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Why Do Some Stores Have Credit Card Minimums?

Sept. 27, 2018
Credit Card Basics, Credit Cards
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Ever try to make a small purchase with a credit card, only to see a sign at the cash register — or worse, hear the gruff voice of a store employee — telling you that there’s a $10 minimum purchase to use a credit card?

It happens, and it’s a result of the fees that merchants have to pay to process credit card transactions.

Big fees on small purchases

Every credit card sale involves multiple parties. In addition to you (the consumer) and the merchant who sells you something, there’s the bank that issued your credit card, the merchant’s bank and the payment network (like Visa or Mastercard) that handles the transaction. This whole structure is financed with fees paid by merchants on every card purchase.

At a minimum, there’s an interchange fee on each transaction — at least 2% of the transaction amount, and usually around 2.9%. In some cases, there will be a minimum fee. For example, a fee might be 2.5% of the transaction or 40 cents, whichever is higher.

How many fees get charged? Card Fellow, a company that connects merchants with payment card processors, keeps track of the many fees charged on Visa, Mastercard, Discover and American Express transactions. See Card Fellow’s list of fees here. It’s a long one.

Add them all up, and the total amount assessed in fees may be rather high compared to the amount of a transaction.

» MORE: Are credit card convenience fees legal?

Fees can eat into merchant profits

Let’s say you’re a merchant. You bought an item wholesale for $2. You sell it for $4. A minimum 40-cent transaction fee cuts your gross profit from $2 to $1.60.

Sound like splitting hairs? Not if you’re the merchant, and especially not if a big chunk of your business is selling small or inexpensive items — if you run a corner store, for example, as opposed to a department store or a giant online merchant. Your profit margin is extremely thin to begin with, and every penny lost to fees is painful.

That’s why smaller merchants get grumpy about accepting credit cards and impose minimums so that the fees they pay are worth their while. Of course, they could just stop accepting credit cards. But that could cost them business; people just don’t carry cash like they used to.

Most merchants absorb credit card fees the same way they absorb any other cost of doing business — by including them in the prices they set. But those who sell mostly inexpensive items have less flexibility to do so, since minimum transaction fees can run to 40% or more of the price of an item.

Where minimums come from

At one point, credit card payment networks prohibited merchants from setting minimum amounts for credit card purchases. Banks that issued credit cards frowned on minimums, too — after all, they were collecting fees, too.

Such restrictions were prohibited under the Durbin Amendment, federal legislation passed in 2010 that regulated practices in the payment card industry. The law says, “A payment card network shall not, directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability of any person to set a minimum or maximum dollar value for the acceptance by that person of any form of payment.”

Pretty clear.

Under federal law, only the Federal Reserve can dictate an allowable minimum for credit card transactions. The Fed has set the minimum at $10. If a merchant wants to impose a minimum, in other words, that minimum can’t be higher than $10. (Of course, most merchants do not impose any minimum.)

Remember the poor merchant

While it may be irritating and annoying to have to pull out cash when a credit card minimum of $10 comes into play, try putting yourself in a merchant’s shoes. Transaction fees alone are a significant cost of accepting credit cards. Add in the dollars spent on security and compliance, and your convenience is certainly not free.