Start swiping

Like it or not, our nation runs on credit. The statistics pile up: A 2009 survey by the National Small Business Association found that 59% of small business owners use credit cards as a primary source of financing; in 2010, the U.S. Census Bureau projected that 191 million Americans will own debit cards by 2012, and the Federal Reserve Bank of Boston found that the average American household uses 3.5 debit and/or credit cards. The most recent data from the Federal Reserve shows that total U.S. consumer debt was $958 billion at the end of 2009, with 98% of that debt due to credit cards. 

Unfortunately, this means that unless you’re a cash-and-check-only operation, a percentage of your sales will get caught up in bank interchange and merchant processor fees. However, some operators have found ways to minimize these fees or avoid credit cards altogether—sometimes while raking in additional cash through in-store ATM machines.

Decoding Fees

Depending on the nature of your transaction types (i.e., credit or debit, in-store or online), you could pay less than 1% to more than 3% of each sale in fees. To reduce your costs, find a processor that understands how to work with your business model and can counsel you on better practices. “There are hundreds of interchange categories that merchants could qualify for, depending on the type of card and the environment in which it’s used,” says Linda Grimm, a payment industry consultant in Eureka, California. “Most processors will offer merchants bundled rates.” 

According to Grimm, there are three major transaction categories that processors offer merchants to make fees easier to understand: qualified, midqualified and nonqualified. Qualified transactions, with the lowest fees and least amount of risk, occur when a customer swipes his card in a store. Midqualified and nonqualified rates occur when a merchant keys in credit card information manually; or if the card is a corporate card, government-issued card or foreign-issued card, or provides rewards to the cardholder. Mid- and nonqualified transaction fees can be 1% or 2% higher than qualified transaction fees. If your business accommodates debit transactions, you should encourage this to qualify for a lower rate with a majority of processors. “You need to communicate with your processor so your account is set up for the majority of your transactions,” Grimm says. “If you take more phone orders than orders at the counter, you can set up your account to accommodate that with programs, such as address verification, that can offer a better rate for each transaction.”

Better Practices

With specials, coupons and by-the-slice deals, some of your tickets may be inexpensive. As a result, some operators institute ticket minimums for credit card transactions, to avoid puny profit margins. If a processor charges an amount per transaction in addition to the bank’s interchange fee, small credit card transactions could actually cost the merchant money! David Smith II, owner of Smith’s Pizza Palace Plus ( in Emporium, Pennsylvania, maintains a $15 minimum for all credit card transactions. “The credit card companies say you can’t generate profits without taking cards,” Smith says, “but if someone comes and swipes a credit card for one soda, I’m not making any money at all.” 

Also, get into the habit of settling credit card batches daily, which qualifies merchants for lower fees. Some banks charge batch fees, so sitting on a week’s worth of credit card transactions can exclude many transactions from being processed at the lowest possible rate. For simplicity, many terminals can be programmed by the processor for an auto batch every 24 hours. Mark Stoss, CEO of Kredit Karte in Walnut Creek, California, explains that older transactions are a liability for banks—and thus more expensive for merchants. “You have to batch out every night,” he explains. “If you don’t, the authorization becomes stale. In three days, the customer may not have that money anymore, but the bank is still required to pay you and chase down the money from the customer.”

Cash at Hand

The cash-only business model is still viable for some operators who want to avoid processor fees altogether and keep menu costs lower. Jessica and Craig Goodman, husband-and-wife coowners of Goodman’s American Pie in Ludlow, Vermont, accept only cash and checks at their shop. Located near a busy ski resort, Jessica says that in their 11 years of operation, they’ve never felt the need for a credit card machine. Their regular group of customers know their policy, and the ATM at the gas station across the street accommodates newcomers. “My husband and I don’t like credit cards—we don’t use them,” Jessica says. “If we started taking credit cards, we’d have to charge more for our product. Cash is simple. We take a gamble with checks but, honestly, if you need a pizza so badly that you’re willing to bounce a check, then you obviously need a pizza.” 

On the flip side, if you choose to not process cards at your business, an in-store ATM machine can generate revenue for your pizzeria. Wade Zirkle, the owner of StrongPoint Capital in Woodstock, Virginia, says that he’s seen pizzerias bring in revenue this way, without any additional costs. Some ATM partners will make a business buy or lease a machine (contracts vary) but, generally, the merchant and the ATM provider work out a surcharge amount and the merchant’s percentage of the profits. Some pizzerias have even incorporated this into their marketing. “One pizzeria that we work with offers a promotion where they give a free slice of pizza to anyone with an ATM receipt,” Zirkle explains. “The ATM surcharge is $2.95, and the slice of pizza costs the shop only about 60 cents. A lot of people who need cash anyway go there, because why not get a free slice of pizza?” 

Dennis Van Oostendorp, owner of Oxford, Mississippi, operation 6 ’n Tubbs, bought his own ATM this year when he opened a cash-only location, and the ATM surcharge is only $1.10. “I could make more money off this, but my idea was that it needs to be a benefit to the customer,” he explains. “I need only about 40 transactions per month to cover the operating costs of the machine.” 

You can also utilize your ATM as a way to give back to community nonprofits, and incorporate this into your marketing. Jesse Seaver, founder of Charity ATM, developed his company as a way for merchants who utilize ATMs to send a portion of surcharge fees to local nonprofits. “We take the traditional ATM business model and donate our part of the surcharge revenue,” Seaver explains. “It’s the default practice of the ATM, so people are donating to nonprofits at every transaction. If the surcharge is $3, more than $1.50 is going to a local charity.” 

For many businesses, opting out of credit card transactions isn’t practical, but understanding better practices can reduce your monthly payments to your credit card processor. You can also look out for opportunities to minimize fees in different ways, such as reduced prices or free refills for cash customers to shift the numbers favorably for you and the consumer.

Andrew Abernathy is PMQ’s associate editor.