Change is Hard: the True Cost of Credit
FEB 15, 2024 • New York Governor Kathy Hochul signed into effect this week a bill requiring local merchants to disclose, in full, and in advance, all credit-card related surcharges being applied to a purchase. The Gov. said:
“New Yorkers should never have to deal with hidden credit card costs, and this law will ensure individuals can trust that their purchases will not result in surprise surcharges.”
I’m all for it! Consumers should know what they’re paying for, and why. I agree with Gov. Hochul that trust is central to the consumer-business relationship, and transparency is crucial to achieving trust.
But if we’re gonna talk about transparency, let’s look upstream a little and talk about why businesses have started passing the surcharge onto the customer, and the economic impact of this decision on the business (and you).
First off: at Transom, we do not pass credit card fees onto the customer. I have come to accept that a book purchased from an indie bookshop is a kind of luxury good. While I believe in my heart that books are essential to mental, emotional, and civic health, I’m not blind to the fact that you could buy the book cheaper elsewhere, borrow it from a friend or the library, or read something commensurate online for “free” (more on that another time). I know my customers shop here to support local, because they believe a town deserves a bookstore, and they love the warm, friendly community space we’ve built (thanks, y’all!). So I eat that credit-card fee, which (again, in the spirit of transparency) is a flat $0.15 charge to swipe a credit card (or tap a phone), plus a processing fee of anywhere from 3.0% to 5.5% of the transaction amount.
That’s right: when you pay with credit card for a $10 transaction, the retailer probably owes the credit card processor about $0.50. And that’s on the gross transaction — not the net earnings. So if I normally keep about 25% of a $10 sale (after costs & expenses), that number just went down to 20%. Multiply that across the whole year and, we’re talking thousands of dollars — the equivalent of a couple months’ rent, or more.
(So if you’ve ever wondered how AmEx can afford to give you points and airline miles and other goodies for just spending money….well, you’re welcome.)
Now, I’m not telling you this to make you feel guilty, or even to stop you from using a credit card when shopping local. Further, I appreciate and fully support consumer-centric legislature (and I understand that consumers—not businesses—are the voters), but I do think the wording of the bill puts retailers in a bad light, as if they’re trying to pull one over on customers.
No, I do not accept that local businesses who choose to pass on those fees are trying to screw you out of a buck or two — they’re trying to stay afloat in an already very tough retail market. Those fees add up, and because most credit card processors take payment at the end of the month, retailers usually feel the pain acutely after all expenses are paid. For a lot of us, it can be the difference between a profitable month and an “oh shit” month.
So what’s next? Well, retailers could follow the letter of the law and print two prices for everything, and create signage that warns customers of the specific fees associated with credit card purchases. They could re-letter their gorgeous, minimalist chalkboard menu and clutter the cashwrap with surcharge notices. And as a consumer, you might end up having some awkward moments at the point of sale with local retailers who now feel legally obliged to tell you how much your muffin costs now, and why.
But what’s more likely to happen is that all fungible* prices will unilaterally go up. A local cafe whose average transaction is $8, and who sees about 80% of transactions paid with credit card, would be wise—and well within their right—to knock the price of everything up $0.20 or so to offset these fees. It’s logistically easier at the point of sale, and they don’t have to post fussy signage about it. And since they cannot (according to the new law) offer a cash discount, everyone will have to just pay the new, higher amount. This is probably not the intention of the bill, but it’s a possible outcome. And it’s one that consumers should not (as I note below) be pissed out off.
(*I say “fungible” specifically because many shops sell wares that don’t come with a Manufacturer’s Suggested Retail Price, or “MSRP.” Books do have a fixed price, so I can’t—nor would I ever—jack up the price beyond the sticker.)
So what can you do, as a loyal customer who wants to support local?
Sure, you could stop using a credit card but that’s just not entirely realistic. Credit cards are easy, more secure, and replaceable if lost. (Plus, statistically people spend more per transaction when they use a card, and even more when they tap — so be careful!) Cash is a pain, change is even worse, and both are increasingly rare.
Instead, here are a few things you can do to help you local buddies stay in business:
Buy a big gift certificate from your favorite local business, and use that for transactions. They get the money up front, which is awesome for cashflow, and they only get hit with the swipe fee once. (Some Point of Sale systems charge retailers to create gift certificates, so ask them first if it’s actually better.) Bonus points if you go in there with a hundred-dollar bill and buy a gift card with that; then the cash is gone, you have just one more card in your wallet, and they don’t pay a fee. (PRO TIP: some shops — like Transom — can put a balance on your account for you, which bypasses POS fees. Inquire within!)
Use a debit card instead. Fees are generally lower for debit card purchases, particularly when a PIN is entered by the customer, because the risk of fraud is much lower.
Combine transactions. What we call “AOV” or “Average Order Value” is a huge lever in staying profitable. Maybe you only need one muffin or one book at the moment. But you might need be low on coffee beans at home, so go ahead and buy both now—or tack on a second book you know you’ll want to read in a couple weeks.
Use cash for under-$10 transactions. Yeah, I know, that’s a pain in the ass. But it helps keep costs down. As noted above, if you’re buying a $3 coffee, buy a gift card or something else as well to drive up AOV and keep relative fees down.
Embrace transparency. This one’s a super-duper longshot, but find out more about a local shop’s margins (aka, the amount they keep per item sold). If they have custom merch (t-shirts, totes, mugs, etc), they likely make a little more off of that transaction than a wholesale-bought item. If you can tack on a high-margin item or two to each transaction (or buy those as gifts in the holiday season), you’re helping a lot.
Don’t be pissed about surcharges. Know that when you buy a $3 muffin, the cafe likely keeps very little of that money. So when they pass a surcharge onto you, it’s not so they can go home and dive into their giant Scrooge McDuck vault of money—it’s so they can pay their utilities bill and show up tomorrow with more warm muffins for you.
More than anything, just keep shopping local. Credit or debit, crypto or ducats, tap, cash, or krugerrands, whatever you can spend to keep your locals’ lights on — we appreciate it more than you could calculate.
