For years, Marcia Levi refused to accept either credit or debit cards for purchases under $10 at her downtown gift shop, Chocolate Moose. Customers complained. She lowered the threshold to $5. Customers still complained, so two years ago she gave up on any minimum.
"People come in and charge $2.25 for a card or $1.75 for jelly beans," said Levi, who co-owns Chocolate Moose with her sister Barbara. "It's annoying. In the past two years, they've just whipped out the card without thinking about it, no matter how small the purchase."
The persistence of her customers was no accident. Visa International, MasterCard Inc. and other card companies are working hard to make sure that no purchase is too small for plastic.
Faced with a saturated market where just about everyone who wants a credit card has one, the companies have set their sights on what by one estimate is the $1.32 trillion in cash spent every year on purchases less than $5. Emboldened by consumers willing to download songs at 99 cents a pop or cell phone ring tones at $2 apiece, card companies are courting fast-food chains, taxicab companies and parking-meter manufacturers that have traditionally accepted only cash. Even American Express Co., whose cards are associated with expense accounts and luxury purchases, teamed up with PepsiCo Inc. to roll out credit card-accepting vending machines last year, mostly in casinos, malls and convention centers.
To woo these merchants, at least the high-volume ones, card companies started lowering the fees they charge them. They also began making better use of technologies that speed up processing and have said card users no longer have to sign for some purchases.
"Card companies tapped out the low-hanging fruit within the merchant community," said David Robertson, publisher of the Nilson Report, a payment card trade journal. "Now they're going after merchants that have been reluctant to accept credit and debit cards."
The push appears to be working. Credit and debit card payments under $5 totaled $13.5 billion last year, more than three times as much as they were in 2000, according to research firm CardWeb.com Inc. Charges under $10 climbed to $35.5 billion, more than six times as much as in 2000.
Cheeseburger on a debit card
Angela Keo of Silver Spring certainly does her part. On a recent visit to McDonald's, Keo used her debit card to buy a cheeseburger and a yogurt parfait. Later, she used it to buy a pack of cigarettes at one convenience store and a bottle of soda at another, she said.
"I don't carry any cash ever because it's easy to lose, very easy to spend and too hard to keep track of," said Keo, 22, who had only a few cents in her purse while shopping at Tysons Corner Center earlier this month.
The mentality "absolutely drives me nuts," Levi said. That's because each time shoppers like Keo swipe plastic at her store, Levi pays a hefty fee.
That swipe triggers an electronic exchange between the bank that issued the card and the merchant bank that processes it for the store. As the banks work to authorize the purchase, they tap into a multibillion dollar-infrastructure. To help pay for that, banks assess retailers a fixed and variable fees per credit card transaction.
Also factored into those fees are the risks card companies assume by guaranteeing payments to the merchants, even in cases of fraud.
Eating up profits
Levi said she easily pays 55 cents in fees on a $2.25 greeting card, depending on the brand of credit card used. That's more than half of her $1 profit margin, she said. For debit cards, she pays a flat fee of 35 to 45 cents per transaction.
"It may not sound like much, but if you do that 100 to 200 times a day, that really eats into your profit margin," Levi said. Her best hope is that the larger purchases offset losses on the smaller ones.
Visa and MasterCard -- joint ventures made of up of thousands of banks that issue credit and debit cards -- prohibit merchants from setting minimum payments. American Express, which issues it own credit cards, discourages minimums but allows them if the merchants apply the same limits to other cards they accept.
Card company executives recognize that the fee structure is a deal-breaker for many of the cash-based merchants they're pursuing.
"We know what the stumbling blocks are," said Carl F. Pascarella, president and chief executive of Visa U.S.A. Inc., which has the largest number of cards in use, about 458 million. "We get it."
But Pascarella said he's confident that Visa can overcome resistance from merchants, as it did when it first rolled out credit cards decades ago, and then debit cards, which gained popularity in the mid-'90s and helped spur card transactions for low-value items.
"This is something that is really in an embryonic stage," Pascarella said. "We have a lot of merchant education to do, and we have a lot of fine-tuning to do with our pricing."
That fine-tuning has begun.
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When Visa stopped requiring signatures for purchases of $15 or less in 2003, it also relaxed the merchant fees it charged. As a result, Visa transactions at fast-food restaurants nearly doubled in dollar value between 2003 and 2004, Pascarella said. Sales of other small-ticket items jumped 25 percent, to $6.5 billion, in the same period.
Meanwhile, even without signatures, fraud remains at an all-time low of 5 cents for every $100 spent on Visa cards. The company's research shows that low-value purchases tend not to attract fraud. And even if they did, Visa guarantees its payments to merchants.
The guarantee is one of the benefits card companies highlight as they pitch their services to traditionally card-averse retailers.
Speed a plus
Another pitch: faster transactions. Swiping cards without signing receipts is much faster than fumbling around for pocket change, they say. And now, all the major card companies are experimenting with getting rid of the swiping altogether so that transactions move even faster.
MasterCard offers PayPass, a card consumers can tap on specially equipped terminals, that McDonald's Corp. now accepts in select stores. American Express Co. is phasing in similar wave-and-go ExpressPay plastic devices at CVS Corp. stores nationwide. Though these cards were not designed to target small dollar amounts, they encourage them because customers with low-value purchases tend to be the ones who walk away most often from long lines, both companies said.
Sales with ExpressPay during test runs with various merchants were 30 percent higher than with cash, said William H. Glenn, president of the American Express merchandising network.
Wendy's International Inc., which started accepting cards in 2003 after trials in select stores the previous year, found that people who use cards at its restaurants spend $7 on average, compared with $5 for those who use cash, said Bob Bertini, a company spokesman.
In cities with parking meters that accept cards, 70 percent of drivers who pay with cards pay the maximum amount, compared with 5 percent of those who use cash, perhaps because cash users can't find the pocket change, said Mark Ralston, chief operating officer of Reino Parking Systems Inc., an Alameda, Calif., firm that makes parking meters and sells related technology.
In some cases, companies are not waiting for banks to lower fees, especially in the online world, where the phenomenon of "micropayments" first took shape. Instead, they're "aggregating" the payments they receive.
Combining small payments
Apple Computer Inc., for example, which sells songs for 99 cents each through its online iTunes music store, combines several small payments and processes them as one transaction using its own in-house software, said Edward B. Kountz of the Tower Group advisory firm.
It made sense for Apple to do that because the entire business model depends on cost-efficiently driving high volumes of low-price songs to the company's iPod MP3 players, Kountz said. Apple needed to control the aggregating in a market where no single standard exists for bundling.
The gamble paid off. Since its launch in April 2003, iTunes has sold more than 250 million songs, roughly half of them as 99-cent singles and the rest as part of higher-priced albums, a spokeswoman said.
For merchants who don't have that kind of volume, third-party vendors have stepped in to fill the void. Among them is Peppercoin Inc., a two-year-old firm outside Boston. Two leading U.S.-based banks now promote Peppercoin's services to the merchants they work with, a sign that the bundling idea may be catching on as a mainstream concept, Kountz said.
Levi, the card shop owner, said she considered aggregating but found it prohibitively expensive. (Peppercoin, for instance, charges 5 cents per transaction for its services.)
Until the banks lower their fees, or the aggregators drop their prices, Levi copes with micropayments as best she can. She gently nudges shoppers to consider cash. Or she gives them "the look." Occasionally, if the item is particularly inexpensive, she even pays for it out of her own pocket, she said, figuring it's all the same in the end.
"People just don't have as much cash in their wallets as they used to," Levi said. "I don't have much choice."
Staff researcher Richard Drezen contributed to this story.