Credit cards have evolved into one of the most common methods of consumer payment, with nearly 60% of U.S. consumers using cards over cash, according to a recent report by the Federal Reserve. Whereas some businesses extend credit to customers through invoices and personal checks, retailers and other merchants generally extend credit through card payments.
But despite the growing use of plastic over cash, a GoPayment survey discovered that more than half of U.S. small businesses—approximately 55%—do not accept credit cards.
Although there are obvious benefits to accepting credit cards from customers, there are also legitimate risks associated with managing credit-card purchases. Running a cost-benefit analysis to ascertain the feasibility of accepting credit cards can help you determine the potential benefits as well as the types of payment systems that work best for your business.
For small business owners, the biggest deterrent to moving from a cash-only system to one that accepts credit cards is processing fees. These typically average between 2% and 3%, although they may vary depending on the payment gateway (i.e. the way customers’ transaction data is routed from your business to the credit-card company).
You can bypass some of these transaction fees by opening up your own merchant account through your local bank. However, the initial setup costs for merchant accounts will typically be higher than if you go through a third-party processor. If you decide to forgo a third-party processor and establish a merchant account on your own, you’ll also be responsible for complying with PCI Security Standards and other data requirements to ensure customer purchases are processed safely and securely.
In short, once you’ve established a merchant account and chosen your credit-card processing method (i.e. point-of-sale (POS) system, virtual terminal, iPhone and Android mobile processing solution, etc.), you’ll need to account for the following costs:
- Setup fees for merchant accounts: These fees can fall anywhere between $50 and $200, according to Entrepreneur.com, if you decide to set one up through a local bank.
- Credit-card processing and transaction fees: Again, these typically fall between 2% and 3% per transaction, but they can get as high as 4% for international transactions (which may or may not include a currency-conversion fee).
- Implementation costs for setting up equipment, such as POS terminals.
- Customer chargeback fees if the customer decides to dispute a credit-card transaction.
- Fraud accountability: Some banks and credit-card issuers may hold your company liable (i.e. require reimbursement for fraudulent purchases or terminate your processing account) if fraudsters charge and receive products and services using stolen customer data. Additionally, as of October 1, 2015, businesses that fail to migrate to EMV credit processing (a new form of transactions meant to increase privacy and reduce fraud) will incur all fraud-related costs. Check out our guide to EMV migration for more info.
Despite the risks of accepting credit-card payments, there are also many benefits to accepting credit cards. According to a number of studies, one of the main benefits is that card and mobile payments are likely to rise in the next decade.
For example, market-research firm Javelin Strategy & Research forecasts that only 23% of all POS transactions will be made with cash by the year 2017. If statistics are any indication, small business owners who choose the cash-only route will potentially be missing out on a significant chunk of credit- and debit-card sales.
Thus, the main benefits cited when moving from a cash-only business to one that accepts credit cards include:
- Increased sales: Credit-card payments have been linked to an increase in “impulse buying,” which has the potential of increasing both the frequency and dollar amount of customer purchases.
- Greater convenience for customers: More customers are paying for merchandise and services with credit and debit cards, to the tune of 66%, according to Community Merchants U.S.A. Also, software solutions like QuickBooks Payments offer merchants flexible solutions for processing card transactions in physical and virtual stores.
- Less risk for customers: Customers aren’t liable if a fraudulent or erroneous charge hits their credit-card account.
- Safer money-handling practices: Credit cards reduce the time and expense of counting, sorting and transporting cash in brick-and-mortar stores. Additionally, holding less cash on the premises can make businesses less attractive to thieves.
- Technology reduces risk: While many may cite an increased risk of fraud as a deterrent to accepting cards, new EMV technology makes credit transactions more secure; so secure it reduced credit-related fraud in the U.K. and Canada by 72% and 42%, respectively.
If you’re torn between the decision of moving from a cash-only business to one that accepts credit cards, doing a basic cost-benefit analysis upfront can help you tally the benefits and subtract the costs associated with offering card-based transactions.
Every business is different, so the risks and advantages of accepting credit payments will vary. In addition to the costs and benefits, don’t forget to consider the impact of other factors, such as your company’s size as well as whether you conduct transactions in a physical store, online or both.
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.
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