How your gain can mean another (business)man's loss

Are all credit cards created equal?

He's about to find out.

I’m sure this happens to you pretty often.  You walk into your favorite restaurant, and you’re about to pay at the counter but you just realize you forgot cash, so you slip out your credit card, and the cashier looks at your uncomfortably, gesturing to the placard next to the register.  Cards only accepted for orders over $15.  Well, you think to yourself, guess I am trying the lava cake after all.  Your stomach thanks you for this in its own subtle way for the rest of the night as you toss and turn.  Why did this have to happen?

Obviously, credit cards are wonderful for consumers—that’s why we love to use them so much—and, because they’re in such high demand, card issuers, banks, and processors can charge companies to accept them for payment.  But, sometimes you’ll see companies go a step further than not accepting your card if you purchase under a certain dollar amount from them.  Sometimes they’ll surcharge you (which is only legal in a few states), or they’ll tell you you can only use a debit card.  Or, you can use anything but a debit card.  Or, you can’t use your American Express card.  What gives?

Three costs?  More like three hundred

The fact is that every credit card in existence has a separate cost associated with it.  Those costs are set by Visa, MasterCard, American Express, and Discover, and there are over 300 distinct card types in total.  The reason there are 300 separate costs, and not just three or four like people sometimes think, is because each of those cards is used by a different person, whether an everyday consumer or a business, and each card carries a different rewards plan with it.  The bottom line: when a business accepts your credit card, they are financing your rewards points.  Kinda cool, or kinda nasty, depending on how you look at it.

So, what’s the deal with all those different signs you see in restaurants or retail shops?  Apparently, not everyone is on the same page when considering how they’re being charged to accept cards.  Maybe you’re a business owner yourself, poised to take something away from this (and, I’d be honored if you did).  Let’s go over the three most common signs I see:

Ø  Cards only accepted for orders over $5/$10/$20

o       This one is logical from a businessperson’s perspective—but illegal in some cases.  Credit cards carry an interchange charge, which is a percentage of the total volume of the transaction, plus a markup, another percentage of the total volume, plus a flat per-transaction fee.  Interchange and markup are unavoidable, but that per-transaction fee looks smaller and smaller comparatively as your transaction amount grows, so business owners try to spurn you into buying more.

Ø  Only debit cards accepted

o       You’ll see this one at certain ARCO gas stations.  Their gas is generally cheaper than average, and the reason for that has everything to do with their card acceptance policy.  Debit cards carry an infinitesimally small interchange charge to businesses—only 0.05%, so even with a profit margin and per-transaction fee, business owners generally pay much, much less to accept those cards than other kinds of cards.  By only accepting debit cards, certain ARCO stations can charge less for their gasoline.  Kinda cool.  (And, really cool when you find one that does accept credit cards because the price tends to be the same!)

Ø  No American Express accepted

o       Why bag on American Express?  Well, there is a reason.  American Express uses a different pricing system than Visa and MasterCard in order to finance their customer rewards programs, which tend to be very…cushy.  They’re a viable option in spite of their high cost to accept because consumers demand they be accepted or they take their business elsewhere, simply put.  So, how much do businesses pay to accept an AMEX card?  Well, businesses that sell to other businesses can get away with paying 2.89% plus $0.15 per transaction, but some retail businesses pay as much as 3.50%.  Relatively speaking, that's pretty high.

An eye for an eye...or not

To answer the question from this entry’s title, no, not all cards are created equal(ly).  Your gain as a consumer participating in a credit card rewards program (or simply using a debit card, which usually carries no rewards, simply for the sake of convenience) definitely does mean another man’s loss in one respect.  However, because of the nature of things, businesses who don’t accept credit cards, or only accept debit cards, or don’t accept American Express, all turn away a little of their potential business.  And, businesses that don’t discriminate against card carriers end up paying a little more each month.  But, they gain customer appreciation and net revenue they would not have realized without taking those credit card payments.  Until someone thinks of a better way, that’s just the way it works.  But, don't despair, business owners!  You might be paying a little more than you would have every month, but your net gain in attracting customers who demand to use their rewards cards overshadows that small monetary loss.

Hope this helped,

Jeremy