Credit Card Processing - Charging a Minimum on Credit Card Purchases
One of the most contested issues in credit card processing is whether a merchant should have the ability to impose a minimum purchase amount on credit card transactions.
At one point or another we've all walked into a store to make a quick purchase and after seeing a sign that read "minimum credit card purchase $10," realized we didn't have any cash.
People handle this situation very differently.
Some of us shrug and leave to find another store while others let the merchant know that they're not supposed to dictate a minimum purchase amount on credit card transactions.
Merchants set a minimum on credit card purchases to avoid losing money on smaller transactions where processing fees are larger than the profit made on the sale.
While it makes business sense to do this, three of the four major card brands specifically forbid doing so.
Visa says "Always honor valid cards in your acceptance category, regardless of the dollar amount of the purchase.
Imposing maximum or minimum dollar amounts in order to accept a Visa card transaction is a violation of the Visa rules.
"1 MasterCard says "A Merchant must not require, or indicate that it requires, a minimum or maximum Transaction amount to accept a valid and properly presented Card.
"2 Discover says "You may not require that any Cardholder make a minimum dollar purchase in order to use a Card and you may not limit the maximum amount that a Cardholder may spend when using a Card except when the Issuer has not provided a positive Authorization Response for a Card Transaction.
"3 American Express doesn't specifically mention guidelines regarding minimum purchase amounts but they do publicly discourage any practice that would hinder card acceptance.
American Express has also gone on the record saying that they don't condone the practice.
Credit card companies discourage minimum purchase amounts because they don't want to lose money when consumers are excluded from using their card.
Similarly, merchants don't want to lose money on processing fees when customers use their card to make a small purchase.
Who's right or wrong is a debate that can go on forever.
What matters is who has the power and in this case it's the credit card originators like Visa and MasterCard.
Some merchants will continue to dictate a minimum on credit card purchases regardless of whether the practice is allowed.
That's certainly their choice, but there are ways to avoid losing money on small credit card purchases without having to enforce a minimum purchase policy - all it takes is a little creative pricing.
The first and simplest option to avoid losing money on small credit card transactions is to raise prices across the board to offset potential loses.
Raising prices will negate the need to institute minimums on credit card purchases but it may hurt business by making prices less competitive.
If you're considering this option, be sure to do research to calculate what price increase, if any, your market will allow.
The second way to avoid losing money on credit card purchases without imposing a minimum is to let customers pay for processing fees.
Charging customers a surcharge or penalty fee for paying with a credit card is also forbidden by credit card companies, but offering customers a discounted price for paying with cash is perfectly acceptable.
There's an article available on this subject at merchantcouncil.
org that completely explains the why and how behind offering a cash discount that you should read if you're interested in learning more.
For now, here's the gist of things.
Instead of imposing a minimum on credit card transactions, create a dual pricing model.
Charge a higher price for credit card payment and offer a discounted price for cash.
This type of pricing model will help to promote cash purchases across all transactions, not just small ones, and it will still allow your business to offer competitive prices.
1 - Source: "Card Acceptance and Chargeback Management Guidelines for VISA Merchants", Section "VISA Rules", "Dollar Minimums and Maximums" 2 - Source: "MasterCard Rules" page 125, "Minimum/Maximum Transaction Amount Prohibited" 3 - Source: "Discover Operating Manual", page 26, "Maximum/Minimum Dollar Amounts and Other Limits"
At one point or another we've all walked into a store to make a quick purchase and after seeing a sign that read "minimum credit card purchase $10," realized we didn't have any cash.
People handle this situation very differently.
Some of us shrug and leave to find another store while others let the merchant know that they're not supposed to dictate a minimum purchase amount on credit card transactions.
Merchants set a minimum on credit card purchases to avoid losing money on smaller transactions where processing fees are larger than the profit made on the sale.
While it makes business sense to do this, three of the four major card brands specifically forbid doing so.
Visa says "Always honor valid cards in your acceptance category, regardless of the dollar amount of the purchase.
Imposing maximum or minimum dollar amounts in order to accept a Visa card transaction is a violation of the Visa rules.
"1 MasterCard says "A Merchant must not require, or indicate that it requires, a minimum or maximum Transaction amount to accept a valid and properly presented Card.
"2 Discover says "You may not require that any Cardholder make a minimum dollar purchase in order to use a Card and you may not limit the maximum amount that a Cardholder may spend when using a Card except when the Issuer has not provided a positive Authorization Response for a Card Transaction.
"3 American Express doesn't specifically mention guidelines regarding minimum purchase amounts but they do publicly discourage any practice that would hinder card acceptance.
American Express has also gone on the record saying that they don't condone the practice.
Credit card companies discourage minimum purchase amounts because they don't want to lose money when consumers are excluded from using their card.
Similarly, merchants don't want to lose money on processing fees when customers use their card to make a small purchase.
Who's right or wrong is a debate that can go on forever.
What matters is who has the power and in this case it's the credit card originators like Visa and MasterCard.
Some merchants will continue to dictate a minimum on credit card purchases regardless of whether the practice is allowed.
That's certainly their choice, but there are ways to avoid losing money on small credit card purchases without having to enforce a minimum purchase policy - all it takes is a little creative pricing.
The first and simplest option to avoid losing money on small credit card transactions is to raise prices across the board to offset potential loses.
Raising prices will negate the need to institute minimums on credit card purchases but it may hurt business by making prices less competitive.
If you're considering this option, be sure to do research to calculate what price increase, if any, your market will allow.
The second way to avoid losing money on credit card purchases without imposing a minimum is to let customers pay for processing fees.
Charging customers a surcharge or penalty fee for paying with a credit card is also forbidden by credit card companies, but offering customers a discounted price for paying with cash is perfectly acceptable.
There's an article available on this subject at merchantcouncil.
org that completely explains the why and how behind offering a cash discount that you should read if you're interested in learning more.
For now, here's the gist of things.
Instead of imposing a minimum on credit card transactions, create a dual pricing model.
Charge a higher price for credit card payment and offer a discounted price for cash.
This type of pricing model will help to promote cash purchases across all transactions, not just small ones, and it will still allow your business to offer competitive prices.
1 - Source: "Card Acceptance and Chargeback Management Guidelines for VISA Merchants", Section "VISA Rules", "Dollar Minimums and Maximums" 2 - Source: "MasterCard Rules" page 125, "Minimum/Maximum Transaction Amount Prohibited" 3 - Source: "Discover Operating Manual", page 26, "Maximum/Minimum Dollar Amounts and Other Limits"
