Credit Cards

Rewards Cards Cost Mom and Pop Stores More

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Last updated on July 23, 2019 Comments: 20

I’ve been using rewards credit cards for many years now. I initially used cash back credit cards to turn what was mostly necessary spending or purchases I would have made with cash or a debit card anyway into hundreds of dollars back in my hands — or by bank account — each year. Now I travel more, so I switched to the Continental Airlines OnePass card for most of my personal spending. Rewards credit cards, whether they focus on cash back, travel, or some other feature, are associated with fees, but not just for the card users.

When any merchant accepts a credit card, the business must pay a fee to the networks that allow that transaction to be processed successfully. For example, let’s say you pay for a $40 meal at your favorite local restaurant with your Visa card. If the card is a typical Visa card, without any rewards such as cash back or travel associated, the restaurant must pay Visa $0.72. If the Visa card offers rewards, the restaurant must pay $0.88. There are more tiers of Visa cards. Beyond the traditional rewards cards is the Visa Signature designation. If you pay for a $40 meal with a Visa Signature card, the restaurant owes Visa $1.02 for that transaction. A transaction with a Visa Signature Preferred card runs up the restaurant’s bill for that meal to $1.06.

These rates are as of the fee schedule published April 2011 pdf).

These fees may seem small, but considering the number of customers who can come through a restaurant, they add up quickly. Merchants blame these swipe fees, merchant fees, or interchange fees for making businesses difficult. Small businesses have a harder time with these fees because the retailers don’t have the bargaining leverage to force Visa and MasterCard to reduce them. I believe even larger retailers have little leverage to negotiate because refusing to accept either Visa or MasterCard would alienate half of their customers.

As a result of the higher swipe fees for certain cards, businesses often create policies that seem unfriendly to customers.

  • Gas stations circumvented the “no discounts for cash purchases allowed” stipulation of their merchant agreements by offering different prices per gallon depending on whether a customer uses a credit card or cash.
  • Although it may transgress their merchant agreements, some retailers have a minimum charge amount. If the purchase isn’t over $10 or $20, the retailer won’t accept a credit card.
  • Some business are resorting to displaying signs that discourage customers from using rewards credit cards, which are often more expensive to process than standard credit cards.

It doesn’t cost the transaction networks more to process a rewards credit card payment than a standard credit card payment, but the cost of the rewards add up. Fees and interest charges aren’t enough to cover the cost of running a major financial corporation like Visa or MasterCard, nor do they cover the costs of the rewards they provide to their customers.

Knowing that rewards cards hurt smaller retailers financially — more than standard credit cards hurt them — would you forfeit your potential rewards by using another payment method in smaller establishments?

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Article comments

Anonymous says:

I’m sure the business takes the higher charges into consideration when pricing their items.

Anonymous says:

As long as the rewards outpace the added cost i will continue to use my rewards cards. Since retailers are allowed to charge differently based on payment method i take that into account when i make my decision of how to pay. Many gas stations around me give a 5 cent per gallon discount for cash payments. I get 2% rewards for gas (and sometimes 5%) so i get 7-8 rewards per gallon using my card. The better deal is to pay the higher amount and get my rewards.

Anonymous says:

I shop at several local businesses that don’t accept debit or credit cards. I don’t mind so much; just have to remember to take in cash when I visit them.

Anonymous says:

My hairdresser accepts credit cards, but her fees per transaction are pretty high. She treats me well, and I reciprocate with a tip and payment by check.

Anonymous says:

It’s all about convenience for me. I will always use my rewards Discover card and then only fall back to my Chase Visa card if necessary. Aside from the cash back bonus, paying with a single card makes it MUCH easier to manage my finances. I’m fine with getting rid of rewards cards altogether, as the whole concept seems silly, but as long as they are available, I will use them.

Anonymous says:

No, I will not use my cards less at small Mom and Pop stores. It is all about conveneince for me and if I have to remember to get cash or checks to pay for something that is too much hassle for me. My hairdresser recently started to add a 3.00 charge if I used my card for haircuts. I paid it the one time and then swithched to another hairdresser. I heard that she had since dropped the charge so I might switch back. She did a great job but after a long day at work the last thing I want to do is to go out of my way by the bank for cash.

Donna Freedman says:

I try to pay cash at smaller retailers/restaurants because I want them to succeed. McDonald’s can get a discount for buying in enormous quantities, has a huge advertising budget, gets promotional tie-ins with children’s films, makes enough money to operate 24 hours in some places, has fast turnover (and lots of carry-out options).
One of my favorite lunch spots, Harley’s Old Thyme Cafe, doesn’t have any of those advantages. It’s not that my 40 cents will make or break the joint. But combined with other factors, I do believe it makes a difference to the bottom line. So I’m willing to forego the 12 airline miles or thank-you points when I eat there.

Anonymous says:

As I read over the comments, it’s clear to me who has an excellent grasp of rational economic theory, and who has actual experience running a small business with high volume credit card swipes.

The difference between the two, in my experience, is vast. One is a fine story we tell university students, the other is a reality that people deal with day in and day out.

