For Small Businesses, Credit Card Fees Pay Off
Keep Your Profits: Negotiate Better Credit Card Fees
It would be almost impossible to sell software online if we didn't accept credit cards.
— Misty Khan, president of Advena Artemis, a consulting and software development company
Today's consumers are practically paperless. As the robotic retail question "Cash or credit?" sunsets into obsolescence, credit card processing has become a fact of life for most small businesses. Along with accepting cards comes hefty fees. Those fees can cut into profits, a long-time issue for business owners. But there are ways to cut down on costs and reap the benefits of accepting cards.
"If a small business accepts credit cards, they will get their money faster than if customers pay by check. Plus, the card use gives them the customer's contact information, which they can develop into a database for contact records," said Jacqueline Taylor, associate region director of the University of Houston Small Business Development Center Network.
Manual machines have been replaced by Internet-based transactions that are exponentially faster. And newer card readers mean lower fees for businesses that send card numbers electronically rather than typing them in manually. With more convenient processing, businesses can deliver the no-hassle experience consumers have come to expect.
Business Necessity
Jayson Cohen called credit cards a necessary convenience for his customers. Cohen, co-owner of the Apricot Lane Boutique franchise in the Houston Galleria, said most customers don't carry more than $50 in cash. For larger purchases, they use cards.
"It's a natural advantage," Cohen said of accepting credit cards. "Eighty-five percent of our store purchases are made by people who pay with a credit card."
A convenience at Cohen's store, accepting cards is an operational imperative for online companies.
"It would be almost impossible to sell software online if we didn't accept credit cards," said Misty Khan, president of Advena Artemis, a consulting and software development company.
Khan added that the company gains more online credibility by accepting traditional card companies, such as Visa and MasterCard, versus online companies such as PayPal. Credibility concerns could be offset by cost, however, as Internet-only businesses can work with PayPal and forgo the expense of credit card readers.
Consumers Swipe Away: Every year there are fewer cash-only businesses.
Widespread use of debit cards has encouraged more businesses to buy machines and swipe cards. As of 2009, there were 576.4 million credit cards and 507 million debit cards in circulation, according to reports from credit card companies to creditcards.com. Even traditional cash-only businesses, such as fast food restaurants, now happily swipe customer cards. Yum! Brands Inc. franchises, including Kentucky Fried Chicken and Long John Silver's, began accepting cards in 2001. The nation's largest fast food chain, McDonald's, began accepting cards in 2003.
Even so, the decision to accept credit cards isn't automatic for some businesses. Costs add up for businesses that process numerous payments with relatively low dollar amounts, because the fee percentage remains the same regardless of the transaction amount. The U.S. Small Business Administration advises all small businesses to consider accepting cards as a way to increase their customer base and simplify the development of customer contact databases.
Merchant Account
A merchant account is required before a business can accept credit cards. Brick-and-mortar stores that still conduct a majority of business in their stores need retail merchant accounts, while shops that conduct the majority of their business online need Internet merchant accounts.
But pitfalls abound when looking for a merchant account provider. For instance, business owners should tread carefully before signing up for a merchant account online. Many of the companies advertising on the Internet tout extremely low transaction fees, but they can hide costs in other areas, such as charging more for transactions that fall below a certain monthly threshold.
Though the Federal Deposit Insurance Corp. (FDIC) does regulate providers, it also allows them plenty of freedom to set fees at almost any stage of the transaction. Small businesses that pay higher fees because of their lower transaction volume should actively negotiate lower rates before signing a contract. In addition, they should carefully research the company's business history with the Better Business Bureau.
Navigating the Fees
A variety of fees, including the discount rate, monthly fee and transaction fee, make up the cost of a single credit card transaction. The discount rate is a single rate charged to a business based on its sales volume. This can range from 1 to 4 percent for small to medium-sized businesses. Banks may offer lower rates or monthly fees when there is an existing loan or credit card equipment lease arrangement, according to the FDIC's Credit Card Activities Manual.
Transaction fees are calculated as a percentage of the total transaction, and total sales volume can impact the actual percentage. Visa and MasterCard generally charge a lower fee than Discover and American Express. University of Houston's Taylor advises that businesses shop around.
"Fees can range from 2.5 percent to 5 percent of sales," Taylor said. "Other than transaction fees, there might be a minimum monthly fee if transactions don't reach a certain level and there might be fees for equipment, whether they buy or lease equipment."
Debit cards, on the other hand, offer an advantage of lower fees. Savannah, Ga.-based MerchantSeek, a merchant service provider broker, estimated debit card transaction fees of between 35 and 55 cents. The lower fees are contingent on customers entering their debit card PIN into a swipe terminal PIN pad. MerchantSeek also recommended that merchants who accept debit cards sign up for a verification service that checks a database of bad-check writers.
Limited Budgets Encourage Cash Use For Some
Many consumers are actually cutting back on credit card purchases. The Federal Reserve's monthly consumer credit report from July showed revolving credit fell throughout 2009 and during the first five months of 2010. Simply put, consumers spent less on credit.
As consumers have cut back on credit card purchases, they have turned increasingly to debit cards. In 2009, Visa debit card use increased 13 percent to 26.9 billion transactions and MasterCard use rose 11 percent to 9.3 billion transactions, according to February 2010 Nilson Report data published on creditcards.com.
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