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Credit card fees causing merchants to limit minimums

John Lutz owns the Ben Franklin store on Main Avenue in Park Rapids. Like many merchants who sell lower priced items, Lutz said credit and debit card fees are too prohibitive to accept for these smaller transactions. (Sarah Smith / Enterprise)

It's the credit card conundrum.

Paper or plastic? Cash, checks and credit/debit cards all have a price.

In Park Rapids, it starts at about 3 percent and goes up.

"It's killing us," said John Lutz, owner of Park Rapids' Ben Franklin Store.

"It's the cost of doing business," said Summerhill Farm owner Eileen Reish.

Lutz relays the story of the customer who parks free in front of the store, runs in and buys a $1 greeting card. If that customer throws out a debit card, Lutz has just lost 18 cents upon swiping the card, plus a percentage paid to the bank. His is 1.6 percent.

Banks charge "analysis fees" for counting your cash, a fee if your business needs a business check or a deposit slip.

Lutz said Park Rapids bank fees are reasonable. No one wants to risk losing a customer, he theorizes.

But it's the credit/debit card market that is rapidly changing and causing consternation among merchants, particularly those who deal in low-cost transactions.

Ortons gas stations in Park Rapids began offering 6 cents off each gallon of gas if customers paid by cash or check. Clerks said the marketing strategy began last fall has brought in new customers and will continue indefinitely.

But as smart phones can now process credit card transactions, merchants are asking if they should get into plastics.

At a Learn and Earn seminar in Park Rapids last week, curious merchants came to learn whether the cost was worth it.

"There's an increasing need to accept credit cards," a local resort owner said.

Credit cards are a way to increase sales, give your business a competitive edge, capture impulse buyers and improve your cash flow, said Jeff Byrd of Sage Payment Solutions.

"Gift cards are a gold mine for a small business," Byrd counseled. "They're a good way to collect extra revenues and build loyalty for your business."

He encouraged the use of gift and loyalty cards, which many local merchants are using.

But Byrd also offered numerous tips to keep your card fees low, and cautioned merchants about jumping at deceptively low percentage rates.

Merchants who think they've gotten a rate under 2 percent often find themselves in a three-year contract at a 6 percent rate, he said. Then they find they have a hefty cancellation fee if they want to bail.

The type of business, credit score of the owner, the age and volume of the business are all factors in how banks see the risk.

Read the fine print and ask questions, especially when you see statement fees, gateway fees, customer service fees, IRS fees, compliance fees and others piled on top of each other, Byrd suggested.

Lutz said the major credit cards, VISA MasterCard and Discover, generally charge 3 percent on credit cards.

It's the debit cards that are a crapshoot.

New federal debit card swipe fee rules will fall hardest on the small stores that line Park Rapids' Main street.

While the majority of retailers could see a reduction in their debit card processing costs, merchants whose business relies on small-dollar purchases will see an increase in debit card swipe fees.

On Oct. 1, 2011, federal law capped the amount that banks can charge retailers whenever customers use debit cards to make purchases. But while many debit card users got used to amounts such as 6 or 7 percent, the capped rate rose to 20 to 24 percent.

On the small debit transactions, the big banks then upped their fees to the highest rates, called interchange fees.

And that's what bugs Lutz.

He thinks the system is skewed against the small businesses, allowing the big box stores to flourish.

And that's what Byrd was trying to tell his audience - how to play the game like the big kids.

A business that accepts plastic undergoes an underwriting process much like any individual applying for insurance, Byrd said. But for merchants, the credit card underwriting process is "much more rigid," Byrd said.

Some businesses are considered so inherently risky, credit card companies won't touch them, businesses such as Internet opportunities.

Other businesses are restricted. They must pay higher rates to get into the credit card game.

A well-run small business that demonstrates a good track record can pay a lower rate on "fully qualified transactions," considered "perfect" in the business world.

But if a business' employees key in transactions, not swipe cards, have their merchant accounts set up incorrectly with the card company, screw up a transaction or two and don't "batch out" their sales totals upon closing to send to the card company or bank each night, they can be downgraded.

Downgrading a business means charging a higher interchange fee. The transaction has slid from perfect into suspect range, Byrd said.

But interchange fees also protect customers using plastic, he said. Merchants pay an interchange fee so issuing banks can recover fraud monitoring and reduction costs.

Using an Address Verification Service on keyed transactions can lower risk. But most importantly, handling clean transactions and settling your terminal and account at day's end is crucial, Byrd said.

He also suggested if a merchant has an Internet presence, to set up separate credit card accounts for each arm of the business.

Lutz believes more federal measures are needed to protect the Mom and Pop businesses.

"It's not fair to make the small guy pay more," he said.

Meanwhile many are taking a cue from Ortons, implementing protective measures for non-cash sales.

Some ban debit cards, some only allow them if customers spend a certain dollar amount. But no one wants to be in a situation where sales become inconvenient for the consumer or pass the costs along.

Sarah Smith

Sarah Smith is the outdoors editor. She covers courts, business and breaking news in addition to outdoors events.

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