The High Price of Credit Cards to your Friendly Local Game Store

Credit cards are both a boon and bane for local game stores. Boon in the sense that customers have instant purchasing power at hand, ready and able to Credit Cards--Sweet Poison spend (and overspend) their budgets in a game store.  This is clearly a boon for any retailer in the form of more sales.

The bane comes from high costs of accepting digital transactions. Before continuing, I should mention that I work in the financial industry and have a significantly more than a layman’s understanding of the credit card and financial transaction world. I think a short introduction into the process of how credit cards work will give some insight into what the real costs of credit cards are to a small game retailer. This is a very high level overview and not a comprehensive review of the credit card transaction process, but I think it will be informative to many.

Today’s example involves Trask going to a local game store and purchasing a $100 game. The FLGS swipes the card in a POS (Point of Sale) terminal and the transaction is authorized by the bank. That is, the bank checks your credit card number to verify it is valid and not otherwise limited on how much you can spend.

My credit card is issued by the “Bank of Greyhawk,” one would assume that the “BOG” is the bank doing the authorization when the card is swiped. This is incorrect. The POS terminal connects to an “acquiring bank.” An acquiring bank literally acquires the transactions from the POS terminals at various retailers and often sells the POS terminal equipment as well. The acquirer did not issue my credit card.

The acquiring bank receives my transaction and immediately take 2-3% (these fees sometimes reach as high as %15, depending on the contract with the POS vendor, but 2-3% is more common) of the transaction right off the top. The remainder goes into the merchant’s account after a processing delay for verification. This verification process (sometimes called risk management) is also the system that turns off your card if you start buying unusual things or purchase large items when traveling. Yes it is annoying, but it does keep the costs down to everyone involved.

The acquiring bank then forwards the 3% surcharge into the “interchange” system. The interchange is the system that moves money back forth between banks. At this point, the $3.00 distributes to the many entities in the interchange system. Visa and MasterCard receive a small amount of each transaction, the acquirer takes a small piece and the issuing bank (Bank of Greyhawk  in this example) gets some too. Bank of Greyhawk also assumes the risk of the debt I now owe for the purchase and receives any interest and penalties I may pay on my credit card.

The absolute amount distributed to each party (and there are more I did not mention in the interests of brevity) depends on contracts and agreements between the banks and POS terminal vendors. Now repeat this process for every single credit card, debit card or Visa/MasterCard/Discover/American Express branded gift card in the world and you get an idea as to the size of the enterprise.

The reason I am explaining all of this is to give you some idea what the costs are to the retailer are and why they exist. Credit cards are here to stay and no retailer can avoid them because not taking credit cards is financial suicide.

Normally, I am a cold-hearted capitalist with no compunction about exploiting every discount and benefit for myself I can find.  I regularly use my credit cards for almost every transaction to maximize my cash back reward from the credit card company(I pay it off before any interest accrues). The card effectively functions as a 1% discount on all of my purchases, which is well and good for me.

However, since I have a certain fondness for my local game store and want them to succeed, I try not to use credit cards when I make a purchase. The math is quite simple . My hypothetical purchase costs me $100.00 whether I use a credit card or cash. For the retailer a CC transaction only garners them $97.00 and I earn $1.00 in cash back reward (or airline miles or whatever the reward is). Two dollars go to transaction overhead. One dollar is not worth penalizing my game store 3% (or more) on the transaction.

If these amounts seem trivial, bear in mind you need to multiply that 3% interchange fee by thousands of transactions per year. It does add up.

Credit cards have their place, especially for online purchases. The ability to contest a fraudulent transaction is priceless and not offered (for the most part) by debit cards and certainly not by cash. I suppose the point of this post is to offer enough information for each individual consumer to make an informed decision about using credit cards at your FLGS, or any small retailer for that matter.

Small businesses have a difficult enough time as it is, so this is my way of giving them a hand. Let your conscience and your wallet be your guide.

Trask, The Last Tyromancer



Trask is a long-time gamer, world traveler and history buff. He hopes that his scribblings will both inform and advance gaming as a hobby.

7 thoughts on “The High Price of Credit Cards to your Friendly Local Game Store

  • December 27, 2009 at 7:07 am

    Hi Trask,

    I just wanted to add two comments:

    1 ) Merchant Account Providers (you refer to them as “acquiring bank”. They need not be “banks”) add rates based on the credit rating of the store that will be processing the transaction. If Bob’s store is paying 12% for processing transactions, it’s probably because of his store’s bad credit rating (or possibly his own).

    Also, many chambers of commerce can help greatly when finding a merchant account provider with a competitive rate. If you know of a store paying a crazy transaction rate, they should attend the next meeting of a local chamber of commerce meeting and ask around for recommendations after the meeting has ended.

    2) Please, never think “I won’t shop at my local store because I only have my cards on me. I can get this from Amazon for cheaper in two days. That way I won’t hurt my local store with a credit card transaction!”

    Every retailer I have ever met would rather have your card transaction than not have your business. If it comes down it to, shop locally if you can and don’t feel guilty about paying with your card. (Cash is preferable, but they love your cards too!)

  • December 27, 2009 at 8:55 am

    Hi Cyrus,

    You are correct, POS terminal providers need not be banks. That was a shortcut I took to cut out some levels of complexity from my explanation. Strictly speaking, POS terminal data goes to acquiring companies for processing and then into the interchange system. That said, many acquirers are also affiliated with banks, so it was just me being a bit too brief in my explanation.

    As to your point two, you are absolutely correct. I am not advocating never using cards at a FLGS and going elsewhere (Amazon), rather I hoped the post would encourage people to shop local and use cash.


  • December 27, 2009 at 11:03 am

    Thanks for the post, Trask. I’d be interested in reading a similar treatment done for online game stores. Aren’t the costs even higher then?

    • December 27, 2009 at 2:05 pm

      Online processing is essentially the same system, but “card not present” transactions (ie online) tend to cost more than an in-person card swipe. Paypal and other credit card processing providers just add another layer of cost to the system.

  • December 27, 2009 at 7:23 pm

    Yeah, it’s a racket, but it all comes down to the cost of doing business. The store should check to ensure they’re getting a good % per transaction rate or get another vendor. FLGS’s need to take it on this one and focus on ways to market their businesses, which is a whole nother topic that they know very little about IMO.

  • December 27, 2009 at 10:24 pm

    One thing you’re leaving out is that consumers take it MUCH harder than retailers do when it comes to fees. The banking industry last year alone made over $300 billion in fees from consumers. That’s expected to rise again by at least 20% in 2010.

    Merchants are responsible for their own well being and it is incumbent upon them to negotiate decent merchant fees for electronic funds transactions. As a consumer, even though I love my FLGS, I shouldn’t have to stop and think that my $3.00 fee is going to break them when I’m spending $100 with them (and yes, I get the math when expounded).

    I think you could have made a stronger point with an article that argued for why you shouldn’t shop on and instead support your FLGS.

    For every $1 spent locally, it will circulate within a community three times or more. For every $100 spent in independently owned stores, some $68 returns to the community through wages, local taxes, local supplies and services whereas only $48 will return if spent on a Big Box store or chain like Amazon.

    So you can support your friends who need the jobs in your community, or get your $3.50 discount on Amazon.

    • December 28, 2009 at 6:42 pm

      @Sean–no argument from me. Many game stores cannot market themselves very well.

      @Dante– I wanted in this post to focus on the interchange costs of credit cards to a small business. Whether or not to shop Amazon vs a FLGS is an entirely separate issue and will probably get a post in the very near future.

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