This article originally published in Self-Service World magazine, Nov. 2007.
Concern over high credit card fees paid by merchants is not a new issue, particularly for those in the convenience store and petroleum retail space. But now that you can use your credit or debit card to purchase a pack of chewing gum, a newspaper from a vending machine and rent a movie from a kiosk, retailers are paying even more attention to how credit card transaction fees take a large bite out of the profit of small transactions.The term "micropayment" originated with e-commerce and meant payments for items less than one cent. More recently, the term has been used to mean small transactions, typically of a dollar or less.
Apple's iTunes, which does the majority of its business in micropayments, charges between 99 cents and $1.29 for songs. Customers are billed on a weekly basis, presumably to aggregate charges and minimize interchange fees.
Interchange fees, the fees card issuers charge on each transaction, are at the heart of the brouhaha surrounding small or micropayments. Interchange fee structures can be complicated, with a flat fee plus a percentage of the transaction based on several factors. For small payments, the percentage is not the issue, the flat fee is.
I recently spoke with Eric Hoersten, vice president of information technology for redbox, which rents DVDs through a kiosk for $1 per night at various grocery store and McDonald's locations throughout the U.S. He explained to me the challenge of a fee structure that does not lend itself to lower ticket items.
For example, if the fixed fee is 15 cents per transaction, it's 15 percent of a $1 transaction versus .005 percent of a $30 transaction. And that's not counting the percentage of the transaction, which can be an additional 2 percent to 3 percent. This can make charging for low cost items prohibitive.
| For more information on micropayments, see: Saving On Credit Card Processing Fees, Forbes.com Card Processing Fees Baffle US Merchants, ePaynews.com |
The move to contactless cards is one more way to make it easier to pay with cards instead of cash. Hoersten thinks retailers prefer cashless because handling cash has challenges of its own and, in redbox's case, they need that credit-card number in case the DVD is not returned.
I asked Hoersten if he had any tips for other kiosk deployers who accept credit cards for small payments. He said that how you are classified by the card issuer is important since some categories have lower fees than others.
Other advice:
- Pay attention to the fees assessed• Look at how the fees are applied
- Different types of processors can have different fees, so search for one that has the best
- Have a comprehensive view of the situation before entering that market
- Interchange fees are the deciding factor for the category you're in
Hoersten also pointed out that new technology and market conditions have lowered transaction costs. For example:
- New communication options, such as cellular or IP/Internet-based connections, are faster and cheaper than land lines.
- Terminals and leased lines have become more affordable.
- It is easier for companies to accept credit cards and set up a merchant account.
Hoersten said the self-service industry needs to join in the fight to lobby for fees that are not as prohibitive. He holds out hope that interchange fees will be reduced or that card issuers will release a rate structure that is more accommodating.
"In the micropayments space," he said, "every penny makes a big difference."
David Drain is executive director of the Self-Service & Kiosk Association.
