“Convenience fees” are extremely rare in restaurants, but those familiar with the credit card processing industry say technological innovations and changing personal finance habits could cause restaurant owners to reconsider their fear of chasing. customers with surcharges.
“Historically, most marketers felt it was not good for business because people felt like they were being ripped off,” says David Robertson, publisher of The Nilson Report, which covers the payments industry. “Low-margin businesses would like to charge, but no one wants to be the first merchant to do so.”
The first Charleston-area restaurants to pass on their credit card processing costs were Tu and Xiao Bao Biscuit, which sparked controversy by illegally rolling the charge into the sales tax.
After The Post and Courier reported last week on the practice, which also violates credit card company rules, co-owner Josh Walker in a long Instagram post credited the convenience fee idea to its credit card processor, Linda Hancock of Dezba payment solutions. (The Friday afternoon post, which included an apology “that any action on our part may be perceived as not being forthright,” said deleted since from Xiao Bao Biscuit’s stream.)
Hancock did not return messages seeking comment, so it’s unclear exactly what she advised clients or why. But Robertson, who is unfamiliar with the specific situation, says approving the convenience fee is a way for processors to try to curry favor in an increasingly crowded field.
“They want to keep their merchant happy,” he says. “They don’t want their merchant to go anywhere else.”
Every business that accepts credit cards must hire a credit card processor to transact. Until about 20 years ago, the processing role was played mainly by banks, but it is now mainly carried out by independent companies, which can be as small as one person.
In the Charleston metropolitan area, the number of payment processors jumped between 2006 and 2012, from 16 to 57, according to the Bureau of Labor Statistics. (The tally for three of the next four years “did not meet disclosure standards,” though the agency in 2014 reported a smaller tally of 25 processors.) This kind of growth is consistent with national statistics, which show the number of people employed by the credit card processing industry increased by 28% between 2006 and 2016.
Although there has been very little written about the credit card processing industry, it is possible that people are drawn to the industry because there is now more money to be made in it. The average annual salary of a processor in 2006 was $56,334. In 2016, the national figure was $88,344.
Credit card processors typically get a cut of each transaction, so they have benefited from Americans’ increased reliance on credit cards. A recent survey by TSYS processor found only 11 percent of consumers prefer to pay in cash.
“More of us are using cards, and 10 years after the Great Recession, more of us are feeling more frisky about using credit cards,” Robertson says.
But what’s good for processors isn’t necessarily good for small businesses, like restaurants, who have to pay the fees associated with credit cards, including the cost of their various rewards programs.
As Walker wrote of the 2.5% convenience fee he adopted, “The increased use of credit cards is cutting the money we make, and as small business owners, that makes a serious difference…these fees only partially offset the cost of credit cards, which I mean clearly does not mean we make money.
Processors tend to like working with restaurants because they have extremely low chargeback rates, which happens when a cardholder disputes charges. When customers are unhappy, they are more likely to complain to the restaurant manager than to their bank. “If there is a problem, you settle it before withdrawing your credit card”, explains Ramon DeGennaro, professor of banking and finance at the University of Tennessee.
Still, DeGennaro isn’t convinced that credit card processors would promote convenience fees as a way to woo businesses, because there’s a risk restaurant owners mishandle the surcharge. “These things really damaged the reputation,” he says. Still, he thinks restaurateurs can embrace them anyway.
“Fees are rising and merchants have to deal with it,” he says.
Ten states have banned convenience fees, but because that group includes some of the most populous states, Robertson says more than half of Americans live in places where convenience fees aren’t allowed. If other states pass similar legislation, he adds, restaurant convenience fees could well be doomed. Otherwise, however, he thinks they will grow in popularity as more merchants switch to tablet-based payment systems.
“The device offers the merchant more than just card processing,” he says. “It controls inventory, it runs your loyalty program, and because it’s consumer-facing, you can tell them things about it, too.”
For example, a screen can prompt a restaurant to approve a convenience fee — and perhaps reiterate the reasoning Walker laid out in his Instagram post.
“The new system makes surtaxes easier,” says Robertson. “And I suspect we’re going to see a lot more.”