Real Issues. Real Answers. Credit Card Fees

iStock.com/andresr

Accepting credit cards for payment is great for cash flow. But in a business known for razor-thin margins, the 2% or 3% fees charged by credit card companies can consume a sizable chunk of an LBM company’s bottom line. This month’s Real Issue reveals how readers handle this expensive reality.

This month’s topic came from two readers whose questions were combined to form this month’s primary survey question: “What should we do with a customer who pays with a credit/debit card that costs us approximately 3% in fees, versus a customer who pays with cash? The number of transactions and dollars paid by credit card have increased exponentially over the last few years due to rewards programs which, in turn, have eroded our profits significantly. When will it be acceptable to charge credit card fees back to the customer?”

Note: current laws vary from state to state, regarding a company’s ability to charge fees for accepting credit cards. Before putting any fees in place, be sure your policies are in line with the laws of the states in which you operate.

- Sponsor -

As always, we built a very brief survey around that question, and sent it to sub- scribers who’ve opted in to receive our email communications. Clearly, this question touched a nerve, as more than 300 readers responded. A big thank you to all who took time to participate. If you’d like to participate in future surveys, please contact me at Rick@LBMJournal.com and I’ll make sure you’re added to our list.

Question 1
First, we wanted to gauge the percentage of readers whose companies accept credit cards. As you’ll see in Graph 1, just 8.5% of respondents’ companies don’t accept credit cards, leaving more than 90% who do. Of those, a strong majority (81.6%) accept credit cards with no purchase limit, while the remaining 9.8% accept credit cards up to a certain dollar amount. Comments included:

“We discourage A/R payments with credit cards, but on occasion will allow it on a case-by-case basis.”

“We accept credit cards only as a last resort collection tool for overdue account balances, nothing else.”

“We accept at point-of-sale, but NOT on house accounts.”

“We have a $10 minimum charge per card.”

“Yes, but only on orders which exceed 12% margin.”

Graph 1: Does your company accept credit cards for payment?

Question 2
Next, for those who do accept credit cards, we wanted to learn how many companies charge a fee. As you’ll see in Graph 2, 82% of respondents whose companies accept credit cards don’t charge a fee. Of those who do, a 3% fee is most common (14.2% of respondents), followed by 3.5% of respondents whose companies charge a 2% fee, and 0.3% of respondents report charging a 1% fee. Comments to this question included:

“It’s a ‘Service Charge.’”

“Colorado law will not allow us to charge a fee.”

“We charge 3% for over-the-phone orders.”

“We tried a fee several years ago and a local competitor sent all our customers a letter saying they would gladly accept a credit card to pay on an account with no fee. We immediately pulled back the fee.”

“I believe it is against all Visa and Mastercard rules to do such. We do offer a cash discount to some.”

Graph 2: Does your company charge a fee for accepting credit cards?

Question 3

What advice or insights would you have for this dealer: “What should we do with a customer who pays with a credit/ debit card that costs us approximately 3% in fees, versus a customer who pays with cash? The number of transactions and dollars paid by credit card have increased exponentially over the last few years due to rewards programs which, in turn, have eroded our profits significantly. When will it be acceptable to charge credit card fees back to the customer?”

“We struggled with doing this. It is a real issue. Most of our customers have accepted the fact that it is a cost of doing business.”

“Hopefully you are tracking margin on this account and getting more.”

“Never. What did bad checks cost? What do carrying costs on accounts cost? We get paid in full on credit card sales. If your margins are so tight that you can’t stomach the cost of credit, you need to raise your prices and increase your margins.”

“I think we have reached that point. We have been kicking around the idea of charging credit card customers by which type of card they use. Rewards cards will be charged more than debit cards, etc.”

“Check state law first, not permissible everywhere. Company preference based upon customer base, competition, etc. Research pros/cons. Must have very visible public posting if you choose to.”

“I think we need to realize this isn’t going to change. True cash customers have become the exception, not the norm. One answer is integrating price increases to offset the fees we incur from the credit card companies. With that, it’s smart to offer some sort of ‘cash’ discount to those regular customers who normally pay with cash or check.”

“We counter with a quick pay discount or rebate program that is less than the fee. We’re restricted in most of our states from adding a credit card fee to an invoice. I also think we have been marginally successful at raising margins on customers that pay with credit cards.”

“We don’t offer payment terms on customer accounts when paying with credit cards.”

