When it’s time to ring up a sale at the Global Village boutique in Kailua — unless the payment is by cash, check or gift card — there’s a hidden cost that the customer never sees.
It’s the fee that all merchants must pay for allowing a customer to make a purchase with a credit or debit card.
In Global Village’s case those merchant fees added up to more than $15,000 last year.
But there’s no getting around the fees, said Debbie Ah Chick-Hopkins, co-owner of Global Village.
"In today’s way of living, cash is dying, and everybody has a charge card or debit card," Ah Chick-Hopkins said. "For us not to accept a card just prohibits sales. We could potentially lose business. About 70 percent of my sales are with cards."
Those merchant fees represent big business for companies that issue cards or process transactions. Merchants typically pay 2.5 to 5 percent for credit or debit card transactions, according to Stephen Ishikawa, president and owner of Hawaiian Merchant Service Express LLC.
In an average transaction a $1 purchase would cost the merchant approximately 5 to 7 cents in fees, a $10 purchase would cost about 20 to 25 cents in fees and a $100 purchase would cost about $1.50 to $2.50 in fees, according to Ishikawa, who includes Loco Moco Drive Inn in Ewa Beach among his North American Bancard clients.
For businesses with small profit margins, fees can eat up profits pretty quickly. That’s why some businesses take only cash or won’t accept American Express, which charges higher fees than Visa, MasterCard and Discover. But businesses that take cards also benefit from increased sales by making it more convenient for their customers to make purchases.
First Hawaiian Bank, the largest local processor of credit and debit card transactions in Hawaii, processed $4.4 billion worth of credit and debit card sales transactions in 2013 at its nearly 7,000 bank merchant locations open at least a year throughout Hawaii, Guam, the Commonwealth of the Northern Mariana Islands and the mainland.
Fees generated from those transactions were part of the $201.3 million in non-interest income that First Hawaiian made for the year.
Bob Harrison, president and chief executive officer of First Hawaiian, declined for competitive reasons to disclose how much in fees the bank made from those transactions. But based on the merchant processor industry average of 0.3 to 0.5 percent of card sales, First Hawaiian’s merchant processing services likely generated between and $13.2 million and $22 million in gross revenue.
The bank’s profit would be reduced by expenses for providing the services, such as charge-back losses, operational costs, internal costs for staffing and system support, and telecommunications.
Honolulu-based Damon Perez, regional director for Axia Payments Technology of Santa Barbara, Calif., said merchant fees are divided four ways. The credit card company — such as Visa, MasterCard or Discover — gets about 8 percent of the transaction fee, and the technology company that processes the transaction receives about 5 percent.
The biggest piece, about 75 percent, goes to the bank that issued the card to the consumer. Common issuers in Hawaii are First Hawaiian, Bank of Hawaii, Bank of America, CapitalOne and Chase.
Finally, the bank that has a contract with the merchant to process credit card transactions gets about 12 percent. First Hawaiian is the largest processor in Hawaii.
"This is a highly competitive business, and while most local banks have opted to resell mainland service providers, First Hawaiian has remained in this business because we see this as an important part of our approach to building relationships with our business customers," said Keith Nagata, senior vice president and First Hawaiian Bank business services division manager. "What sets us apart from other service providers is our ability to provide 24/7 local servicing for our customers."
In addition to boosting the bank’s revenue, the fee collected by the issuing bank covers such costs as money-back and travel rewards benefits, as well as cardholder statements. Fees charged by the merchant’s bank cover processing the transaction and absorbing the risk of nonpayment or fraud by the customer. These two sets of fees account for the majority paid by the merchant.
While merchants might moan about credit card fees, the banks do provide key services, according to Greg McBride, senior financial analyst for Bankrate.com, a consumer financial services company based in North Palm Beach, Fla.
"For all the complaining about credit card interchange fees, merchants conveniently never mention the fraud protection, incremental sales that occur because they accept plastic, or the added costs/losses they’d incur from bad checks and cash management," McBride said in an email.
Ah Chick-Hopkins of Global Village uses Axia to process merchant transactions, which costs her 2.25 to 2.5 percent in fees.
"For a small business it’s tough. … It tends to hit us a little bit harder than a Walmart or a Costco or those types of stores," said Ah Chick-Hopkins, whose store has eight employees. "I look at service rather than going with the cheapest rate. I’m going with a company like Axia that has a local representative and can provide me customer service on the weekends if there’s a technical issue or problem with the credit cards. If there’s a technical issue that can’t be addressed until Monday, that affects the bulk of our business because weekends are our busiest time of the week."
Eric Wong, who owns Wiki Wiki Drive Inn at Waterfront Plaza in Honolulu and Loco Moco Drive Inn in Ewa Beach, can see both sides of the merchant fee issue because only one of his eating establishments accepts plastic.
Wong accepts only cash at Wiki Wiki Drive Inn — thus avoiding card processing fees — because the typical transactions are small and fees would eat up his profit.
"For Wiki Wiki there’s two reasons why we don’t take it," said Wong, who has 12 employees between his two restaurants. "First, we’d have to install a phone line or get wireless service; that would cost me. Secondly, the majority of my sales are under 10 bucks, and the transaction charge I would have to pay didn’t make sense to accept credit cards when the majority of sales are individuals buying a quick lunch."
It’s a different situation, though, at Loco Moco Drive Inn, where customers might pay hundreds of dollars on party pans and catering.
"On Super Bowl Sunday people were buying whole trays of noodles and katsu," Wong said.
He said he pays more than $5,000 a year in fees — or 2.28 percent of sales volume — but that turning card processing over to someone else ensures that he gets paid.
"Without the cards maybe some people couldn’t afford the food," Wong said. "We have people put on credit cards baby’s first birthdays when they buy $1,000 worth of food. It gives them the ability to pay without having the money in the bank."
