Did you know that businesses that accept credit card payments can increase their annual revenue by more than 30%? How about the fact that consumers with credit cards frequently engage in impulse purchases, increasing transaction sizes by 250%? If you’re a merchant who’s recently started accepting credit card payments at your business, or if you’re contemplating accepting credit cards but aren’t sure if it’s worth it to your bottom line, I’ll try to help you realize that it’s definitely a worthwhile investment.
First, let’s dispel a myth about accepting credit cards: It has been said that if a small transaction is made, say for $5, a merchant can lose money. Therefore, many merchants have a sign that says: “Credit cards are NOT accepted for purchases under $5” (or other low dollar amount). This is not true and, in fact, a signal like this violates your credit card issuer agreement. A percentage of the total value of the transaction is taken and the merchant receives the rest, known in the industry as a Merchant Discount. At the time of this writing, that percentage is between 1.79% and 2%. If you go to a gas station and buy a bottle of cola for $2, the Merchant Discount amount would equal $1.96 (assuming 2%), meaning that the merchant receives $1.96 and the processing industry of payments receives $0.04.
Now that we’ve dispelled that myth, your next question might be, “Where does that 2% go? Why do I have to pay it?” You must first realize that the payment card industry exists not only to provide payment convenience, but also to generate revenue. Each step that occurs with each card transaction takes a piece of the pie, or a small portion of the selling price of your product. At first, you may be hesitant to start offering credit cards in your business because you think you’d make less money. Just remember that there are currently 1.5 billion payment cards in circulation and most of your customers won’t have enough cash to make large purchases in your store without your ability to accept their credit cards. So where does that 2% go?
1. After your customer presents their card to you and swipes it through your card reader, that transaction will be authorized. Authorization is done at the customer’s issuing bank (ie: Chase, Bank of America, Wells Fargo, Citigroup, etc.). The Issuing Bank is the bank whose logo appears on the card and it is the bank that finally sends the client their monthly credit card account statement. The Issuing Bank takes the largest percentage of your processing cake: approximately 1.75% + $0.10 (or $1.85 from a $100 sale). This is called the interchange fee. Technically, this fee is levied on the merchant’s bank (the acquiring bank), but ultimately this cost is passed on to the merchant.
2. In the process of authorizing a $100 transaction, $0.18 goes to the Visa or MasterCard associations. This is called the assessment rate. Current Visa assessment fees are listed as 0.1100% with MasterCard at 0.0950%.
3. The last slice of the 2% pie ends up going to the merchant account provider, usually the merchant’s acquiring bank or independent sales organization (ISO) that maintains the merchant’s processing relationship. The Acquiring Bank receives $0.07 of the $100 transaction, or .07% of the value of the transaction. An acquiring bank then pays the money to the merchant and awaits a refund from the cardholder’s issuing bank.
This is the basic outline of the costs associated with accepting credit cards. Occasionally, there’s an extra step where the credit card processing platform (you didn’t think all this hard work was being done by hamsters on wheels, did you?) also gets a piece of the pie, but usually that cost is compounded in the industry. -average 2%.
As a merchant that accepts credit card payments, you are basically expanding your target market and increasing the chances that current customers will visit you. Even if you’re a seller of low-cost items, it’s still in your best interest to find a merchant service provider to set up credit card processing right away. In the end, you earn much more than you lose due to processing fees and you will attract more customers who spend more money on your business.
© 2010 Lorraine Wolfe