash seems to come up short many times due to errors or sticky finger syndrome.

    • Travis says:

      I had read that, too, Kim….so thanks for mentioning that. The discount fee does vary depending upon what kind of product you’re selling. Optometry is a pretty standard and stable kind of product….whereas there is some risk involved with a product like adult products (the example used in the article I read). I found it interesting how much the fee rate can vary – thanks for sharing your experience as a business owner, Kim!

  7. Hey Travis, you’d be surprised at how low those fees can be for local stores or high volume businesses. For instance, my business partner and I only pay .25% of each transaction with no transaction fee. It really depends on the merchant account you can qualify for and the level of risk your business has.

    • Travis says:

      Thanks for sharing your personal experience, Josh….as mentioned in my response to Kim, I’m surprised at how much the fee rate can vary. I really thought it would be more standardized than that!

  8. I don’t know if this is something they do everywhere but here in NJ you have to pay a premium to use your credit card at a gas station. It’s usually about .10 cents. That’s why I don’t use debit or credit for gas. I don’t want to pay the extra .10 per gallon.

    • Travis says:

      Wow, an extra .10 per gallon to use your credit card? We don’t have that around here (I live in Minnesota), and certainly something to keep our eyes out for when traveling!

  9. Travis, that’s crazy. I think the merchant got it backwards – or maybe they signed a bad deal with their processor. I’ll be keeping my eye out for these poor processing practices wherever I go now.

    • Travis says:

      Who knows, Steve….something seems “off” here. I’d love to call them up and ask – but if they won’t return the phone call from the media that was reporting the story, they’ll likely not respond to me either.

  10. I’ve never run across this but it is great to know. I’ll be checking my debit transactions more closely to see if this happens. Thanks for the info!

    • Travis says:

      I believe they have to notify customers of any surcharge of this variety, Brian…so if you get charged without notification, you should complain immediately!

  11. I think that’s terrible – poor customer service, and encouraging people to use credit since most don’t carry much in the way of cash. SO glad we don’t go out to eat much anymore. Thanks for the thorough research on this, Travis. Good info here.

    • Travis says:

      I agree Laurie, we should be encouraging people to NOT use credit – but businesses are going to do what is going to make them the most money. I’d like to find out the reasoning behind it. I may try to contact them, but I’m not holding my breath. 🙂

      • Deep says:

        Hi Travis,
        The reason why businesses encourage to use credit cards are:

        Private label credit cards are a pretty good deal for stores selling expensive items to shoppers likely to pay their debts. A few benefits for the store (covered in part by various other answers):
        You and the store can enter into a financing arrangement that is profitable for the store.
        The cost of accepting the private label card is lower than the cost of accepting other credit cards
        Shoppers are tempted to spend more than they would without the card
        The store gets a record of everything you buy
        The store knows who its regular customers are and can send them targeted advertising.

        Top 4 reasons:
        1. Lower cost by saving on interchange fee
        2. Increase sale because of discounts and reward points
        3. Revenue from late fees and interest
        4. Improved return on equity (ROE) for entire business because financial service (credit cards) is a high risk high leverage business.

  12. Michelle says:

    What a horrible idea. But sadly, I’ve seen it all over Chicago. Gas stations are also now giving a 10 cent discount if you pay in cash and charge an extra .30 if you use your debit cards. I get why they do it, but I avoid those places like the plague.

  13. Cash is King. Always has been, and always will be. – That’s why I prefer to use cash and I didn’t have a credit card since before. That’s why I’m not really a big fan of credit card because of lots of fees.

  14. Julie says:

    This was a new experience for me and I was absolutely outraged! I’ve been going to my KFC for years and was never charged extra for using a debit card. Well, today was the day. $0.49 exactly as you described, credit card and cash, no charge…debit card, yes…and FOR WHAT!?!? I’m sooo pissed! You’re right, Cash is King from now on!

    • Travis says:

      Thanks for your comment, Julie……this policy still makes ZERO sense to me. I’d actually LOVE to run into a business that does this and ask if they can explain what the possible logic is behind this move. Just flat out stupid!

