Credit-Card Fees Squeeze Small Businesses

"If retailers in general operate under a thin profit margin, then small retailers operate under an ultra-thin profit margin," says Mallory Duncan, senior vice president and general counsel of the National Retail Federation. "As the credit-card companies have made a concerted effort to push usage down to the smallest purchases, some retailers are actually losing money when a customer uses a credit card."

How is that possible? In order to accept credit cards, merchants must pay a "swipe fee," consisting of a percentage of the purchase price (currently averaging around 2%), plus a flat fee of 10 cents per transaction. Sell $100 worth of food at your corner store, and $2.10 goes to credit-card fees. Sell $5 worth of food, and the fees add up to 20 cents, a much higher proportion of the total. In some cases, that wipes out the entire profit margin. According to the Association for Convenience and Petroleum Retailing, which represents thousands of gas stations and convenience stores across the country, its members in total pay more to credit-card firms than they make in profit.

Other recent pressures have made the situation worse. Banks have increased their selection of value-added cards, which come with rewards such as frequent-flyer miles. Customers, always hunting for a deal, have been signing up for such cards in increasing numbers because they see it as an easy way to earn a free plane trip.

But who's covering the cost of those trips? The merchants, who now pay fees of 3% or more when premium cards are used. "They don't know how much the next card will cost them," Duncan says. Because of credit-card company rules, store owners must accept any card with a Visa or MasterCard logo, no matter how high the fee.