Why Does My Business Need to Accept Credit Cards From My Customers?
According to a Tower Group study, credit card usage grew from 1 percent of transactions to accounting for more than half of transactions in America over a period of just 15 years. With consumers using credit cards for more and more purchases, many businesses need to accept credit cards if they want to stay in business. Of course, this isn't true of all industries. Some businesses do just fine without accepting credit card payments.
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How it Works
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Credit cards are issued by institutions, usually banks, as a convenient way to access a flexible line of credit. When a business processes a card, the card machine contacts computers at the credit card company. It receives information about the card, the card's issuer and the amount of credit available on the card. Provided everything is copacetic, it then instructs the credit card company with the details of the new transaction. In the following days, the credit card company deposits the appropriate amount in the business bank account.
What it Costs
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For most credit card processing arrangements, the fees come in two forms: transaction fees and service fees. Transaction fees are charged for each transaction, typically a flat fee plus a percentage of the transaction. Businesses can often negotiate to lower one type of transaction fee by raising the other. For example, a jewelry store would accept a high flat rate to get a low percentage fee, since they have fewer transactions at higher individual value. A dollar store would seek the exact opposite. Service fees are monthly charges for materials, statement issuance and general service. For most businesses, the service fees total up to a fraction of the total transaction fees.
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Pros of Credit Cards
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Credit cards make payment convenient for your customers. For repeat business companies, this makes it easier to collect on customers who would otherwise ask to pay later. It also makes suggestive sales easier. A customer with a twenty dollar bill can only spend twenty dollars, but a customer with a credit card can spend much more on impulse. Credit cards also limit the amount of cash in your shop, which limits opportunity for employee theft and reduces the loss from a robbery or break-in. Accepting credit cards can simplify your billing process. Where you might before allow a customer to establish an account, a credit card allows you to bill for the full amount on the spot and let the credit card company worry about tracking and collecting on the debt. Finally, consumers are growing more and more accustomed to paying with credit cards. Businesses that don't take credit cards can lose sales for not providing that convenience.
Cons of Credit Cards
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The chief drawback to accepting credit cards is the expense. There's the direct cost of the transactions, the service fees, the cost of processing equipment and the cost of training employees in how to process them. This can add up. The other complaint many make is the added complexity. Money that would otherwise go into the register and then to the bank now moves electronically through several banks before hitting your account. This is secure and convenient, but does add several extra steps where something can go wrong.
Who Needs to Take Credit Cards
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Accepting credit cards makes a big difference in businesses that make their money through multiple small transactions, especially if those transactions include suggestive sales, impulse buys or upselling. The retail, grocery and food service industries are the best examples of this kind of business model. Businesses that make their money through a small number of large transactions, such as auto lots, don't need to take credit cards but might make more sales if they did. Some industries have been able to resist the push to take credit cards, most notably utilities, professional services such as attorneys and CPAs and rental properties. As of 2010, these businesses lose little if anything by not taking credit cards.
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References
- Photo Credit credit cards image by Aleksandr Lobanov from Fotolia.com
