New technology and changing consumer habits affect credit card costs

There are many ways to pay for a pizza, and most of them involve credit. New technology, and increased demand for delivery and takeout, could affect how much it costs pizzeria owners to accept these forms of payment. Whether customers use tap and pay, mobile payments, or pay at the table on a device, part of the total amount goes to the credit card processor and related entities. The exact amount varies, and restaurant operators sometimes don’t really know how much they are paying.

Consumers are increasingly using their cards and smartphones to pay for purchases. According to the 2023 Diary of Consumer Payment Choice from the Federal Reserve, in 2022 only 18 percent of consumers preferred using cash for payments, down from 26 percent in 2019. While the pandemic drove much of the preference for contactless payment, online orders, and other transactions that use credit and debit cards, the report noted that consumer preference for credit cards has increased since 2016, when the Fed began the survey.

There has been little change in the amount restaurant operators pay to accept cashless payments. “Newer technology has affected payment processing fees, but not always in the way that one would expect,” says Robert Livingstone, founder of Ideal Cost, which works with merchants to reduce credit and debit card acceptance fees. “Using Tap to Pay, Apple Pay, Google Pay, etc. should not significantly change credit card processing fees.”

Using Tap to Pay with a card or Apple Pay, Google Pay, or another smartphone payment requires EMV compliance, or the use of the chip instead of magnetic stripe reader. The chip is more secure and less susceptible to fraud than the mag stripe. If a pizzeria accepts cards by swiping or keying in the number, that is considered non-EMV compliant, which Livingstone says can add more than one percent and hundreds of dollars in penalties. It can also hamper businesses in chargeback disputes.

Another payment innovation that has captured attention is peer-to-peer payments such as Venmo and Zelle. These systems, while handy for friends repaying each other for dinner, are not designed for businesses to accept payments. “We always recommend that business owners confirm with their accountant whether the revenue will be reported correctly,” Livingstone says. “Most banks do not allow these apps to be connected to a business checking account.”

In general, Livingstone says, pizzeria owners should expect to pay three- to four-percent rates for credit card processing sales, and possibly more if they use third party delivery apps.

Payment Processing Fees and Discounts

One big trend that affects payment processing fees is the increase in delivery and takeout. These phone and online orders have Card Not Present (CNP) fees to offset the higher risk of fraud. “Based on the credit card processors we work with, if you tap or insert it’s cheaper than when the card is not present with online ordering,” says Dean Kashefi, CEO and an owner of InTouchPOS.

Because there are many entities involved in accepting credit cards, there are several factors that affect costs. “The trick about credit cards is the fees are not necessarily by the processor,” says Damian De La Rosa, director of sales operations at InTouchPOS. “There are so many different rates based on card types.”

The different fees cover various stages of authorization when a consumer pays with a card. Different processors might refer to the various fees with different names, or offer a flat rate that encompasses several fees.

The interchange fee, which can also be referred to as the wholesale fee or the swipe fee, is a percentage plus a per-transaction fee, which the merchant pays to the cardholder bank. The interchange fees are generally one to three percent. The fees are higher for credit cards than for debit cards, and higher for rewards cards such as those that offer airline miles.

Payment processors, which facilitate communication between the merchant, credit card network, and the cardholder bank, can charge monthly fees, per-transaction fees, and equipment lease fees.

Assessment fees are paid to the credit card networks. The four networks are American Express, Discover, MasterCard and Visa.

“It gets challenging for merchants to be able to budget,” Kashefi says. “If I was looking for a processor, I would ask three questions: are you charging me per transaction, what is the amount per transaction, and what is the interchange rate.”

Avoiding Confusion with Credit Card Fees

Businesses may not discourage people from using credit or debit cards, and may not add a surcharge to consumers who pay with a card. Beware of payment processors that offer “surcharge billing,” says Chris Lybeer, chief strategy officer of point of sale company Revel Systems. “They will say, ‘Sign up and customers will pay for your credit card fees.’ First there are federal rules about this, second there are state rules, and third of all the card brands want people to use credit cards.”

American Express, Discover, MasterCard and Visa can impose fees on businesses that violate agreements. Instead of adding a surcharge, pizzerias can offer consumers a discount for paying cash, and display both prices clearly on the menu.

Pizzeria owners should make sure the payment processor provides detailed, easy-to-read billing statements. The bill should show the number of transactions and the dollar amount that was subtracted from the sales total to pay the processing fees. Instead, Lybeer says, some processors simply deposit money into the restaurant’s account, and the owner doesn’t have access to details, such as whether they are being charged for not being EMV compliant or how much of the fees were for Card Not Present. “Knowledge is power,” he says. “See if you can get a sample statement.”

As with any vendor, an offer of “free” or “0% markup” should also be met with suspicion. “When something is free it’s too good to be true,” Lybeer says. “Something is wrong.”

Proposed Changes to Credit Processing Fees

Legislation might change some of the fees. The Credit Card Competition Act of 2023 proposes opening up payment processing networks to more competitors, potentially lowering the processing fees that merchants pay. The bill is currently in committee in the U.S. Congress.

Separately, the Federal Reserve proposed lowering the fees merchants pay for accepting debit cards. Merchants currently pay card issuers 21 cents plus 0.05 percent of the transaction amount, and the proposal would lower that to 14.4 cents plus 0.04 percent of the transaction amount. The Fed would have to vote on the proposal and collect public comment.

NORA CALEY is a freelance writer who covers small business, finance and lifestyle topics.