NEW YORK – Gretel-Ann Fischer already told customers that she won't accept credit cards for purchases under $5 at her Vermont bakery. The last thing she wants to do is alienate them by passing along the transaction fee she has to pay each time they use plastic.
Fischer is one of thousands of retailers in 40 states who now have the right to charge customers the fees that come along with using credit cards. They won that right as part of a settlement of a class action lawsuit brought by merchants against the credit card companies Visa and MasterCard and major banks that issue credit cards. But many small retailers say that customers will bolt if they tack on a surcharge that could range from 1.5 percent and 4 percent of purchases made with plastic.
"It's just not going to happen. It's hard enough to get them to accept the $5 minimum," says Fischer, who owns Cupps Cafe and Bakery in Winooski, Vt. She imposed the minimum because of a 17-cent per transaction fee that's in addition to the 2.5 percent that Visa and MasterCard charge for the entire purchase. Seventeen cents on a $2 cup of coffee was too much for the bakery to absorb.
Credit card transaction fees cost the bakery $10,000 a year, a big bite for a company with annual revenue of about $400,000. But, Fischer, and her husband Brian say passing the fees along just isn't an option.
"I think you'd alienate a bunch of customers," says Brian Fischer.
The surcharges are the result of a settlement last July of a long-running federal antitrust lawsuit brought by nine retailers against Visa, MasterCard and major banks. Before the agreement, the credit card companies prohibited retailers and other businesses that accept credit cards from charging customers for the right to use plastic. The settlement gave merchants the right to pass along the fees as of Jan. 27.
The plaintiffs in the lawsuit ranged from Leon's Transmission, a California auto repair company with seven locations, to Payless ShoeSource, which has thousands of shoe stores across the country. They charged that Visa, MasterCard and the banks conspired to fix the fees on credit card transactions. Other big merchants including grocer Kroger, and drugstore chain Walgreen, had also filed suits.
The surcharges aren't something that a retailer can just slip in without telling customers. The agreement requires retailers to notify customers before and after a purchase. That means visible signs at a store entrance and its cash registers. And the sales receipt has to list the surcharge separately. Websites must also have notify customers that they're about to pay more for something they buy online.
But the number of retailers who pass along the transaction fee is likely to be relatively small. Big retailers like Wal-Mart and Target have already said they won't do it. And under the agreement, a multistate retailer with stores in the 10 states where the surcharge is illegal can't impose it in states where it is. So if a small retail chain with stores in New Jersey has just one store in New York, where the surcharge is prohibited the chain also can't charge it in New Jersey. The surcharges are also illegal in California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma and Texas.
The lawsuit's intent was to lower the transaction fees that merchants pay, says Mallory Duncan, a senior vice president at the National Retail Federation, a trade group that is opposed to the settlement. Allowing them to add a surcharge onto a purchase does accomplish that goal. But Duncan says the reality is that retailers will be hurt by charging their customers more.
"That's exactly opposite where we want to be," he says.
Duncan cites another reason why few retailers will pass along the fees: Under the agreement, those who also accept American Express would have to pass along fees to AmEx customers as well. AmEx prohibits its merchants from doing that.
Retailer Angela Gianfrancesco says she'll lose customers if she makes them pay a transaction fee.
"Customers are definitely going to tailor their spending to places that don't pass along the charge," says Gianfrancesco, owner of Stella Blue Design, a jewelry store in Chicago. "Their repeat business and loyalty are more lucrative than what I would make passing that along."
A big reason why she can't pass on the charges is the sales tax in Chicago – 9.25 percent. Add on another 2.5 percent for a credit card fee, and customers would be paying nearly 12 percent above the ticket price. And Gianfrancesco's customers tend to spend more than $100 each time they buy from her.
Shoppers in many cases are already paying for the transaction fees – they're part of the overhead that retailers have to pay, along with rent, salaries, cost of merchandise, etc. So retailers can nudge their overall prices higher rather than pass along transaction fees.
Another reason many shops will avoid passing on the fees – they don't want to give customers a reason to check out their rivals.
"You don't want to give somebody else a competitive advantage," says Michael Sansolo, a retailing consultant in Washington, D.C. He predicts most retailers will now do nothing
Asking customers to use cash is another possibility. Gianfrancesco says she deducts 2.5 percent if a customer decides not to use plastic.
But that won't work in a bakery where people on the go want to buy a muffin and coffee with a swipe. Many don't carry cash, says Cupps' Brian Fischer.
"The convenience of the credit card is too great to alienate all the customers."