Concern over high credit card fees paid by merchants is not a new issue, particularly for those in the convenience store and petroleum retail space. But now that you can use your credit or debit card to purchase a pack of chewing gum, a newspaper from a vending machine and rent a movie from a kiosk, retailers are increasingly paying attention to how credit card transaction fees can take a large bite out of the profit on small transactions.
The term “micropayment” originated with e-commerce and meant payments for items less than one cent as content providers were looking for a way to charge for page views rather than accept advertising. More recently, the term has been used to mean small transactions, typically a dollar or less.
iTunes, which charges between 99 cents and $1.29 for songs, bills customers on a weekly basis, presumably to aggregate charges and minimize interchange fees.
The brouhaha around small or micro payments has been the interchange fees, which is the fees charged by card issuers like MasterCard or Visa on each transaction. Interchange fee structures can be complicated, with a flat fee plus a percentage of the transaction based on several different factors. For small payments, the percentage is not the issue, the flat fee is.
Recently I spoke with Eric Hoersten, vice president of information technology for redbox, which rents DVDs through a kiosk for $1 per night at various grocery store and McDonalds locations throughout the U.S. He explained to me the challenge of a fee structure that does not lend itself to lower ticket items.
For example, if the fixed fee is 15 cents per transaction, it’s 15% of a $1 transaction versus .005% of a $30 transaction. And that’s not counting the percentage of the transaction, which can be an additional two to three percent. This can make charging for low cost items prohibitive.
Hoersten believes that more retailers would leverage a cashless transaction if the fees weren’t so steep. This is ironic considering that the major card providers are pushing for more of a cashless society. The move to contactless cards is one more way to make it easier to pay with cards instead of cash. Hoersten thinks that retailers want to go more cashless since handling cash has challenges of its own and in redbox’s case, they need that credit card number in case the DVD is not returned.
I asked Hoersten if he had any tips for other kiosk deployers who accept credit cards for small payments. He said that how you are classified by the card issuer is important since some categories have lower fees than others.
- Pay attention to the fees that are assessed
- Look at how these fees are applied
- Different types of processors can have different fees so search for one that has the best fee
- Have a comprehensive view of the situation before entering that market
- Interchange fees are “the deciding factor” for the category you’re in
He also pointed out that new technology and market conditions have lowered the cost. For example:
- New communication options exist, such as cellular or IP/internet-based connections, instead of the traditional costly and slow land line.
- Terminals and leased lines are cheaper than they used to be.
- There is a greater ability for companies to accept credit cards and set up a merchant account.
Hoersten says that the self-service industry needs to join in the fight to lobby for fees that are not as prohibitive. He holds out hope that interchange fees will go down or that card issuers will release a rate structure that is more accommodating.
“In the micropayments space,” he says, “every penny makes a big difference.”