Why Must Your Business Be Able to Process Payments with Credit Cards?
A major transformation is in process throughout the consumer driven economies of the developed world. To say that cash is “out” as a medium of exchange, and credit cards are “in”, may be a bit of an overstatement, but the phrase neatly summarizes a trend that all sellers of goods and services must pay attention to. Mints around the world are still producing good old coins and paper currency, and there are many minor purchases that are quicker to complete with a dollar or two and some big pocket change. But an increasing number of transactions such as renting a car or checking into a hotel, can only be accomplished with a credit or debit card. The same is true for the rapidly increasing proportion of purchases we now routinely make online. Small and medium businesses that set up to accept payment with credit cards find that the ability to accept payment with credit cards brings a wide range of advantages, with only a few minor downside concerns. On the plus side, small and medium-sized business owners report advantages including:
- Purchases of expensive products or services are easier and more convenient for customers if they do not need to have hundreds of dollars of cash in their wallet to complete the transaction.
- More and more people prefer not to carry more than a few dollars of currency on their person. If your business doesn’t “take plastic”, that increasing portion of the population is excluded from your potential customer base.
- The consumer’s sensible resistance to indulging in high-margin impulse purchases is often undermined by the simple phrase “I’ll just put it on the card”.
- For some kinds of shopping, credit card users spend more per store visit because they are not limited by the amount of cash they are carrying. Cash customers, by contrast, make the more visits, and buy less per visit. Larger sales per customer visit works to the advantage of the business owner.
[Reported] Downsides of Accepting Payment with Credit Cards
- The card processing companies take a small portion of each credit card transaction to cover their expenses, and frequently charge monthly or annual account maintenance fees.
- Sales completed with credit cards carry a slightly higher risk of fraud than cash sales.
- It can take up to several weeks longer for credit card sale proceeds to show up in the company’s bank accounts than cash sale proceeds.
- The time lag between the sale of an inventory item and the receipt adds an extra layer of complexity to company bookkeeping.
How Does Accepting Payment With Credit Cards Actually Work?
In its simplest modern form, credit card processing starts when the seller enters the transaction information into a terminal connected to a modem. The buyer then swipes his or her card through the terminal, which then encodes both buyer and seller information, and transmits that information to a “merchant account” in a bank or specialized credit card processing company. The merchant account immediately accesses the buyer’s credit or debit card account. If sufficient credit (or cash, in the case of debit cards) is found in the buyer’s account, the transaction is authorized, and funds are transferred from the buyer’s account to the merchant account, and then on to the seller. Variations on this process exist to accommodate the special needs of restaurants, resort hotels, and other product or service providers.
Credit Cards and Online Purchases
The ability to accept payments by credit card opens the door for sales through company websites and other online venues. It is not uncommon for revenue from online sales to quickly surpass direct sales revenues. With a little help from website design experts, business owners can learn a great deal about the age, gender, and web browsing habits of current and potential customers. This information can be used to place targeted ads with links to the company website at online locations most likely to be visited by potential customers. Privacy concerns notwithstanding, the emerging science of precisely targeted Internet marketing has become a powerful force in today’s consumer driven economy.
Online payment by credit card can be transacted using a merchant account as described above, or through an online payment processor such as PayPal. Fees are generally similar even though the buyer’s local currency may be different from the seller’s.
Beyond the Credit Card
Technology has existed for some time that allows the connection of handheld card readers to cell phones, allowing credit card transactions to take place almost anywhere that cell phone coverage is available. This technology has been used in a surprisingly diverse range of financial exchanges.
There are a number of competing technologies that permit a buyer to complete a transaction using a smart phone application instead of a credit card. In most cases, the seller must have a specialized receiver for the process to work. Some major retailers have installed terminals for one such application, perhaps hoping to attract the demographic group most likely to find the technology interesting and fun.