“I don’t think customers in our industry will ever accept this type of fee. Would you? You must try to recapture these costs through smart pricing strategies.”

“We give discount (fees) back to customers who pay cash. We get our money in a couple days and don’t have to wait until the 10th. Credit cards provide good cash flow, and house accounts cost a lot more than 3%.”

“You cannot do that per credit card rules/regulations. You could offer a 1% discount for cash/check though. Build it in to your business is my suggestion and take payment anyway they will pay.”

“Using credit cards is a huge expense. We figure it costs more than 5% to accept them. Invoices over $10,000 gets expensive. All the bank fees are next to impossible to figure out. Just give me a check! The cost of machines and fees never stops. I only have it for the convenience of customers.”

“Just figure it into your overhead. I know of one restaurant that gives cash back if no credit is used.”

“We are considering adding a fee for those customers who choose to pay on account balances with a credit card, but not those using it at time of purchase.”

“Raise basic prices and give a discount for cash.”

“We recently changed our merchant for better rates. Our accounts receivables are often paid with credit cards as well, and as long as our competitors continue to accept cards, I expect we will as well—no new concept here. Customers receive perks as well as a monthly statement from their credit card—fast and efficient. Rather than penalize those transactions, we push 2% 10th prompt pay discounts for customers paying with cash or check. We end up allowing 2% across more transactions and more time. Not the best practice, but more people in general are pulling out plastic and it is a trend that has continued to grow over the past ten- plus years. Consider that the more credit card dollars you transact, the better the rates you can get.”

“You can charge for CC transactions as long as the charge is not more than 4%, disclosed before the transaction, and shown as a separate line item.”

“My understanding is that when you agree to process credit cards you are entering an ‘agreement’ with said service provider that you will not penalize those who use the card by charging extra or by giving discounts to those who pay cash. I could be wrong.”

“What about the legal issues? I worry that if we were to charge a fee, that there are certain rules that would have to be followed that I am not aware of.”

“While I was initially opposed to tacking on the fees, once the dollar amount our company was paying was made available to me, I was astounded. We have customers putting thousands of dollars on their credit cards, and we are left holding the tab, so to speak. Now when a customer wants to use their credit card for a transaction, we make very clear that we charge a 2.88% fee for credit card use. That gives them the option of either using the card to gain their points or paying by check. Clear communication up front is the key, and in almost every case has not been a barrier to doing business.”

“I don’t do this yet, but we should give a discount for cash. Because of box stores, and the low margins they have on many of their products, we cannot increase margins as we need to. It would only be fair to us, but not sure how the customer would take it.”

“A former employer would not take cards for payment except on larger accounts (spending $50,000-plus annually) which requested it. By accepting the cards, the customer was not given the early pay discount of 2%. We also would not take cards over the phone nor keep cards on file. Cards had to be in-hand to use, and this decision made a difference in our credit card cost and did not really affect our sales—a practice that the owner I work for now will not accept due to a belief that they will lose customers.”

“We have posted signs that we have a built in 3% discount on all cash sales, and any credit card sales do not qualify. So the 3% is added onto the credit card as a service fee. We warn people with large purchases before we run the card, and often they will pull out a checkbook instead.”

“If the customer is at the counter and pays with a credit card, no fee. Over the phone or internet, 3%. The fees are a lot less when the card is present for purchase.”

“I think we all need to spell out how we will accept payment on any quotes up front. We attempted to take credit cards for cash sales only for a long time. We have modified that to pay for accounts in person. There are a lot of questions about not honoring the credit card as a form of payment if you take them.”

“You should not charge a fee to walk-in customers. If it is a bid job, you should raise the price accordingly or tell the customer a 3% fee will be added if they use a credit card.”

“I would consider charging fees if they pay an account that is past due.”

“I did not think it was legal to have the customer pay a fee for a credit card transaction.”

“Going to be hard until everyone in the industry charges a credit card fee.”

“It will be acceptable to charge a fee when most suppliers charge a fee.

My advice is to build the fee into the customer’s pricing when you know the customer regularly pays with a credit card.”

“With new computers, I think it will be possible to customize prices, so that you can price a customer’s business based on his payment method. I have customers who insist on paying by credit card and getting the lowest price. We have had to part ways with some of them.”

“Not sure. If the competition will not, we cannot.”

