Fight the Fee

Looking for a way to cut down on those pricey credit card transaction fees? Nudging customers to pay using a debit card and PIN is saving some savvy merchants serious cash.

While costs borne by merchants range widely depending on their agreements with credit card service providers, fees for PIN-based transactions are typically well below those of signature-based transactions. In fact, Ken Paterson of industry consulting firm Mercator Advisory Group Inc. puts a conservative estimate of the cost difference at 20 cents per transaction--an amount that quickly adds up.

"While the cost depends on the merchant's situation and what rates they negotiated, the difference can be huge," says Paterson, who says merchants who have PIN technology in place can lower their costs simply by telling customers that they prefer they pay using their PIN. "In fact, some businesses go so far as to accept PIN-based debit or cash payments only."

Currently, only about 2 million merchant locations have PIN-debit technology in place, compared with about 6 million that accept credit cards and debit cards requiring a signature, according to a 2006 study by Mercator. "The technology is becoming more widely available," says Paterson. "But whether or not [you have] a strong business case to install it depends on the volume of your business and the interchange rates you negotiate for payment methods. You have to do the math."

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This article was originally published in the June 2007 print edition of Entrepreneur with the headline: Fight the Fee.