Friday, February 1, 2008

Credit Card Fees on tips, who pays:

There has been a ongoing debate among restaurateurs regarding whether to charge the employee the processing fee on the tip portion. The argument is simple enough. Restaurants pay 2%-3% of the transaction amount when a customer uses a credit card. That is a cost of doing business and everyone is ok with that. The restaurant also pays the same percentage on sales tax collected and on the tip piece of the transaction amount.

Let’s look at an example.

Meal cost: $100.00

Sales Tax cost (10%) 10.00

Tip (20%) $20.00

Total Charge $130.00

The net fee using a 2% credit card processing fee is $2.60, that translates to a net fee on the transaction of 2.6%. The restaurant’s transaction costs have just gone up 30%. There is nothing you can do about the sales tax cost, however the tip piece becomes low hanging fruit. By passing on the credit card fee (in this case let’s assume the entire amount $.40) to the server the restaurant reduces it total transaction cost to $2.20 or net cost of 2.2% per transaction. The server receives 19.60 in tips from this $20.00.

The main arguments why every restaurant does not do this are

1) The move is seen as miserly and anti employee and in the end the employee will find another way to extract their pound of flesh from your restaurant.

2) The belief that servers will encourage customers to use cash or will frown on customers who use American Express which is a higher transaction cost (3%) card

Both of these arguments are flawed, one you need to create an environment where your employees are valued members of the restaurant and the reason for the charged is explained and transparent. Two, any employee that places the customer experience secondary to their needs should immediately be asked to find another line of work.