Credit cards offer unmatched services and conveniences to end customers. As such, more people than ever before are leveraging them. As per a recent study report, it is estimated that around 72 percent of households across America are using at least one credit card.
If your business still does not accept credit cards, you might be at the risk of alienating a major portion of prospective customers. However, it is important to understand that as you accept credit cards, you will have to incur credit card processing fees along with every transaction. Usually, the overall benefits of credit cards are much more than the price worth. Still, merchants keep looking for ways to minimize the overall costs.
As a business owner, can you fix a minimum amount on the purchases made with credit cards? How about imposing a minimum amount on it? Industry and legislation regulations can make the process of looking for an answer quite complicated. Let us find out!
Why Do Businesses Impose Credit Card Minimums?
As a buyer, have you come across a business that features the minimum purchase requirement? There is a financial reason behind this rule.
Whether you aim at using a cash-back credit card or a rewards card, or any other type of credit card, the business you will buy from is expected to pay a specific fee to the respective card networks (American Express, Mastercard, Visa, and Discover) for processing the transaction. These charges are known as interchange charges or swipe fees. They are usually set by the concerned payment networks.
Paying into the involved fees can consume a major part of the profit margins of a small-scale business. This is why some business owners or merchants go ahead with setting minimum purchase amounts for the respective credit cards.
Why are There Minimum Purchase Requirements?
The amount for a minimum purchase limit enables a business organization to offset the swipe fee or interchange charge it is expected to pay to the credit card network for transaction processing. The fee can be anywhere between 1 percent to 3 percent of the total transaction price. In some cases, there will also be a minimum interchange fee. For instance, a fee could be around 2.5 percent of the transaction or 40 cents -whichever might be higher.
Therefore, if you are using a credit card to purchase something for around $1.50, the transaction can end up losing money for the respective seller, once you take into account the interchange fees. It might not be worthwhile for a merchant to enable you to purchase only a single item and no other item on the card.
Adding Up of Interchange Fees
Let us assume that you are the store owner. You purchased an item for wholesale worth $2. You go ahead with selling the same for $4. A minimum fee of 40 cents in the form of swipe fees will minimize your gross profit from $2 to $1.60.
While it might appear meager, the fees when accounted for cumulatively, will cut into the bottom line. It is especially true when you have a business that sells multiple inexpensive or smaller items. Even penny that you lose to fees will have a negative effect on the overall business success.
Indeed, small-scale merchants can simply go ahead with right away not accepting credit cards completely. However, it will ultimately cost them valuable customers who wish to enjoy the overall convenience of not carrying cash all the time or the capability of earning rewards on the credit card.
A number of merchants perceive interchange fees in the similar manner to the way in which they assume any other cost of operating their businesses. They simply include them in the prices set for the commodities. However, those who have to sell inexpensive items have minimal flexibility to ensure the same. It is because minimum transaction fees can advance to around 40 percent or even more of the item’s price.
Understanding Interchange Fees
Interchange fees are fixed by one of the leading payment processing giants -Discover, American Express, Mastercard, and Visa. The fees are ultimately divided amongst multiple players that are involved in ensuring that the credit card is charged for the respective purchase amount and that the merchant is paid effectively.
The fees are divided amongst the bank issuing the card, the processor responsible for handling credit card sales for the respective merchants, and the payment processing network responsible for handling the transaction (Discover, American Express, Mastercard, and Visa).
Interchange fees tend to differ depending on varying factors, including:
- Card issuer -the bank issuing the credit card
- Purchase type
- The dollar amount that it being processed
- Card type -no rewards, rewards card
- Network of the card
Avoiding the Requirements for Minimum Purchases on Credit Cards
For merchants, interchange rates are the ultimate cost of executing a business. If the retailer would like to accept credit cards, it is regarded as the unavoidable expense.
Therefore, if your favorite store has the requirement of a minimum purchase, you can consider the following options:
- Taking your business elsewhere -potentially to some large retailer
- Getting prepared to fork over cash
- Aggregating the purchases such that you are able to meet the specific amount
Losing Customers for Your Business
As you send away a customer in search for alternative methods like cash, it will not serve fruitful for your business at all. It is because you can observe ATMs disappearing from the lanes since the advent of the global pandemic. Whatever might be the case, customers are more likely to come across a business enterprise offering the convenience of using credit cards on top of cash.
Indeed, there are customers who wish to support the local businesses. However, even the best intentions might make them sway due to the overall convenience and lack of cash. Once a customer is aware of the fact that you do not want amount below a specific amount, it might also deter them from coming back. It is important to understand that valuable repeat customers are worth the smaller amount of credit card processing fee on the given sale.
Is the Minimum Purchase Amount Legal?
Yes. However, it is important to know that there are several contractual and legal limitations to ensuring the same. As a business owner, you are expected to understand all the involved restrictions on the practice before you go ahead with implementing the same in your business.
Before 2010, setting a minimum purchase limit or amount as the credit card charge as under the governance of credit card processing agreements as specified by primary credit card associations. Every leading credit card brand prohibited this practice. It is because they wanted to make money out of the usage of credit cards while not caring about merchants losing money on small-sized transactions.
However, in 2010, the Federal Government address the existing issue. As the Dodd-Frank Wall Street Reform & Consumer Protection Act were passed after the period of the Great Recession in 2008, it took a series of steps to rule the reckless attitude of the leading banks contributing to the recession.
What is the Minimum Purchase Amount for Credit Cards?
The Federal Government has successfully overruled the past contract-based limitations imposed by the credit card networks or associations. Merchants now have the freedom to set a particular minimum purchase amount requirement if they are willing to. Until now, the highest permitted amount for minimum purchase on credit cards is $10. As a business owner, you have the freedom to set a reduced requirement. However, you are not allowed to set any amount above this limit.
While leading credit card associations no longer have any rights to stop merchants from setting a particular limit for the purchase amount on credit cards, they have moved ahead with modifying the processing agreements to make sure that any imposed amount is equitable and fair. Discovery, Visa, and Mastercard have multiple stipulations on specifying a minimum purchase amount in the processing agreements. The foundation of the stipulations is that a minimum purchase amount requirement, if applied, should consider all credit cards as equal. Therefore, you cannot go ahead with setting a minimum purchase amount for Visa, but not Mastercard. At the same time, you can also not set the minimum purchase amount for one issuing bank, and not the other.
With detailed information, you will not be well-equipped to understand whether or not minimum purchase amount for credit card transactions is a viable option for your business. It is crucial to remember that most consumers out there are aware of the fact that accept debit and credit cards will cost you money. Therefore, be prepared to explain why you are implementing the policy in the first place.