Anonymous says:

I have encountered Mom and Pop restaurants within the last month that have always accepted American Express cards now refusing them One restaurant said they were “renegotiating” with Amex. Since Amex is reducing the reward on my Costco Card for restaurant expenditures from 3% to 2% at the end of this month. perhaps merchant fees will also be decreased allowing the local restaurants to once again afford to be able to accept Amex cards.

Anonymous says:

My understanding is that Amex fees have always been higher than Visa/MC in general. I believe thats why many places don’t take them I know someone who owns a restaurant and thats the story I got from her.

Anonymous says:

Rewards are one thing, but some places that take cash only or gas stations that give s discount for cash transactions can be more valuable than the rewards you would get for using a card. I take them on a case by case basis, but I don’t stop to consider that rewards and credit card interchange fees raise prices on their own. I would rather deal with reality and the situation in front of me and try to make the best of it whatever way I can.

Anonymous says:

I would use the card if I want or need to. The retailers have the option of not taking credit cards at all. I used to stay in a Lodge on a lake that did not accept credit cards. People were told in advance, and always brought cash or a personal check. If you take the card, you take the card.

Anonymous says:

“These fees may seem small, but considering the number of customers who can come through a restaurant, they add up quickly.”

With larger numbers of customers, revenues add up quickly too.

“Knowing that rewards cards hurt smaller retailers financially”

Not much different than larger retailers being able to pay less rent per square foot, less shipping per tonnage, etc. On the flip side, is it fair that small retailers have lower marginal tax rates?

“would you forfeit your potential rewards by using another payment method in smaller establishments?”

I’d rather donate directly to my preferred charity.

Anonymous says:

Mom & Pop stores pay more for most things since they are small operations that don’t get volume discounts. Thats the nature of business.

Frankly if a restaurant is going to “struggle” cause of an extra 20¢ fee to process my credit card purchase of a $40 meal then I’d say that restaurant is on the brink of failure all on their own. If they claim that will put them out of business then they’re just making excuses or simply lying.

If they can’t afford to pay credit card fees then of course they shouldn’t take the cards. Obviously businesses who take cards have decided that they want the business and that hte fees are acceptable part of doing business.

“no discounts for cash purchases allowed”

There was no such rule in the first place. Visa & Mastercard policy has been able to have a cash discount.

Anonymous says:

great post jim! i agree with pretty much everything you said. spot on!

Anonymous says:

Yes, I always pay cash at the mom and pop stores/restaurants. I’d rather have the 3% go to the neighborhood than to the big banks. I also ask for a discount on large purchases. We got new blinds last year and I got 3% back by paying with a check instead of a credit card.

Anonymous says:

Your facts are outdated. Contained in the Dodd-Frank Act passed last year are provisions that explicitly allow retailers to impose minimum purchase amounts as well as allowing them to charge different prices based on the type of payment used. Merchant agreements cannot legally prohibit these actions any longer and any preexisting contracts would find these clauses unenforceable.

This recent development really takes the teeth out of any argument that credit card use hurts small business as those business can directly pass that cost to only customers who want to use a credit card.

I would be wary about doing this however. There are several local gas stations and a couple restaurants I refuse to patronize because they won’t allow me to use my credit card or charge me more to do so. Instead of saving a couple percent in transactions fees they lose my business entirely.

Anonymous says:

Bill – I understand you point about not being able to use your credit card, however small local businesses cannot negotiate card processing fees like the big guys can. I’m fairly sure that when Mc D’s added a value menu & started taking cards for $1, that they had hammered out a favorable agreement with the banking industry to manage such fees. Little businesses don’t have that option, and while I see that you want to spend what you want, where, is there any other reason you might buy? Great food, exceptional service, better prices? There are reasons small businesses can be better; more knowledgeable, higher quality, etc, and you wouldn’t want to A), miss out on that or B), limit yourself to just the big box stores in a few year if the independent are gone, would you?

I have a similar situation with a local pet store – exceptional service, quality dog food, know exactly what they sell and what you may need. However, they stopped taking checks recently, and I generally write checks. It’s just a tiny bit of thought to plan ahead for that, as I don’t want to use a debit card and basically take 5%? 10? off the top of the total, depending on what I buy.

I felt bad this summer when I paid a large bill via credit card to a local mechanic – I ALWAYS write them a check but couldn’t get there. So just because I was busy, I cost them around $33 in fees by taking my credit card. And they are so awesome – it’s not as if I ever take cars anywhere else – so it comes down to a question of if you “value” a product or service. If it’s just a “position” – I want what I want – then I respectfully would comment that is limiting you.

Just my thoughts. Have a great day!

Anonymous says:

I have to agree with steve who makes a great point because I’m not sure how much of the disparity between small & large retailers has to do with interchange fees.

Anonymous says:

No. I can’t figure out if the horse is pulling or pushing the cart. The price I pay reflects the cost of goods sold plus associated administrative cost and profit. “Knowing that rewards cards hurt smaller retailers financially…” is an assumption I not willing to accept. All merchants (of similar size) choose their own profit level – all other costs are shared by their competitors and therefore moot. The type of card used is inherently agregated into the numbers.The effects of competition between smaller and larger retailers are much more severe and have far greater consequences, but very little of that is attributable to interchange/transaction fees.