  15. Candy says:

    I went through a Long John Silvers drive-thru. The lady told me my total was $10.80. I handed her my card, and she said my food would be out shortly (nothing short about it). As I waited, I wrote down “$10.80” in my register. Needless to say, she eventually come back with my food and asked for my signature. did think that was odd coming from a fast food drive thru window, but ready to eat and go, I quickly signed, took my two receipts, and drove off. Later I was sitting down checking bank account and come across an unknown transaction of “$11.19″…Long story short, I luckily still had receipts. Food receipt says $10.80 total and Debit Card receipt says $11.19. I am actually more mad about being verbally told my total was one amount to actually find out I was charged another :/ Life goes on, but for that reason alone, they will not be getting any more of my debit card or cash!!

  16. Travis says:

    That’s horrible, Candy…and may actually be illegal as well. I believe in my research that I saw that if a company is going to do this sort of thing, they have to let you know ahead of time. Maybe there was a sign and you just didn’t see it…or maybe there wasn’t – but it seems fishy (pun intended!) that they would tell you the amount for the food total without saying anything about the extra fee!!!

  17. Sassy Mamaw says:

    I have run into the same thing at KFC. They have a small sticker in the window that explains the “fee”. However, if you order at the drive up, they have no way to know how you are paying, so they will tell you the food cost, and then add in the fee when they take the debit card. And I haven’t seen any type of notification inside at all. But, for the life of me, I cannot figure out why they do this with debit and not with credit. It has always been my understanding that there are extra fees for the merchants associated with credit cards rather than debit.

    • Travis says:

      It really makes no sense, Sassy Mamaw. I have half a mind to call and see if I can get them to explain it. in reality, they’re probably passing along the fee to process debit and credit cards along to the customer twice – once wrapped up in the cost of the product, and now again with these fees.

  18. keith petiti says:

    After reading article, how can ARCO charge a 35 cent fee for using debit card before purchase? Is this legal?

    • Travis says:

      I’m not sure what you mean by “before the purchase,” as I’m sure it’s tacked on once you present your form of payment. But from what I read, no, I don’t think this is legal and I’m shocked someone hasn’t called them out on it.

  19. Sassy Mamaw says:

    I finally talked to the folks @ KFC, Travis, and they said they were doing it because the debit cards were processed through a different company than the credit cards, and the other company charged a higher fee. (That’s their story and they’re stickin’ to it!) They told me they have gotten it squared away and do not charge the extra fee any more.

  20. Jeannie says:

    I am having this similar issue at my favorite tobacco shop. No matter the amount of product you buy the author get is .25. I’m curious as to if I pay as debit instead of credit are they still able to charge this fee?

    • Travis says:

      From the information in the post, it sounds like this may fall well within the boundaries for what they can charge…….but it’s extremely odd that they explicitly pass that along visibly to the customer. Ask them if it’s for any payment form….and then ask why. I’d be curious to hear their answer.

  21. Jeannie says:

    Or is the fact that you pay with debit or credit that you can get charged the fee regardless? I’m just trying to see if the company’s .25 fee is legal or not before I go to BBB

    • Travis says:

      As mentioned in my previous comment, this is small enough that it may fall well within the bounds of what they can charge (unless it is a very small amount). I think I’d just pay cash. 🙂

  22. Dan R says:

    Thing is, with cash, the price you are charged is based on the merchants costs, which include point of sale transaction costs for cards. So, for the example given in the article, when you fork over ten dollars in cash for the restaurant purchase, you just put seventy cents straight into the merchants pockets since they didn’t have to pay that to the bank for use of a card on the transaction. I myself would rather there be a cash price separate from the credit card price so the cash price could be reduced by the merchant (assuming like merchants follow suite and price competition works) and I then don’t have to pay banks for something I’m not getting.

  23. Candice says:

    Too bad cash isn’t accepted everywhere anymore lol!

