Can Merchants Set Minimum Amounts On Card Transactions?
So, you’ve opened your business, and you’re starting to rack up a lot of sales. You’ve even signed up for a merchant account so your customers can use their credit cards. Things seem to be going great – until you notice something a little unsettling.
You knew when you opened your merchant account that you’d have to pay for credit (and debit) card processing, but $0.15 or $0.20 per transaction (in addition to the percentage charge) didn’t seem like it would be a big deal. Unfortunately, a lot of your customers come in and only buy a single item, maybe something for $3.00 or less. They don’t carry any cash and want to use their credit card. However, your margins are so thin on low-priced items that the fixed per-transaction fee you pay for processing can wipe out your profit. In fact, you might even lose money on some sales if the customer uses a credit card.
Naturally, you’d like to avoid this situation altogether. You remember being in other stores that had a policy of only accepting “plastic” if the total sale was at least a certain amount (say, $10.00, for example). You’d like to implement a policy like this yourself, but you’re not sure if it’s legal.
In this article, we’ll review the laws and agreements that govern setting a minimum amount on credit and debit card transactions. We’ll also discuss the pros and cons of doing so, even in situations where it’s perfectly legal. After all, you don’t want to risk losing sales when customers either can’t or don’t want to buy enough items to meet your required minimum. Finally, we’ll review the differences between setting a minimum purchase requirement on credit card and debit card transactions.
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Can You Implement A Minimum Charge On Credit Card Purchases?
Here’s the short answer: Yes, you can set a minimum charge on credit card purchases. However, there are several legal and contractual limitations on doing this, so keep reading! You’ll want to understand all the applicable restrictions on this practice before you try to implement it in your business.
Prior to 2010, setting a minimum credit card charge was governed entirely by the processing agreements set forth by the major credit card associations (i.e., Visa, Mastercard, etc.). Every major card brand prohibited the practice, because they wanted to make money off credit card usage and they simply didn’t care if merchants lost money on small-ticket transactions.
However, in 2010, the Federal government weighed in on the issue. When the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress in the aftermath of the Great Recession of 2008, it took many steps to rein in the reckless behavior of the big banks that had contributed to the recession. Part of this legislation, the Durbin Amendment, contains the following provision:
(3) NO RESTRICTIONS ON SETTING TRANSACTION MINIMUMS OR MAXIMUMS.–A payment card network shall not, directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability of any person to set a minimum or maximum dollar value for the acceptance by that person of any form of payment.
In other words, the Federal government has effectively overruled the previous contractual limitations imposed by the credit card associations. Merchants are now free to set a minimum purchase requirement if they want to. However, their ability to do so is not unlimited. A separate provision in the Durbin Amendment authorizes the Federal Reserve to define the highest allowable minimum purchase requirement that may be imposed, and they can change this limit from time to time if they see fit. As of this writing, the highest allowable minimum purchase requirement that merchants can set is $10.00. You’re free to set a lower requirement if you want to, but you cannot set a limit above this amount.
While the credit card associations can no longer stop you from setting a minimum purchase requirement, they have modified their processing agreements to ensure that any minimum imposed is fair and equitable. Visa, Mastercard, and Discovery all have several stipulations on setting minimum charges in their processing agreements. The gist of these stipulations is that a minimum purchase requirement, if imposed, must treat all credit cards and all issuing banks equally. In other words, you can’t require a minimum purchase for Visa, but not Mastercard. You also can’t set a minimum purchase for one issuing bank, but not another. Having different minimum purchase amounts for different cards or issuing banks is also not allowed. American Express is a little different, as they don’t mention minimum purchase requirements at all in their processing agreements. We recommend that you apply the same minimum purchase requirements for American Express cards as you do for any other card brand.
Can You Implement A Debit Card Minimum Purchase Amount?
Now that we’ve established how you can set a minimum purchase requirement for credit cards, you’ll probably want to know if the rules are the same for debit cards. Of course, they’re not. That would be too easy, right?
With few exceptions, the general rule is that you cannot impose a minimum purchase requirement for debit card transactions. Why not? Well, the Durbin Amendment also placed some strict limits on the interchange fees (and PIN debit network fees) that banks could charge for processing debit transactions. However, the Amendment doesn’t prohibit the credit card associations from imposing their own restrictions on minimum purchases the way it does for credit cards. Naturally, the card networks responded to this change in the law by immediately strengthening their prohibitions against minimum purchase requirements for debit cards. While this might seem unfair to merchants, realize that the new limits on debit card processing fees cut deeply into the card networks’ revenue. Being able to prevent merchants from imposing minimum purchase requirements has the effect of partially compensating the card networks for this loss of income.
