
Lora Wee, owner of Baker Wee Bakery and Cafe in Phoenix, prepares pie crusts for pumpkin and fruit pies. Wee said she pays between $700 and nearly $1,000 a month in card-processing fees.
Credit and debit cards provide convenience to consumers but are often a source of headaches for mom-and-pop retailers.
Plastic consistently outranks cash as the preferred way to pay for everything from fast food to groceries.
For example, in a recent survey of 8,167 consumers by Worthington, Ohio-based BIGresearch, 34.9 percent of respondents reported most often using debit cards and 27.7 percent reported most often using major credit cards for dining out. Cash buyers represented 35.6 percent of respondents.
“Whether (businesses) take credit cards or not – that really is not an option in today’s society,” said Neil Nelson, a counselor with Maricopa Community College’s Small Business Development Center in Phoenix.
But processing fees, equipment leases and other contract terms that come with accepting plastic can be an expensive proposition for small businesses.
Every time a customer uses a credit card at Baker Wee Bakery and Cafe in northwest Phoenix, a payment-processing firm charges the business a 16-cent fee plus about 1.75 percent of the transaction.
Owner Lora Wee said the fees add up quickly, especially when some customers spend only a few dollars for a cup of coffee and a doughnut.
The bakery typically does between $30,000 and $35,000 in monthly sales. Wee’s monthly processing bill has ranged between $700 and nearly $1,000.
“I wish I could just pull the plug on the whole machine and say I don’t need it,” Wee said. “(But) it would put a big dent in my business.”
Merchant services
Wells Fargo, Bank of America, Compass Bank and other banks provide merchant-account services to businesses. Many other firms provide payment-processing services.
The firms charge fees for every card transaction a business performs. They also often charge a monthly service fee.
The fees are meant to cover the interchange rates that credit-card companies such as Visa and MasterCard charge the processor. They also cover the perceived risk the processor assumes by agreeing to handle a merchant’s payments.
Some processors require businesses to lease card-swipe machines; some allow businesses to buy the machines elsewhere, which can be significantly cheaper.
Processing firms and industry trade groups say fees are meant to protect them from the risk involved with card transactions. Fees have increased only slightly, they say.
“What has happened is the volume of payments that are now being processed electronically has grown exponentially,” said Carla Balakgie, chief executive officer of the Electronic Transactions Association.
The Washington, D.C.-based trade group represents banks and other firms that perform payment processing.
Fine-print contracts
Merchant-account contracts are written in fine print, but owners should read any agreement line for line or consult an expert before signing, counselors say.
Two merchant accounts that Donna Doyle and Wade Nichols set up for their Scottsdale-based travel business were frozen by their processors for excessive “chargebacks.”
Chargebacks are payments a business makes back to customers who dispute a charge because, for example, a product or service was defective or because they didn’t receive what they paid for.
Processors will freeze a merchant account if excessive chargebacks occur. The purpose of the freeze is to ensure that there is enough money in the account to pay back consumers who have disputes and to make sure that no fraud is occurring. If a merchant runs out of funds or goes out of business, its processor could be on the hook for paying outstanding chargebacks.
Doyle and Nichols have not been able to access about $215,000 in customer payments in the accounts since they were frozen by Bank of America and National Processing Co. about six months ago.
Assessing risk
Merchant-service providers determine their rates based on the industry in which a business operates, the amount of transactions it performs each month, who its customers are and whether it conducts card transactions in person or over the phone.
Another reason why National Processing Co. froze Doyle and Nichols’ account was because of changes in how their business generated revenue.
Doyle and Wade originally specialized in event planning under the name Event Planners LLC. They currently operate License to Travel LLC, which runs a Web site that finds discounted resort packages.
The business charges around $4,000 for site access.
“This particular business morphed into a whole different business,” said Jim Oberman, senior executive vice president of the Louisville, Ky.-based National Processing Co.
Some providers also freeze accounts if there is a large surge in transactions in a particular month.
Doyle and Nichols said the increase in chargebacks was mostly due to customers having buyer’s remorse.
They say neither National Processing Co. nor Bank of America has given them an accounting of how much money they have left. They have resorted to personal savings to pay some vendors.
“I will agree we were naive in many ways, and I will agree I did not read the contract clearly,” Doyle said. “My biggest concern and my biggest complaint is (that) they never talked to us like two adults and two people that made some mistake and are willing to cover those mistakes.”
Oberman said only about 20 percent of the approximately $143,000 that was in the account at the time it was frozen remains because License to Travel continued receiving chargebacks after the account was frozen.
Bank of America spokesman Will Wilson said the bank was reviewing the matter.
Ask around
Business owners’ advice to others is to compare different options and ask for references when picking a payment processor.
Wee changed providers two months ago after receiving a sales call from Icon Payment Solutions.
Wee said Icon’s sales team told her that switching providers would save her about $400 a month.
When she received her October bill, the fees were nearly identical to what her previous processor, BluePay, had charged.
Brian Peterson, president of Phoenix-based Icon, said the company plans to work with Wee to bring her fees more in line with the quote the company provided her.
He said fees may differ from projections because of the type of cards consumers use. Credit cards tied to frequent-flier miles or other rewards programs typically carry a higher transaction fee than non-rewards cards.
Corporate credit cards also cost more that consumer cards.
Wee said she has considered posting a sign in the bakery asking customers to pay cash if they can.
Most debit- and credit-card companies prohibit merchants from setting dollar limits for accepting their cards, but many businesses still do so to cut back on fees. Some businesses include a surcharge for using cards, which generally is allowed as long as they apply the charge for all cards.
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Shopping for a merchant account
The growing use of debit and credit cards has motivated more small businesses to accept plastic. But processing fees, hardware costs and contract terms can be costly. Business counselors suggest the following when picking a merchant-account provider:
• Comparison shop. Firms charge different fees and require different contract terms. Some may provide card-reading machines for free; others require businesses to lease machines from them. Many charge expensive fees to cancel a contract early, while others are more flexible.
• Know the fees. Transaction fees vary for credit and debit cards. The brand of card a consumer uses can affect the transaction cost for the merchant. Reward cards typically cost more.
• Monitor charge backs. Consumers can dispute charges on their cards and get their money back. Processing firms limit the amount of chargebacks against a merchant as a safety precaution. Businesses that hit the limit can be blocked from accessing funds in their accounts.