  24. Aqib says:

    I work at a gas station chevron california and we charge extra .10 cents aswell for debit or credit card. We don’t charge any kinda fee if someone buys anything from inside my boss said its because they only make .08 – .10 cent profit per gallon and its not enough to cover the fees. Their profit margin inside the store is 30-50 % that’s their version. And here is the picture of the prices u can barely read it from far away.

    http://s14.postimg.org/6qhkaqzup/image.jpg

    • Travis says:

      Wow, that IS misleading, Aqib…I see what you mean! I would guess many people just drive in and pump their gas without even noticing there is a price difference. Thanks for sharing the pic – watch out for this one consumers!!!!

  25. Andrew says:

    I used to be an accountant but I’m alright now.

    As you say, the merchant will take into account all the costs including point of sale charges when calculating his selling price. He will do this based on cost experiences and add a percentage.

    e.g. Total material cost for last month $10000, total POS cost $160 (some cards some cash). Therefore percentage to add for POS = 1.6%.

    Material cost for a single item: $10, Profit mark up 20%, POS mark up 1.6%: Selling price $10 + $2 + $0.16 = $12.16

    All customers will then pay this one price.

    But, what this actually means is that someone paying cash is actually contributing towards the cost of someone paying with a debit card. Neither the bank nor the merchant get more, the debit/credit card user pays less.

  26. Michael Roberts says:

    Interesting read but I completely disagree with “Cash is King. Always has been, and always will be.”

    Cash will almost be non-existent given a few decades. All currency transactions will be digital – the trend started a long time ago and it’s not going to stop anytime soon. That being the case, I expect these transaction charges to eventually fade away as well… whether that is done via gov’t regulation or from free market payment processors, I’m not sure of.

  27. Andrew says:

    You are wrong. Cash is King. Unfortunately, he is being deposed by bandits.
    Cash may all but disappear but the charges never will. Regulators are there to protect the financial institutions – not the public. This is why the charges are hidden. Ask anyone who has a debit card how much it costs them and they will tell you its free. Ask anyone who uses a credit card and many will tell you they pay off the balance each month so its free.
    What the regulators should be doing is making the banks and card companies make their charges visible. The merchants are not the card companies customer – you are. So, stop charging the merchant and show the customer how much his card is costing him. Your bank statement should include entries like Debit Card Bank Charges and Amount paid to Visa. This would also mean that anyone using cash would not be subsiding those using cards.
    And now we have a new kid on the block – MobilePay. So now you no longer need to tap in your pin, you just touch your phone to a pad. Is this free too? Of course not. Now, not only are you paying the banks and card companies, you are paying a phone company aswell. Three bites of the cherry for every transaction.
    So I say again; cash is definitely king. Free and anonymous but we the public are turning our backs on him for the sake of convenience and fashion – and its costing us a fortune.

  28. Stan says:

    hey Travis I am a retailer in Ohio and it has cost on average over the last 5 yrs $ 6500.00 a year to take credit cards. last year I imposed the 3% fee for credit cards(allowable under Dodd-Frank Act) and I saved $ 2000.00 in 2015 ! you would be surprised how fast a customer finds a $50 bill for that $ 8.00 purchase when its going to cost THEM ! When a customer balks I simply say then run down to the bank and get an advance, They response is they charge me 3% on cash advances. I say yes just like they do me!

    • Travis says:

      That may be true for Banks or ATM networks that do not belong to the customer’s bank…..many banks do not charge ATM fees to their own customers. I don’t have a problem with consumers being charged for the convenience of using a credit/debut card – as long as they know up front (before they pay). The downfall for retailers, however, is this: People tend to spend more if they pay with a card, because it lacks the physicality of having less money in their pockets. It would be interesting to see how directly charging customers using debit/credit a fee affect how much they spend. 🙂

  29. GJTGJTGJT says:

    I’m not sure why some feel it is my responsibility to pay for your fee…Oh, you think the “business” pays it, how cute, no every customer that buys goods with cash is forced to subsidize your credit cards, it’s fricken sick.

  30. alan says:

    does any body knows how much Card dealerships are charged if the customer/car buyer pays all or part of the price by credit card?

    thanks
    alan

  31. Jack says:

    Actually I tried paying my Electric bill on their web site and they charge a $5 Convenience fee for you using a credit card on their site.

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