Strategic Decisions for Successful Restaurants Bank and Credit Card Processing Fees

In today’s competitive landscape, understanding what separates high-performing restaurants from the others is more important than ever. Citrin Cooperman’s Restaurants and Hospitality Industry Practice has undertaken a comprehensive analysis of over 50 full-service restaurant establishments and assessed the influence of strategic decisions, such as bank and credit card processing fees, on the bottom line.

Similar to last year, bank and credit card fees increased again. Providers in this market had been increasingly competitive with one another for many years going into 2020, but the race to the bottom has leveled off. Still, an operator should be able to get their fees below 3%. It's quite common for processors to quietly increase their interchange premium by adding other fees and surcharges.

Recently, we discovered a merchant statement which reflected the agreed upon discount rates for Visa, Mastercard, Discover, and American Express which resulted in a blended rate of approximately 2.4%. As the statement continued, there were additional charges stating "authorization detail", "processing detail - other", and "other detail", none of which the operator was able to actually understand. In the end, the total fees came out to 4.37%. Once questioned, the processor agreed to reduce specific rates to effectuate a more competitive fee structure for the operator.

How the Top Performers Operate

Top performers will challenge their merchant processors when their costs are higher than expected. Also, some operators withhold a processing fee from their servers' tips. This effectively takes the processing fees that the operator pays on credit card tips and charges it to the servers that are receiving such tips. If considering credit card fee withholding on tips, understand that:

Not remitting 100% of an employee’s tips to that employee could impact sales tax if the charge is taxable; and
Some states do not permit employers to withhold fees from employees' tips.

How the Low Performers Operate

Low performers are not challenging their providers and are potentially locked into high fees because of "free hardware" from their POS providers in exchange for an inflated processing fee. This is a very expensive method of financing the hardware, so it’s important to understand the terms of any hardware financing. Operators that have a significant number of parties or events may have to use a separate processing system to collect deposits online that may charge a higher rate than what they use in-store.

Trends

Full-service restaurants are now receiving close to 95% of their tenders via credit card, so we are likely at or very near the ceiling for noncash payment penetration. Interchange fees have risen steadily in addition to the usage of premium rewards cards, which carry higher fees.

The Credit Card Competition Act is a bipartisan bill reintroduced in 2024 which seeks to increase competition in the credit card processing market by requiring large banks to offer at least two network routing options, not just Visa or Mastercard. The goal is to lower interchange fees by allowing merchants to route transactions through lower-cost networks. This has gained some congressional momentum; however, strong lobbying from banks and card networks continues to delay its passage.