Judging by the number of restaurants that open and close within a few months or years, the competitive landscape that eateries operate in is, well, dog eat dog. With changing consumer tastes, occasional recessions, and real-time social media critiques that can damage a reputation in seconds, it’s more challenging than ever to successfully operate a dining establishment.
So, it doesn’t help when credit card companies and major banks come up with a new way to twist the knife and make themselves look like false heroes to boot. Their “cash rewards” programs, typically attached to special credit card offers, make it sound like they invest their own money in their card users, but their rewards actually come out of the pockets of local retailers, restaurants, and by extension, their customers and patrons.
John Kavanaugh, owner of Kavanaugh’s Esquire Club in Madison, has had his fill of the rising cost of accepting credit cards. His objection isn’t to the basic “swipe” and transaction fees that cover the cost of credit-card transactions, but the cash-rewards cards that cost the retailer or the restaurateur a fee on top of those, forcing them to increase prices to recover those costs, accept cash only, or make another protective move that puts them at a competitive disadvantage.
Thus far, trade organizations such as the National Restaurant Association have pushed for legislation to limit the basic fees, which have been rising and now average about 4.3 percent. As Kavanaugh notes, the government might be willing to limit those fees to ensure they don’t get out of hand and become a drag on retail bottom lines, but so far few people have sounded the alarm on fees related to cash rewards.
Kavanaugh is raising the issue because cardholders generally are unaware of who is actually paying for those rewards, and it’s not the credit card company, the processor, or the large bank that issues cards — it’s the retailer or restaurateur.
“You know, those particular [basic] fees, we probably should pay for those because that’s the cost that either the bank or the processor is paying to make the transaction happen,” he states, “but the concern that I have is the rewards part of it. When I get a card, I have no idea the rewards that that card carries, whether it’s airline miles, cash back, or a free whatever. We have no way of knowing that, and because all the cards are computerized, we’re paying anywhere from 2 or 4 percent back.
“That just comes out of our money that people are spending, and the concern that I have is number one, the cost of it,” Kavanaugh adds. “I’m paying probably a minimum of 2 percent sometimes in rewards fees.”
It’s not that retailers don’t have alternatives, but they are imperfect. Some grocers only accept cash, and other retailers and restaurateurs will only accept cash and personal checks. For some grocers, their overhead costs and their percentage of profit simply do not allow them to pay out anywhere from 2 to 4 percent in credit card fees because it will eat up their profits. While there are exceptions, the profit margin of restaurants is typically in the middle single digits, so they have similar concerns.
Of course, the risk of not accepting credit cards is that consumers have come to expect the convenience of using them, so much so that 95 percent of full-service restaurants accept credit or debit cards, according to the National Restaurant Association.
In some cases, retailers have established their own low- or zero-interest versions. A couple of years back, when Kavanaugh traveled to Washington, D.C. to meet with members of Congress about swipe fees and other issues, he had a conversation with a man representing Kwik Trip, the convenience store retailer. “He was telling me that in their particular situation at Kwik Trip, they have a free ATM machine that consumers can use for nothing,” Kavanaugh recalls. “If you take their credit card, they will give you five cents off per gallon on their gas, and their credit card has no fee to get it, and they still paid out $22 million in credit card fees for the year from people using their regular credit cards, not the Kwik Trip credit cards.
“So, the cost of getting your own money is just skyrocketing,” he states. “Mastercard, Visa, and American Express aren’t sending you on a trip. It’s your local retailer.”
Usual and customary
Kavanaugh is a member of the National Federation of Independent Business, the Wisconsin Tavern League, and the Wisconsin Restaurant Association, and he served on the National Restaurant Association’s board of directors. He knows that just raising your prices doesn’t solve the problem, and when he talks to retailers and restaurateurs about this, they tend to throw up their hands and say, “Well, what can you do about it? You’re just doomed, so you should just raise your prices and suck it up.”
However, he notes that credit card fees are a huge expense at the end of the month, depending on your sales volume. “If you just raise your prices, you’re paying more sales tax, and you’re paying more in fees,” Kavanaugh notes. “You’re getting more volume, but there again, you’re still paying out more money.”
Short of a legislative solution, Kavanaugh says it will have to become “usual and customary” for restaurateurs and retailers to pass these costs onto customers. He knows of a restaurant operator who adds a convenience fee of 3.99 percent for those who use a credit card at his establishment, but he’s out on an island. Kavanaugh reasons that if that were something that was accepted by consumers as usual and customary for restaurants, what probably would happen is that consumers would realize that and understand that they have some choices such as bringing cash, getting cash from an on-premises ATM, or writing a check.
It’s a basic buyer- or consumer-beware approach, but Kavanaugh says consumers would be more likely to demand that credit card companies only offer them a card with reasonable rates and fees that cover the basic transaction. “To me, one of the solutions is to tell the people that the restaurateur or Macy’s or Amazon or whoever, when they take your credit card with rewards on it, they are the ones sending you on your trip and sending you the cash back,” he states. “If it were to become usual or customary to pass along some sort of a percentage, whatever they felt their percentage is for their average reward, that could influence customers.”
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