MINIMUM PURCHASE AMOUNT FOR CREDIT & DEBIT
WHAT IS A MINIMUM PURCHASE AMOUNT?
A minimum purchase amount refers to the minimum monetary value a customer must spend in order to make a transaction using a specific payment method, such as a credit card or an electronic payment system. This minimum spending requirement is typically set by the merchant or the business establishment, and is imposed to encourage higher sales volume, cover transaction costs, or regulate certain payment methods.
PURPOSE AND BENEFITS
Setting a minimum purchase amount serves several purposes and yields various benefits for both the merchants and customers alike.
1. Covering Transaction Costs: One of the primary reasons merchants establish a minimum purchase amount is to cover the costs associated with processing transactions. Credit card processing fees, for instance, are charged on a percentage of the transaction amount. Thus, implementing a minimum purchase amount can help offset these costs and ensure profitability for the business.
2. Encouraging Higher Sales Volume: Increasing the minimum purchase amount can incentivize customers to spend more in order to meet the threshold and complete the transaction. This strategy promotes higher sales volume, which can ultimately contribute to increased revenue for the merchant.
3. Regulating Payment Methods: Some businesses may choose to impose minimum purchase requirements to encourage the use of certain payment methods. For instance, when dealing with low-margin items, merchants may set a minimum purchase amount for credit card transactions, while offering discounts or waiving the minimum for cash payments. This can help reduce transaction costs and maximize profitability.
LIMITATIONS AND CONSIDERATIONS
While minimum purchase amounts can be advantageous for businesses, certain limitations and considerations should be taken into account:
1. Customer Perception: Customers may perceive a minimum purchase requirement as an inconvenience, especially if they only intend to make a small purchase. This can negatively impact customer satisfaction and deter repeat business.
2. Competitor Policies: Merchants should also consider the minimum purchase amounts set by their competitors to avoid creating a significant disparity that could drive customers towards more flexible alternatives.
3. Flexibility and Adaptability: Setting a reasonable minimum purchase amount is crucial. It should strike a balance between meeting the merchant's objectives and accommodating customer needs. Retailers should regularly evaluate and adjust their minimum purchase amounts to stay relevant and responsive to market demands.
COMPLIANCE AND LEGALITY
It is important for businesses to ensure that their minimum purchase amount policies comply with all applicable laws and regulations. In some jurisdictions, there may be specific restrictions on
A minimum purchase amount is the smallest transaction value at which a customer can pay by credit card. Businesses are legally allowed to set minimum purchase amounts of up to $10 as a means to reduce the cost of processing smaller transactions.
For example, if you set a minimum purchase amount of $5, your customer would need to purchase at least $5 worth of goods or services if they want to use their credit card.
IS A MINIMUM PURCHASE AMOUNT LEGAL?
Minimum purchase amounts are legal under the Dodd-Frank Act’s Durbin Amendment of 2010. However, there are several legal and contractual limitations to setting a minimum purchase amount.
According to the law and merchant agreements, businesses implementing minimum purchase amounts must not:
Set a credit card minimum exceeding $10 for any card brand
Set a minimum purchase amount for one credit card brand and not others
Set a minimum purchase amount for one issuing bank and not others
MINIMUM PURCHASE AMOUNT FOR CREDIT CARDS
Merchants are allowed to set a minimum purchase requirement for credit cards. As of this writing, the highest allowable minimum purchase requirement that merchants can set is $10.00. You’re free to set a lower requirement, but you cannot set a limit above this amount.
Visa, Mastercard, and Discovery all have several stipulations on setting minimum charges in their processing agreements. The gist of these stipulations is that a minimum purchase requirement, if imposed, must treat all credit cards and all issuing banks equally.
In other words, you can’t require a minimum purchase for Visa, but not Mastercard. You also can’t set a minimum purchase for one issuing bank, but not another.
MINIMUM PURCHASE AMOUNT FOR DEBIT CARDS
With few exceptions, the general rule is that you cannot impose a minimum purchase requirement for debit card transactions. The Durbin Amendment doesn’t prohibit debit card associations from imposing their own restrictions on minimum purchases the way it does for credit cards.
If your merchant account uses an interchange-plus or membership-based processing rate plan, the inability to set a minimum purchase requirement for debit cards won’t be a problem. That’s because both of these types of plans pass interchange and PIN debit network fees directly onto you.
On the other hand, flat-rate pricing, charges the same rate for both credit and debit cards, essentially treating debit card transactions as if they were credit card transactions. So, you’ll be paying an unnecessarily higher cost for processing debit card transactions.
CAN STORES CHARGE A MINIMUM FOR DEBIT CARDS & CREDIT CARDS?
Whether your business can charge a minimum for debit cards and credit cards depends on your processing agreements with the major credit card associations and your contract with your merchant account provider.
We recommend that you refer to those documents before setting a minimum purchase requirement. You might also consider imposing a minimum purchase requirement that only applies to credit card transactions, especially if you’re paying fair market rates for debit card transactions through your processor.
CONSIDERATIONS BEFORE IMPLEMENTING A MINIMUM PURCHASE AMOUNT
In general, you should consider implementing a minimum purchase amount when you begin to rack up high processing costs that cut into profits as a direct result of customers using credit cards on low-cost transactions.
However, just because you can set a minimum purchase amount doesn’t necessarily make it a great idea. Let’s take a look at some pros and cons of minimum purchase amounts.
Pros
You won’t lose money on small transactions
Credit cards remain an option for your customers for larger transactions
Simple to implement and enforce
May improve your profit margins
Cons
Cashless customers may not buy anything
Your shop may be considered less convenient than a larger business that can handle the costs
Finding the ideal minimum purchase amount may take some trial and error
Not useful for businesses whose transactions are mostly over $10.
You’ll need to keep more cash on hand for cash transactions.
HOW TO IMPLEMENT MINIMUM PURCHASE AMOUNTS
Most consumers are oblivious to the fact that accepting credit and debit cards costs you money, so be prepared to explain why you’re implementing the policy.
Implementing a minimum purchase requirement also means that you’ll have to educate your employees to enforce it. Make sure they understand the difference between a credit card and a debit card. This isn’t as obvious as it sounds, as most debit cards are sponsored by either Visa or Mastercard. They’ll also need to understand the difference between PIN debit and signature debit, as you usually won’t be able to enforce a minimum purchase requirement on PIN debit transactions.
If you do decide to implement a minimum purchase requirement, make sure that you set it as low as possible to reduce the frequency of lost sales and frustrated customers. Under no circumstances should you implement a minimum that exceeds $10. Customers can report you to the credit card associations, and you’ll probably have your merchant account shut down. You might even end up on the Terminated Merchant File (TMF, or MATCH list), making it that much more difficult to find a new processor.