The Hidden Costs of How You Pay: Understanding the Impact on Small Businesses
Your payment method can make a difference to the financial health of small businesses, shedding light on the hidden costs of your purchases.
When you make a purchase, how you choose to pay can have a significant impact on the business you’re supporting. Credit card fees, in particular, can be a burden for small businesses, eating into their profits. While you may not feel the direct consequences, understanding the hidden costs of your payment method can help you make more informed choices and potentially support local businesses in a meaningful way.
The Impact of Credit Card Fees
Paying with a credit card often comes with higher fees for businesses compared to other payment methods. Jeff Hallenbeck, head of financial partnerships at Forter, a fraud-prevention firm, explains that small businesses, in particular, can feel the pinch of credit card fees, as they may not have large profit margins to absorb the costs. While you may enjoy the benefits of rewards and points, it’s essential to consider the financial strain on small businesses.
Unveiling the Hidden Costs
When a business accepts credit card payments, they may owe fees to multiple companies involved in the payment process, including Visa or Mastercard, the bank that issued your card, and other financial institutions. Brian Riley, co-head of payments at Javelin Strategy & Research, provides an example of a candle store with $600,000 in annual sales. If you make a $100 credit card purchase, the store could owe approximately $2 to $3 in fees. However, if you pay with a debit card, the fees for the store could be as low as 50 to 60 cents. It’s worth noting that debit card fees are regulated by the government, while credit card fees are not.
The Complexity of Payment Fees
The complexity of payment fees goes beyond simple credit card transactions. Online stores generally pay higher fees than physical stores, and different industries, such as gas stations or fast-food restaurants, have varying fee structures. Additionally, larger businesses often negotiate lower fees compared to smaller ones. While high-end rewards cards may cost merchants more, using platforms like Square or making purchases from Etsy shops may result in similar fees for both credit and debit card payments.
The Impact on Small Businesses
For small businesses, payment fees can be a significant operational cost. Pete Mulvihill, co-owner of Green Apple Books in San Francisco, highlights how card payment fees rank as one of their largest expenses after purchasing books, employee salaries, and rent. To mitigate these costs, Mulvihill regularly renegotiates payment contracts. He also suggests that paying with cash can benefit smaller businesses, as it helps reduce their payment fees. However, it’s important to note that accepting cash also comes with its own costs and risks.
Making Informed Choices
Ultimately, the choice of payment method is up to you, considering factors such as convenience, protections, and rewards. For large businesses like Home Depot or Amazon, the impact of how you pay may be negligible, as they have the power to negotiate lower fees. However, when supporting small businesses, opting for cash or a debit card can make a difference. Money-transfer apps like Venmo or Zelle, linked to your bank account, also tend to have lower fees for merchants compared to credit cards. It’s crucial to be aware that credit cards offer better protections in case of issues, but it’s equally important to only use trusted payment apps with merchants you trust.
Conclusion: While it may seem inconsequential, how you choose to pay for your purchases can have a significant impact on small businesses. Understanding the hidden costs of payment methods allows you to make informed choices that support local businesses in a meaningful way. Whether it’s opting for cash, a debit card, or a trusted money-transfer app, your decision can contribute to the financial health of the businesses you care about.