George R wrote:

NFriday wrote:Hi- Thanks for the insider's look. Does the retailer get charged anything when a debit card is used as opposed to a credit card?

Yes, the retailer is charged though at a lower rate. If it's processed as a credit card then the % is lower. Perhaps 1.25% instead of 2%. If it's processed as a debit card - that means entering your pin code on the machine - then the fee is less, maybe just 25 cents.

Let me add my thanks to you (and others) for taking the time to provide these useful explanations.

I'm relieved to hear that it's a bit better for the retailer to process a purchase as a credit charge rather than a debit charge. I try to make purchases as credit charges rather than debit cards whenever I can, because my bank---a credit union, actually---charges a 50-cent fee on every debit transaction (and ATM withdrawals too, which is annoying at a restaurant that only takes cash, or rather, at the nearest ATM thereto). But I guess that's what the credit union feels it needs to do to keep afloat. I often feel there's one gerbil in a wheel powering the entire operation.

mrsm wrote:George R., I'll chime in with the others to thank you for your insider's view. If you don't mind indulging us a bit further, what happens if it turns out that the customer was using a credit or debit card fraudulently?

If the car was used fraudulently, then the merchant will have to eat it.

Banks will generally protect credit card customers against fraudulent use of their cards. I think it's a Federal regulation that the customer isn't be liable for more than $50 for fraudulent use of a credit card if reported promptly. However, many banks protect customers 100% on this.

Please note the rules are different for debit cards. Protection is much more limited which means someone with your debit card and PIN can empty your entire bank account regardless of the amount involved. You should eventually get all your money back, but it's usually a long battle with the bank.

That's why I don't have a debit card; it's the keys to the kingdom. They're convenient, but I don't feel they're worth the risk.

When a customer reports an improper charge on either a credit card or debit card to a bank, then the bank starts what is known as a charge-back. This means the money is taken out of the merchant's account and the business is asked to prove the charge is legitimate.

The burden of proof is on the business. If they can't prove it then they lose the money. The gold standard of proof is a signed charge card slip. The bank will compare the signature on the slip to the signature they have on record for the customer.

If the signatures match the bank will probably reverse the charge-back and return the funds to the merchant while telling the customer "tough luck." If they don't match (or are not present) then the merchant is the loser.

As you see, the bank is the arbiter in these situations. Because you're dealing with a large bureaucracy, the results may not always be consistent or appear rational to outsiders.

About this time you are thinking what about telephone or internet orders? The answer is it gets tougher to prove. If a customer sends a signed fax that would work, but it's not the norm.

I've never had to deal with a charge-back, so I can't tell you much more. However, I can tell you some of the standard security measures.

One is that a merchant will ask you for the 3-digit security code on the back of the card. That number is not on the magnetic strip, so you need the card in hand to get it. Also, there is address and zip code verification. Many systems require that information when the card is not present. If the numbers don't match that's a warning.

Of course, people often ask that an item be shipped to an address different from their billing address, such as an office or to a gift recipient. Most of these are legitimate, but there is risk to the merchant. Address verification doesn't work as easily with foreign orders. It can be done. You have to call the processor and they may be able to do it but could take several days.

Again there is a cost. Charges processed when the card is not present are at a higher rate to cover the added risk. Similarly, when a card number is entered manually instead of swiped the rate is higher.

By the way, the overall loss rate on credit cards is about 0.1% or one dollar per thousand. The surcharges are higher than that. I suspect the banks make a profit on the surcharges. They probably are happy when the magnetic strip on your card stops working because it means more money for them.

By the way, the banks are phasing out magnetic strip cards with new cards containing an imbedded chip. The Europeans have been using this for years and it is considered more secure. Later this year merchants will need a new terminal with a chip reader in it. Either a signature or a PIN will still be required.

After October 1st, merchants who swipe a card rather than using the chip will be liable for any fraudulent charges they process. The magnetic stripes will be around for a while, but the move is definitely toward chips.

The US is the last major market to use magnetic strip cards. Fraud losses in the US were about $6 billion last year. That's about half of all fraud losses world wide, even though we are responsible for about one-fourth of all transactions.