“Probably best just to put an upper limit on the amount they can charge. We’ve found it’s worth having them use the card just to keep from having to extend them credit.”

“I don’t think there is a clear-cut answer (or you wouldn’t be sending this survey). Depending on the relationship I would offer them a house charge account with 1% or 2%/10 dating. Or start to raise the margins on their purchases.”

“We are very aware of all our large volume customers who pay their accounts with a credit card. We have specific discount structures based on payment method as well as their overall credit-worthiness.”

“That seems to be the big question. What can we charge because the credit cards processing is an added expense. Seems like it should be acceptable now similar to how we’ve handled things like this in the past with the spikes in fuel costs.”

“Split the fee, increase prices by 1.5% and charge a service fee of 1.5%.”

“I am concerned about every cost we have, but after a few years of fighting an uphill (unclimbable) battle against the increasing use of plastic, I raised my base markup across the board to cover the cost. In the end we have to have enough markup to cover costs and still show a profit even though it is almost always too thin.”

“Our estimates and invoices clearly state that there is a 3% charge for credit card payments. When asked, we explain that is what the bank charges us. Many will write a check instead.”

“I started an auto pay plan, here’s how it works. At the end of the month, prior to issuing statements, I give customers a 2% early payment discount (on material charges only, does not include sales tax) and charge their credit card for the net amount after discount. We used to give an early payment discount if paid by the tenth. This brought the money in a lot quicker resulting in us paying our vendors in a more timely manner to take advantage of our vendor discounts.”

“You can’t add a fee. You have to figure it into your mark up.”

“Unfortunately, this is a cost of doing business. We eliminated our own rewards program. Customers can’t pay by credit card and take an early pay discount on their accounts. With a credit card, we ask 1/2 with the order and final payment the day before delivery.”

“I would explain the circumstances to the customer. It seems obvious that the credit card company is not giving them anything for free, as retailers are the ones paying for it, but some people are oblivious to this fact. If they insist on a reward, and you determine that it’s justified and viable, tell them you will offer a direct rebate or gift of their choosing at a set amount. Then your company can be the hero ‘giving them’ this wonderful ‘free’ benefit.”

“Our cash sales have credit card fees built-in. On our in-house charge accounts, we quote prices paid by cash or check only, and we inform the customer so they know we do not accept credit card payments unless they are willing to pay the fee.”

“We are making deals with our largest credit card customers to give rebates equal to less than half of the merchant fees if they switch to paying by cash or check. It still costs us money, but a much better deal all the way around.”

“The majority of our customers using credit cards are walk-in transactional customers, who pay a higher price level. For A/R customers that insist on using CCs to pay their account, we revoke their 1% cash discount and do not reward them with our loyalty program, which is worth .6%.”

“Only when other competitors and Big Box stores do.”

“When they pay 100% in advance for product that takes 3-4 weeks to arrive, we don’t charge a fee, otherwise it’s 3%.”

“Allow no payment discounts for credit card payments. Federally Regulated debit cards (those from larger banks) should only cost .05%. Has the amount of business with this customer increased exponentially or just the payment by credit card? Many factors to consider, are they a ‘high maintenance’ customer? Are you better off without the business? Also, make sure you are getting the best pricing from your credit card processor, which generally is not a bank—they charge too much, we saved over .5% switching from our bank.”

“We don’t charge a fee on over-the- counter sales, but we do on phone orders.”

“Other than charging a fee, the best solution is to sell additional product categories with better margins.”

“We have adjusted our discount percentages to accommodate credit card and Blue Tarp fees.”

“Never, as long as others are not. This has been gradually growing for years as credit card companies make using cards more rewarding for consumers. While we hate it, it is a fact of life. Raise prices on blind items to compensate or analyze your highest selling items by quantity and raise a few cents each. There is no store that doesn’t have some room to play on prices. Just bite the bullet and do it. Easy to calculate covering the cost of fees; just time- consuming.”

“Have a discussion with the customer, specifically stating/showing them the incurred costs of allowing them to pay their account via credit card. Ask them to pay the 3%, or ask them if you can include the 3% into their pricing.”

“We offer a “paid in cash/check reward discount” of 3-5% for those customers not using a credit card. We assume everyone is going to use a credit card, and when that is not the case, we would like to reward the customer accordingly. So needless to say, the 3% CC fees are already built in to the pricing to start with.”