How will these changes affect your business? As usual, there isn’t a simple answer, and the impact on your processing costs will depend on what type of processing rate plan you have, among other factors. If your merchant account uses an interchange-plus or membership-based processing rate plan, the inability to set a minimum purchase requirement won’t be a problem. That’s because both of these types of plans pass interchange and PIN debit network fees directly onto you. Interchange fees and PIN debit network fees for debit card transactions are very low, thanks in part to the Durbin Amendment and also because these types of transactions cost very little to process and involve a very low degree of risk to the processor. In other words, you won’t need to set a minimum purchase requirement in the first place, because processing small-ticket sales won’t have an impact on your profitability.
What Happens If My Processor Treats Debit Cards As Credit?
Of course, things are never simple in the processing world. Merchants who are on a flat-rate or tiered pricing plan have several other factors to consider. Flat-rate pricing, such as that offered by Square (see our review), charges the same rate for both credit and debit cards, essentially treating debit card transactions as if they were credit card transactions. While this makes your costs much more predictable and easy to understand, it also means that you’re paying far more than necessary to process debit card transactions.
Tiered pricing, on the other hand, varies depending on your processor and how they structure their tiered rate plans. Some processors have separate (and usually much lower) tiers for debit card transactions, while others lump both debit and credit card transactions together and treat them identically.
Why is there a difference in how debit card transactions can be treated? The answer usually depends on how the transaction is verified at the point of sale. Briefly, debit card transactions can be verified using either the PIN debit method or the signature debit method. With PIN debit, the customer verifies their identity by inputting their 4-digit Personal Identification Number (PIN) when making a purchase. This routes the transaction to a PIN debit network rather than a credit card network. Because this type of transaction is considered to be more secure, PIN debit network fees are very low.
Signature debit transactions, on the other hand, require the customer to sign their receipt to verify their identity. With this verification method, the transaction will be routed to a credit card processing network and regular interchange fees will be assessed. Remember, published interchange fees for debit transactions are also very low. However, your merchant account provider may or may not pass those lower rates onto you. If you have a flat-rate pricing plan or a tiered plan that doesn’t include a separate tier for debit transactions, you’ll end up paying the same processing rates as you would for credit card transactions. For more details on how debit card transactions are processed, please see our article, The True Cost Of Debit Card Transactions.
If you’re paying the same processing rates for both debit and credit card transactions, can you still impose a minimum purchase requirement that applies to both types of transactions? You would certainly be justified in doing so since you’re paying an artificially high amount for accepting debit cards. The answer is that it will depend on your processing agreements with the major credit card associations and your contract with your merchant account provider. We recommend that you refer to those documents before setting a minimum purchase requirement. You might also consider imposing a minimum purchase requirement that only applies to credit card transactions, especially if you’re paying fair market rates for debit card transactions through your processor.
Now that we’ve thoroughly discussed the legalities of minimum purchase requirements, let’s consider whether you should go ahead with doing so. Yes, you’ll avoid losing money on small purchases. At the same time, you run the risk of losing sales when customers can’t use their credit cards and don’t have any cash on them. Like it or not, most consumers are oblivious to the fact that accepting credit and debit cards costs you money.
There are several options you should consider if small-ticket sales are costing you too much in processing fees. Your first option is to review your merchant account contract and confirm that you’re on an interchange-plus or membership-based pricing plan. These two types of plans give you the lowest per-transaction processing costs, and you shouldn’t need to implement a minimum purchase requirement at all. If you’re on a flat-rate or tiered pricing plan, on the other hand, you’ll want to check a few things. Does your plan have a lower rate for debit cards, or does it treat both debit and credit cards the same? If you’re on a flat-rate plan, does the lack of monthly and annual account fees compensate for the higher processing rates? Many small businesses sign up for a flat-rate service like Square due to the low up-front costs, but fail to realize that once they reach a certain processing volume (typically around $5,000 per month), it actually costs more to use Square (or any other flat-rate service) than a traditional merchant account.
Another option to lower your processing costs is surcharging. This is the practice of passing your processing costs onto your customers by adding a surcharge to credit and debit card purchases. We recommend you exercise caution in considering this option. While surcharging is now legal in most (but not all) jurisdictions, it can result in lost sales unless you’re in an industry where the practice is common and accepted. For more details, please see our article, Your Complete Guide to Credit Card Surcharges.
If you do decide to implement a minimum purchase requirement, make sure that you set it as low as possible to reduce the frequency of lost sales and frustrated customers. Under no circumstances should you implement a minimum that exceeds $10.00 – customers can report you to the credit card associations, and you’ll probably have your merchant account shut down. You might even end up on the Terminated Merchant File (TMF, or MATCH list), making it that much more difficult to find a new processor.
Implementing a minimum purchase requirement also means that you’ll have to educate your employees to enforce it. Make sure they understand the difference between a credit card and a debit card. This isn’t as obvious as it sounds, as most debit cards are sponsored by either Visa or Mastercard. They’ll also need to understand the difference between PIN debit and signature debit, as you usually won’t be able to enforce a minimum purchase requirement on PIN debit transactions.
If you’ve read this far and come to the conclusion that your best option is to switch to a different merchant account provider, we can help. Check out our Merchant Account Comparison Chart for a side-by-side comparison of the best providers in the industry.