A minimum purchase on credit card of up to $10 can be necessary.
With a few small things and your credit card, you walk up to the counter. Then you see the sign: “$10 minimum for credit card purchase,” mostly handwritten and taped to the ledger.
For customers, particularly those who frequent mom-and-pop stores, it’s a familiar scene. Now, there is only one difference: it is a law-sanctioned activity.
Most card networks barred traders from setting minimum payment standards for credit cards until 2010 as well as from setting consumer methods for breaching them. Card issuers want cards to be recognized uniformly as cash, and minimum purchase requirements have made them less, well, cash-like.
Congress was asked by a group of retail and small business groups to amend that. Small transaction amounts can render accepting cards unprofitable, especially in places such as convenience stores and gas stations, where profit margins are paper-thin, since it costs retailers money to accept cards. They asked for the option of requiring credit card purchases to have a minimum purchase amount.
They’ve got it. The request received little attention because it was bundled into a bill which became a legislative behemoth of 848 pages, the Dodd-Frank Wall Street Reform and Consumer Protection Act. The short section on credit card minimum payments survived, on page 698, as fierce debates took place about whether the law produced or retained “too big to fail” banks and whether to put a limit on debit card interchange fees.
In July 2010, it went into practice, and all those handwritten signs went from banned to federally blessed.
2010 law: a minimum purchase of up to $10
According to the rule, merchants can buy a credit card at least $10 as long as all cards are handled identically. It also enables the Federal Reserve to review the minimum purchase amount and to increase it.
“Norman Scarborough, professor of entrepreneurship at Presbyterian College in Clinton, S.C., and author of “Essentials of Entrepreneurship and Small Business Management,” says, “I’m very sympathetic to business owners and prefer not to pay with a credit card.
“Cash customers are basically subsidizing credit card customer transactions,” he says.
You’ll need to buy something else to get rid of minimum purchase category
On the other hand, minimum sums can also make it inconvenient to cashless shoppers who may buy more than they had expected.
“I hate it because of the consumer impact,” says Linda Sherry, director of strategic priorities for Consumer Action, a national consumer education and advocacy organization based in San Francisco. But, she continues, once it becomes common, there might not be much in the way of customer frustration.
From our point of view, we have not seen a significant negative customer reaction. They understand that.’
The rage just hasn’t materialized, says Doug Kantor, counsel for the National Association of Convenience Stores, a retail trade organization. From our point of view, we have not seen a significant negative customer reaction. They understand that.’
Transaction fees on credit cards
When you pay by card, if you do not, then the dealer must divide the amount into a ratio, often in addition to a flat fee. These fees vary in terms of the vendor, the contracts it has signed, the size of the business and even the customer’s card. (See How Purchases with Credit Cards Work.)
Rewards cards also cost more than the plain-vanilla kind to the merchant, Kantor says. [The merchant cost] runs even higher if you have a high incentive or corporate card. These charges are all over the place.
Charge amounts usually vary from 1 to 3.5 percent; per-transaction costs are mostly between 5 and 10 cents.
These days, profit margins are so small for some retailers that they will lose money if they don’t set some kind of limit, says Kantor. And for smaller or independent stores, it does appear to be more of a concern, he says.
There may also be some merchants who do not completely understand the new law and may attempt to enforce a higher minimum or one for debit,” said Ted Carr, Visa spokesman, via email.” “In those cases, by calling the number on the back of their card, cardholders can report the situation by contacting their card issuer.”
Three of the big four card networks (Visa, Mastercard, and Discover) did not allow merchants who approved their cards to set transaction minimums until the 2010 federal legislation.
Before the new rules, American Express allowed merchants to set transaction minimums as long as merchants extended the minimums to all credit cards.
Minimum dilemma for Merchants
The rule shift for merchants is a mixed blessing. While some are unwilling to annoy consumers, some are happy that they can set the floor for card charges.
Since a large chunk of her company is in the range of $5 to $7, she has set a minimum of $5. “It was a decent figure, it seemed.”
The new law allowed one merchant in South Carolina to finally set the minimum purchase $5 credit card he had included in the business plan he drew up long before opening his store.
“It works great,” says Dana, who asked that his last name not be used. “Every once and a while, someone will come in and won’t have cash or a check. They’ll purchase an extra thing most of the time, so it goes over $5.
“Somebody’s going to be upset once in a blue moon,” he says. “But they’re more angry that they have no cash.”
Driving away customers?
“Banning credit cards for tabs under $10 “would not be easy for my customers with an average bill of $4 to $8,” says Doug Hendrick, who owns Steamer’s Cafe in Clinton, S.C., and does not enforce minimums on cards.
That would push business elsewhere,” he says, “to someone who was not concerned about it.
That’s a mutual refrain.
Retailers are trying to please their customers and make buying transactions as pleasant and smooth as possible, says Carol Schroeder, co-owner of Orange Tree Imports in Madison, Wisconsin, and author of “Specialty Shop Retailing.” “I think it’s a small place to buy a credit card for less than $10 in this case.”
“With that minimum, you can run many individuals off.”
Schroeder says that many people, “especially younger individuals, go cashless and use credit for everything.” “And we don’t want those transactions to be lost.”
Regular relationships and small transactions also result in bigger purchases for many retailers. “I think the potential of a larger sale is worth the cost of handling a small transaction,” she says.
Some retailers are seeking constructive, creative ways to create relationships and educate consumers on the cost of credit cards rather than fixed minimums.
A monthly contest for a $20 gift certificate is held by Hendrick. Who is eligible: anyone who pays with cash or checks for an order. This offers him an opportunity to let clients know that not all payment options are equal.
He loses about 3 percent of each credit card tab in fees, Hendrick estimates. “The average customer doesn’t know that,” he says. Though this may not sound like a lot, break it into thousands of customers with a slight margin of profit and, he says, “it’s a huge chunk.”
Instead of credit cards, entrepreneur Phil Waddell, who operates seven small businesses in South Carolina, is exploring moving to gift cards or gift certificates at a store he owns where receipts frequently equal $4 or less.
He worries that “with that minimum, you can run a lot of individuals off.”
And loyalty to customers is important, Waddell says. “What are you getting, as opposed to what money’s trading hands, for your relationship with us.”
Merchants correct misinformation as well.
“I think that customers have the impression that they make it easier for everyone by paying by credit card because of the convenience of a credit card, and the onus that shops have placed on paying by check,” says Schroeder.
But it is not always the case for retailers, she says. “For every single purchase, 2 to 4 percent off is a lot of money.”