Based on experience elsewhere, the card companies hope to cut that loss in half.

stevez wrote:I just got an offer in the mail for a free Square Reader (iPhone, iPad & Android compatible) and a flat 2.75% per swipe fee. No other fees at all. So, credit cards can be accepted rather inexpensively, if someone is so inclined.

It's been about a year since I looked into Square. Details may have changed, but this is what I recall.

Square is indeed useful for small businesses. All you need is a smart phone and a Square Reader. (There are other similar services, but Square is the first mover.) You can also purchase the Reader at some stores (I think it was about $10), and will receive a credit for the cost of the Reader when you process your first charge.

The 2.75% rate is reasonable if there are indeed no other charges. (The rate initially was 3%, but they've dropped it.)

Square would also be handy for a retail merchant who occasionally conducts business outside his/her usual venue such as at a trade fair.

As always, it's a good idea to check the fine print. The biggest drawback to Square involves large transactions. If you charge more than $2,000 in a day, they may withhold payment for up to 30 days. There are exceptions to this, but it's a good idea to check the details beforehand.

A minor issue is that the Reader may become damaged if too much pressure is applied when swiping a card. Also Square only sends receipts by email. If you want to print out receipts you need a separate printer which adds to the bulk factor.

Finally, Square will be offering a chip-compatible Reader for the new credit cards.

George R wrote:

mrsm wrote:George R., I'll chime in with the others to thank you for your insider's view. If you don't mind indulging us a bit further, what happens if it turns out that the customer was using a credit or debit card fraudulently?

If the car was used fraudulently, then the merchant will have to eat it.

Banks will generally protect credit card customers against fraudulent use of their cards. I think it's a Federal regulation that the customer isn't be liable for more than $50 for fraudulent use of a credit card if reported promptly. However, many banks protect customers 100% on this.

Please note the rules are different for debit cards. Protection is much more limited which means someone with your debit card and PIN can empty your entire bank account regardless of the amount involved. You should eventually get all your money back, but it's usually a long battle with the bank.

That's why I don't have a debit card; it's the keys to the kingdom. They're convenient, but I don't feel they're worth the risk.

.

My debit card number was hacked somehow five years ago.

The perps used it once, to buy tires someplace downstate.

My bank telephoned me immediately to ask about this out-of-pattern purchase, and as soon as I confirmed it wasn't me they closed down that debit card number and sent me another. The new debit card arrived in two days. I was not charged for the tires.

Glad to hear it was handled so well for you.

I should have said that liability protection is much more limited. With credit cards your liability is generally limited to $50. With debit cards I believe there is no limit.

If someone out there knows more about this please correct me.

Of course, what's really important is how your bank deals with a situation. For Roger Ramjet, the bank was on top of things and did a good job.

mrsm wrote:George R., I'll chime in with the others to thank you for your insider's view. If you don't mind indulging us a bit further, what happens if it turns out that the customer was using a credit or debit card fraudulently?

George said that the merchant eats the cost, but he left something out: The merchant also gets hit with a processing fee. When we were running a web-based children's bookstore, occasionally someone would get their bill, forget that they'd had something shipped to a niece, and reverse the charge, thinking it's fraudulent. That cost us $35 a pop, nonrefundable.

Even if we contact the customer and get them to call the credit card company and say, "oh yeah, that one's all right," we're still out the $35... on what was probably a $14 purchase. For a restaurant, this is less likely: there's paper receipts, and you're more likely to remember where you've been, and probably less likely for the credit card company to take your word that you didn't eat there.

And in the reverse, there's no 'bounty' for finding fraud. If we got a charge on a card from South Carolina to ship 20 copies of Harry Potter to Singapore (along with Rumania and Nigeria, the places most likely to have something fraudulent ordered), we're pretty sure it's fraud. For purchases that size, we'd contact the buyer and ask for more identification... and inevitably the order would evaporate. Contacting Visa/MC to say there was likely fraud had no point, there isn't even a number for that.

