Credit is Due

Dec. 9, 2002

Given their druthers, few operators would accept credit cards. With every swipe of the plastic, a percentage of their sales -- typically 1.5 percent to 3 percent of per transaction -- is pulled from the owner's pocket.

Operators say, however, they don't have much of a choice whether to accept cards as more consumers than ever are paying with plastic rather than cash.

Vincent Caminiti knows this well -- perhaps better than most pizzeria operators. Some 50 percent of customers at his two Brooklyn South Pizzerias pay with credit cards.

"This is USAir country, and they like to get those points. So everybody uses credit cards," said Caminiti, whose stores are in Charlotte, N.C. "When I opened this store four years ago, (charges made up) 33 percent of my sales."

According to a National Restaurant Association study, operators risk losing customers, not to mention bigger-ticket sales, if they don't accept credit cards. The Washington, D.C.-based association's 2002 Tableservice Trends Survey found credit-card use is not only rising, cards are used more often as ticket sizes increase. In full-service restaurants alone, 80 percent of tickets higher than $25 are charged.

Does that exclude pizzeria owners, whose check averages are commonly lower? According to the report, no. "As the demographics of credit-card owners change, more mid-scale and casual restaurants can expect increased credit-card usage by their customers." In short, credit card use for smaller transactions is increasing at less expensive restaurants. Again, Caminiti knows this all too well.

"People charge one slice of pizza on a credit card all the time," he said. "I think, 'You mean to tell me you don't have $2 in your pocket?' But that's what happens."

To understand the raw impact of credit card transactions on an operator's bottom line, just do the math, said Chris Benson, senior vice president of new business development for FEDChex.

Hypercom T7P card reader

"If their margin is 10 to 20 percent, and the credit card is costing them 2 to 2 1/2 percent per transaction, you've cut deeply into their profit margin," said Benson, whose Irvine, Calif.-based company provides credit card and check processing hardware and services for retailers. "But still, I can't see how an operator can afford not to accept cards. If he doesn't, the other guy will."

Counting the cost

Not only do operators resent transaction fees, they don't like paying for card readers.

But according to Sam Zietz, president of PayRight Merchant Services in Haledon, N.J., hardware costs don't have to be as high as they commonly are.

"The way people get paid in (my) industry is by selling equipment," said Zietz, whose company processes transactions and sells and leases both fixed and wireless card readers though one of its Web sites, "Too often there's a naïve pizza owner out there who decides to accept credit cards, and he just calls his local bank and goes along with whatever they sell him. Some of these guys pay as much as $1,000 for a terminal" that PayRight sells for $299.

If an operator can't be convinced to purchase a card reader, Zietz said salespersons push high-rate leases.

"I've seen them lease those terminals for $79 (for 48 months) when they shouldn't lease them for any more than $29," he said. Operators also "should never pay an application fee or programming fee, because there is no such cost. ... And don't ever let the bank tell you that their fees are set in stone, either. Question their fees."

Card readers also can be purchased as an optional add-on to modern POS systems for around $450, said Tom Bronson, president and CEO of Rockland Technology Group. If an operator does that, he recommends the purchase of a high-speed Internet line rather than a dial-up connection.

"The problem with dial-up is that it can lock up the computer" as it logs on, Bronson said. "And, really, the people who are willing to spend $40 a month to have perpetual Internet connection are going to use that connection for other things, too. So it's a wise investment."

Deb Cochran, a Papa Murphy's Take 'N' Bake Pizza franchisee in San Diego, finds comparing rates between hardware and processor providers confusing because "it's not apples to apples between anybody."

VeriFone Omni 396 card reader

That decision, it turned out, was the least of the credit card problems Cochran faced when she opened her franchise earlier this year. During her first six weeks in business, the credit card reader she purchased from the prior owner of her store received all her store's credits. The card reader, it was discovered later, never was reprogrammed to credit her bank accounts.

"To straighten it out, we had to credit all those customers and then re-debit them," said Cochran. "We weren't supposed to have been charged for fees at that time, but (the processor) wound up charging us $300 anyway."

