You step up to the counter with a couple of small items and your credit card.
Then you see the sign, often handwritten and taped to the register: "$10 minimum for credit card transactions."
It's a familiar scene to consumers, especially those who frequent mom-and-pop stores. There's just one difference now: It's a practice sanctioned by law.
Until 2010, most card networks prohibited merchants from setting minimums for credit card transactions, and even set up methods for consumers to turn in violators. The card issuers want cards to be universally accepted like cash, and minimum purchase requirements made them less, well, cashlike.
A coalition of retail and small business organizations asked Congress to change that. Because it costs retailers money to accept cards, small transaction amounts can make accepting cards unprofitable, especially at places such as convenience stores and gas stations, where profit margins are paper-thin. They asked for the option to require a minimum purchase amount for credit card transactions.
They got it. The request received little notice because it was tucked into a bill that became an 848-page legislative behemoth -- the Dodd-Frank Wall Street Reform and Consumer Protection Act. As fierce debates took place over whether the legislation created or preserved "too big to fail" banks, and whether to set a cap on debit card interchange fees, the short section on credit card minimum payments survived, there on page 698 .
It went into law in July 2010, and all those handwritten signs went from forbidden to federally blessed.
New rules: up to $10 minimum OK
The law says that merchants can set a credit card minimum purchase of up to $10, as long as they treat all cards the same. It also allows the Federal Reserve to review and increase the minimum payment amount.
"I'm very sympathetic to the business owners and try not to pay with a credit card," says Norman Scarborough, professor of entrepreneurship at Presbyterian College in Clinton, S.C., and author of "Essentials of Entrepreneurship and Small Business Management."
"Cash customers are basically subsidizing transactions for credit card customers," he says.
'You'll need to buy something else'
On the other hand, minimums can also make it inconvenient for cashless shoppers, who'll have to buy more than they intended.
"From a consumer impact, I hate it," says Linda Sherry, director of national priorities for Consumer Action, a San Francisco-based national consumer education and advocacy group. But unless it becomes widespread, there probably won't be much in the way of consumer ire, she adds.
That anger just hasn't materialized, says Doug Kantor, counsel for the National Association of Convenience Stores, a retail trade group. "From our perspective, we haven't seen a big negative reaction from customers. They understand."
How credit card transactions work
In case you don't, here's what's going on when you pay by card: When it's swiped, the retailer has to part with a percentage of your total, often in addition to a flat fee. These charges vary based on the retailer, the contracts they've negotiated, their business volume and even the version of a card that the consumer uses. (See " How credit card transactions work .")
Rewards cards often cost the merchant more than the plain-vanilla kind, says Kantor. "If you have a high reward or corporate card, [the merchant cost] runs much higher. These fees are all over the place."
Fee percentages commonly run from 1 to 3.5 percent; per-transaction costs often range from 5 to 10 cents.
Profit margins these days are so slim with some retailers that "if they don't set some type of limit, they will lose money," says Kantor. And it does tend to be more of an issue for smaller or independent retailers, he says.
Retailers also aren't allowed to impose minimums for debit cards, according to representatives at both Visa and MasterCard , the two largest debit card networks.
"There also may be some merchants who don't fully understand the new law and will try to impose a higher minimum, or one for debit," Visa spokesman Ted Carr says, by email. "In those cases, cardholders can report the situation by contacting their card issuer by calling the number on the back of their card."
Before the new rules
Until the new federal law, three of the big four card networks (Visa, MasterCard, and Discover ), didn't allow merchants who accepted their cards to set transaction minimums.
Since convenience is one of the big benefits credit cards offer, some card networks and banks worried that the minimums would hinder usage, says Betsy Haglage, spokeswoman for the Electronic Payments Coalition. "On that level, they are not happy with it."
American Express allowed merchants to set transaction minimums prior to the new regulations, as long as merchants applied the minimums to all credit cards.
"We just require parity," says Diana Postemsky, director of corporate affairs and communications for American Express. "That's always been our viewpoint. There has to be a level playing field."
Note that the change applies only to credit card transactions, not debit card transactions. Under merchants' agreements with the card processing giants, minimum payments may not be imposed when a debit card is presented. MasterCard's agreement is typical. It says, "MasterCard does not permit merchants to set a minimum transaction amount to accept MasterCard cards that access a debit account."
Merchants minimum dilemma
For merchants, the rule change is a mixed blessing. While some are leery of annoying customers, others are happy to have the option of setting a floor for card charges.
"We jumped on it right away," says Carrie, who runs a general store in Vermont and asked that her last name not be used.
"Philosophically, I hated that people were handing me a credit card for a $1.50 purchase," she says.
Since a large chunk of her business is in the $5 to $7 range, she set a minimum at $5. "It seemed like a decent figure."
The response has been "really positive," says Carrie. "We've never had anybody pull their purchase."
The new law allowed one South Carolina retailer to finally set the $5 credit card minimum that he'd included in the business plan he drew up long before he opened his store.
"It works great," says Dana, who asked that his last name not be used. "Every once in a while, someone will come in and won't have cash or a check. Most of the time they will buy an additional item so it goes over $5."
"Once in a blue moon someone will be upset," he says. "But they are more upset that they don't have cash."
Driving away customers?
Others fear the practice could alienate customers.
With an average bill of $4 to $8, banning credit cards for tabs under $10 "would not be convenient for my customers," says Doug Hendrick, who owns Steamer's Cafe in Clinton, S.C., and doesn't impose card minimums.
"That would drive business elsewhere -- to someone who wasn't worried about it," he says.
That's a common refrain.
"Retailers are in the business of trying to please their customers and make purchase transactions as pleasant and smooth as possible," says Carol Schroeder, co-owner of Orange Tree Imports in Madison, Wis., and author of "Specialty Shop Retailing." "I think in this case, it's a small accommodation to take a credit card purchase for under $10."
A lot of folks, "especially younger people, are going cashless and use credit for everything," says Schroeder. "And we don't want to lose those transactions."
For many stores, regular relationships and small buys often lead to larger purchases. "I think that the cost of handling a small transaction is worth the potential of a larger sale," she says.
Rather than set minimums, some retailers are finding positive, inventive ways to build relationships and educate customers on the cost of credit cards.
Hendrick holds a monthly contest for a $20 gift certificate. Who is eligible: anyone who pays for an order with cash or checks. It gives him a chance to let customers know that all payment options aren't created equal.
Hendrick figures he loses about 3 percent of every credit card tab in fees. "The average customer doesn't know that," he says. While it may not sound like much, multiply it by thousands of customers and divide it by a slim profit margin and "it's a huge chunk," he says.
Entrepreneur Phil Waddell, who runs seven small businesses in South Carolina, is investigating switching to gift cards or gift certificates in lieu of credit cards at a sundries shop he owns where receipts often total $4 or less.
He worries that "you can run a lot of people off with that minimum."
And customer loyalty is key, Waddell says. "What are you getting for your relationship with us, as opposed to what money's trading hands."
Merchants are correcting misinformation, too.
"I think that because of the convenience of a credit card, and the onus that stores have put on paying by check, customers have the impression that they are making it easier on everyone by paying by credit card," Says Schroeder.
But for retailers, she says, that's not always the case. "2 to 4 percent off every single purchase is a lot of money."
See related: How credit card transactions work
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