Joel - interesting on the no bonus for finding fraud. Back in the very late 60s/early 70s I managed the front counter of the Record Hunter in NYC (straight out of high school) and we would get books listing stolen card numbers which we checked for every cc transation. If you found one, the bank would pay you $75 or higher ... up to $200 ... big money when my takehome pay was $83 a week! We loved stolen cards and were very vigilant!

JoelF wrote:

mrsm wrote:George R., I'll chime in with the others to thank you for your insider's view. If you don't mind indulging us a bit further, what happens if it turns out that the customer was using a credit or debit card fraudulently?

George said that the merchant eats the cost, but he left something out: The merchant also gets hit with a processing fee. When we were running a web-based children's bookstore, occasionally someone would get their bill, forget that they'd had something shipped to a niece, and reverse the charge, thinking it's fraudulent. That cost us $35 a pop, nonrefundable.

Even if we contact the customer and get them to call the credit card company and say, "oh yeah, that one's all right," we're still out the $35... on what was probably a $14 purchase. For a restaurant, this is less likely: there's paper receipts, and you're more likely to remember where you've been, and probably less likely for the credit card company to take your word that you didn't eat there.

And in the reverse, there's no 'bounty' for finding fraud. If we got a charge on a card from South Carolina to ship 20 copies of Harry Potter to Singapore (along with Rumania and Nigeria, the places most likely to have something fraudulent ordered), we're pretty sure it's fraud. For purchases that size, we'd contact the buyer and ask for more identification... and inevitably the order would evaporate. Contacting Visa/MC to say there was likely fraud had no point, there isn't even a number for that.

Thanks Joel,

I didn't mention a processing fee for charge-backs as we have not run into that. I expect such fees vary depending on the processor. We've only had one charge-back which was resolved in our favor and there was no fee that time.

Speaking of fees I can tell you a horror story which happened years ago to a business I knew. A clerk who was not very good with numbers mistakenly entered an $800 sale as $80,000. It was on the customer's business credit card and went thru! The customer signed the slip without looking. No one at the store noticed it until the next morning when they saw that the automatic closing had produced a large bank deposit.

Of course the merchant later had to issue a credit for the difference. However, it cost the business. I don't know the exact amount, but the processing charge for $80,000 at say 2.5% is $2,000! And there was a similar fee for issuing the credit! The result was that mistake cost the merchant somewhere in the vicinity of $4,000.

I want to make a few points.

For years, I had all the major banks encouraging me to accept credit cards in our manufacturing business. Most of the banks - Chase, AMEX, BA, etc. - showed us surveys that people spend 20-30% more on plastic. I do believe that. We did start accepting cards on retail parts sales.

Most of the small business people always state the fees as the reason they don't accept cards. However, they NEVER calculate the REAL COSTS of accepting cash:

1) greater chance of defalcation (theft).
2) cost of armored car service.
3) Lost sales due to customer desires
4) Bad checks

Personally, I always carry cash when I go shopping, especially if I have plans to purchase in a situation where there are chances to negotiate. You can talk all you want about credit cards and the like, but MOST people prefer cash over all forms of payment. For example, last week, a guy offered 60# of fresh produce for $10. I took him up and got it. The others, well, had to run to the ATM. My wife and I especially use this when attending any liquidation sales.

I have never used a debit card until the past month when I discovered that my favorite discount grocer - Winco Foods - does NOT accept credit cards. It is NOT a practice that I plan to do very often.

Something else to take into consideration is that merchants are now permitted to charge up to a 4% surcharge on credit card purchase per a court settlement. Technically merchants have always been permitted to charge differential prices but they were required by their merchant agreements to present the lower price as a "cash discount" rather than the higher price as a "credit card surcharge." So far it appears the only merchants who have regularly availed themselves of either option are gas stations. But merchants do have the option to charge more for a credit card price no matter which way they frame the price differential.

FYI: I manage a restaurant here in the city. Last year we paid almost $40,000 in credit card processing fees (we take everything, including AMEX). And we have a good deal with our merchant services processors.

So depending on your revenue and your arrangements, obviously YMMV, but for any restaurant operator $40,000 is a sizable chunk of change. We decided that not accepting credit cards would not work with our business model, and so we have no choice. Cost of doing business I suppose.

40K?

what's the annual sales ?