Adding to the credit card cost confusion are transaction fees, which vary as widely as hardware costs. According to Benson, Master Card and Visa typically charge 1.55 percent to 1.75 percent per transaction. Discover Card hovers near 1.8 percent, while the highest of all is American Express. According to its Web site, businesses receiving less than $5,000 a year in charges get a flat rate of $5 per month, but those who receive more than that amount pay 3 percent per transaction.

Dan Collier, a one-store Rusty's Pizza franchisee Santa Barbara, Calif., said the 20 percent of his customers who pay with cards cost him about $300 a month. Caminiti wishes he could get by as cheaply.

"It costs me more than two grand a month to take cards," said Caminiti, whose check average is $15. "The whole thing's a hassle and it's a lot of my money. I hate it. I wish I didn't have to take them."

Safer than checks

According to, credit card issuers lose about $1 billion each year to fraud, and merchants lose even more.

Compared to check fraud, however, both groups get off easy. estimates that banks and retailers lose $50 billion each year to check fraud, some of which surely comes from the pockets of pizzeria operators.

Card Facts

Eighty-one percent of Americans owned a credit card in 2001, up from 76 percent in 2000.
     Source: Gallup survey, April 2002

In 2001, the global sales volume of VISA, MasterCard, and American Express were:
     * VISA -- $2.1 trillion
     * MasterCard -- $986 billion
     * American Express -- $298 billion

According to survey conducted by the American Bankers Association and Dove Consulting, during the first half of 2002, debit cards accounted for 26 percent of in-store transactions, compared with 21 percent for credit cards. That marked the first time credit-card use has fallen behind debit cards.


Benson believes pizzeria operators are wise to acknowledge two trends -- the increasing use of cards and customer cravings for convenience -- and then consider addressing them by using wireless credit card readers for delivery. The small, belt-mounted terminals allow customers to pay with credit cards at the door, and credit card transaction fees on deliveries go down as well. Here's why:

When credit card orders are taken over the phone or online, card issuers charge a slightly higher rate (1.8 percent to 2.25 percent, according to Benson) for what is called a "card not present" rate. In other words, order-takers aren't able to verify that the card is that user's by comparing it to the user's I.D. Since such a transaction could be fraudulent, card issuers view it riskier and thus charge a slightly higher rate to protect themselves.

However, if a delivery driver is equipped with a wireless card reader and can verify at the door that the card user is its owner -- called a "card present" transaction -- the transaction fee returns to the typical 1.5 percent rate.

"In a secure wireless transaction at the door, the driver can swipe it and also capture a signature," Benson said. "That not only reduces the chance of fraud, it builds a customer's confidence" that his card information isn't being duplicated for unauthorized uses by someone on the other end of the phone.

Such technology doesn't come cheap, however. PayRight and FEDChex sell wireless card readers for $299 each, and Benson said some wireless units run as high as $1,000 each.

But just as the cost of using cellular phones went down in the past few years, the same is expected to happen with wireless readers, said Benson. All parties involved -- hardware providers, card issuers, transaction processors, etc. -- will reduce costs and fees to encourage a higher volume of end-users to enter the market.

"We believe the ideal transaction cost (for a pizzeria operator) would be 68 cents," said Benson. "That would include Master Card and Visa interchange fees, airtime fees, equipment cost and transactional fees."

Comstar wireless credit card reader

Currently, Benson said, an operator purchasing a FEDChex terminal, would face an average transaction cost of $1.20, "which is just too much, unacceptable."

To reduce to his ideal rate, he has approached officers of the top four pizza chains to develop a discount deal where operators can buy wireless terminals for $99.

"If all our vendors come together, we can get it to 63 cents a transaction," Benson said.

When prices come in line, Louisville, Ky.-based Pizza Magia will line up to get wireless readers, said Roger Crews, the company's chief financial officer.

"That's something we've looked at, but it's still a little early for us," said Crews, who said about 15 percent of Pizza Magia's transactions come from credit/debit cards. "But I know it's coming, and we want to use it. It would certainly make it easier on the operations side to have them."

Topics: POS , Telecommunications

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