“The customer is using the card for an additional 30 days or more of cash flow. In addition, they are getting cash back, points, or air miles with the card. Maybe try offering 1.5% in extra cash discount for paying by ACH or cash. In essence, split the difference and cut out the credit card company.”

“We have only a small handful that use credit cards for their monthly purchases. Thank goodness!”

“Announce a 1% charge for credit card use. More than likely the credit card rewards program will still benefit the customer, and you will cut your cost by a third.”

“Put a dollar limit to where you won’t charge a fee, or have the CC be present to lower the fee that is incurred. Tell them you prefer ACH payments and help set those up.”

“We try, at all times, not to take credit cards, but there are times to close a sale on accounts that do not have an established account with us, or times to close out a bad receivable, that we will take a credit card. Additionally, we have seen the use of credit cards more frequently on specific product lines (i.e.-cabinet sales, composite deck sales, etc.) due to the fact that we are dealing with a homeowner, rather than a professional builder.”

“We are looking for a similar answer in our own operation. One solution we are contemplating is raising prices 2%-plus and offering a cash discount at time of sale and offering accounts who pay by check 2% net 10th.”

“Credit card fees are no different from free delivery, extending additional terms of sale, running an incentive travel promotion, etc. They all are competitive factors and they all cost the dealer money. Every dealer must make a decision about these kinds of costs that will probably never go away and decide if the customer who insists on paying by credit card is still profitable, or if the credit card charge throws the customer into the ‘red.’”

“Handling, recording and depositing cash is not cost-free. For example, there are bank fees for handing cash deposits and employee time or armored car fees to get it to the bank. So maybe that ends up being equal to 1% or more.”

“We are struggling with this is as well, and it is becoming a big issue. We do not offer the prompt pay discount to customers that pay with their CC.”

“A discount of 1.5% for paying actual cash seems appropriate.”

“We charge 2-3% to a customer who wants to use a credit card to pay the balance on his store charge account. We do not charge a fee for payments by credit card at the time of purchase.”

“Our commercial bank’s merchant services and fees program cost us less than 1% on credit card transactions on a monthly basis. so, we are very happy with our program. I would suggest that they review their merchant service program with their provider/ bank. In some cases such as ours, our commercial bank takes ownership of the Merchant Services program whereas some other banks farm it out to third party providers. As for charging credit card fees to the customer, that is a tricky area. For small transactions where you are most likely making higher margins, I would leave it alone. For large orders, especially if they are trade accounts, make your sales policy clear that on large orders that are project driven and quoted specifically on the nature of that said project, if a credit card is the payment of choice than a credit card surcharge may be applied. State what that surcharge is (Visa, MC and Discover may carry a lower surcharge than AMEX) and the reason behind it. Once it is made clear, then your customers will have a better understanding.”

“You need to look at the overall profitability of the customer. CC fees are one element, also gross margin on product, rebates, unique service requirements, commissions paid, etc. If all else is equal, I would encourage the CC customer to pay by cash and consider splitting the difference.”

“We make sure that our sales margins adequately support the CC fees on an on-going basis. Beware of charge backs. The credit card company often blindly supports the purchaser without investigation. Check your CC operating agreement and state law regarding adding a sales surcharge—this could be big trouble.”

“We have started offering a 1.25% rebate for our larger customers paying their account with a check. We had not offered any rebate or fee for CC users. I figure I am still saving money at the end of the day as I no longer have the 2-3% CC fee.”

“Give the customer who pays cash 3% back at the till. If a customer wants to pay for their deck in cash vs. credit card, they may leave with a smile as they accept cash back.”

“We have a charge price that is set at 2.0408% higher than a cash-n-carry customer. That we use for all charge and credit card companies. We view it as the cash customer gets a discount.”

“Suppliers and vendors are increasingly charging us a percentage if we want to pay our bill with a credit card, so I think it is getting more common in our industry to do this. On our end, we charge 3% on anything over $1,500 to cover some of the costs.”

“Include the 3% cost of the credit card in your cost of material, and then put your profit on top of that when quoting a price to the customer.”

“We also accept credit card payments for AR payments. We do not charge a fee but we also do not allow the prompt payment discount.”

Hundreds of readers share their insights for this every-issue feature. Have a Real Issue? Contact me at Rick@LBMJournal.com. The reader who suggests the Real Issues. topic receives an LBM Journal Prize Pack, which includes a polo shirt, cap, mug, and pen.