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Big Credit Card Firms Agree to Cut Fees They Charge Merchants

Josh Smith

Swipe, insert, or tap — sound familiar? According to recent research, 66 percent of all point-of-sale transactions are completed by card. And this number is expected to grow with technological developments and time-conscious consumers looking for the fastest payment method. Yet, there are still many businesses that don't accept credit cards as a form of payment. Why? Because merchants are charged a fee every time consumers swipe, insert, or tap their plastic card.

Recently, large credit card companies have lowered these merchant fees. This change is, of course, beneficial to business owners. And, these lower fees could also prove to be a strategic move on the part of credit card companies.

What are merchant fees?

Merchant fees are costs that business owners must pay to credit card companies and financial institutions for accepting their credit card as a purchase method. Each time a customer makes a purchase using a specific credit card, merchants have to pay a percentage and a fee to the issuing bank, the credit card company, and the software processor.

Credit card firms are responsible for determining the merchant fee. On average, merchants pay 2 percent of each purchase. It is often a challenge for credit card companies to find the ideal percentage to charge, especially since there are many considerations when determining the fee including the type of card being used, how the transaction is processed, the amount being charged, and the kind of business.

Benefits for merchant

Lower merchant fees are an obvious benefit to business owners. They will now be able to retain more money per customer transaction. Recently, American credit card companies Visa and Mastercard decided to lower merchant fees for Canadian companies. This lower percentage is estimated to save small Canadian businesses over $192 million a year. With these savings, more organizations will accept credit cards as a form of payment.

More payment options will increase customer satisfaction for business owners. A study from WePay discovered that 58 percent of small businesses are regularly asked if they accept credit cards. However, many small to mid-size enterprises choose to opt out of this payment method because high credit card fees equal little profit. Out of the 27 million small businesses nationwide, over half don't accept American Express cards; this is a significant opportunity missed considering the 47.5 million American Express cards currently in circulation.

Furthermore, various studies show that when consumers can pay with credit, they are more likely to make impulse purchases, join loyalty programs, and spend more. These are all key drivers of business growth and success. Increased spending is associated with credit cards because consumers like the "money-less" transaction. Compared to the actual exchange of money for goods, a credit card doesn't cause any immediate dent in the consumer's wallet.

Benefits for credit card brands

Credit card companies are brands. They determine the fee and percentage to charge merchants, but they do not take on any of the risks themselves. Their primary goal is to be the most widely used card brand, accepted in more establishments, big and small. Consumers will opt for a credit card brand that is widely recognized so lowering merchant fees will attract more businesses, and in turn, more cardholders.

Lowering merchant fees could be a recipe for long-term growth and success for both the merchants looking to increase profits and the credit card companies seeking to boost their brand presence.