How and Why Retailers Pay to Accept Credit Cards
In the past we’ve talked about how credit card companies make money. One of the ways that credit card providers stay in business is by partnering with retailers and charging usage fees for the rights to that company’s cards.
When it works well, this is a mutually beneficial relationship for both credit card companies and run-of-the-mill retailers. The big credit card companies can bring in the dough for themselves and retailers get a shot at expanding their customer base — credit card payments are so common these days that it’s hard to run a business without accepting your clients’ cards.
In the past, credit card companies have dealt mainly with other large companies. Giants like Target and Macy’s have the resources to deftly negotiate with credit card providers in order to get the best deals available. However, a new breed of retailer is coming into the market. More and more individuals are starting up their own shops, selling homemade goods online or in farmer’s markets.
Individual retailers stand to benefit a great deal by accepting credit cards from their clients, but these personal entrepreneurs lack the behind-the-scenes know-how of larger retailers. Here’s everything that you need to know about accepting credit cards as a retailer.
The Fluidity of Money — Why Credit Cards Mean More Customers
In economics there is a concept known as “fluidity” of currency. Fluidity is an attempt to explain some facets of consumer spending, and it is a big deal for retailers of all stripes. To understand why, let’s talk about what makes currency fluid and what high fluidity means for retailers.
Let’s imagine a prospective consumer that we’ll call “Martha.” Martha is at the farmer’s market when she sees a piece of jewelry that she really likes. She reaches into her purse for her credit card, but the jeweler only accepts cash. Martha doesn’t have enough cash on her to pay for the item. She could go a few blocks down to the ATM and pay the ATM fee, but that’s a trip that she doesn’t want to take.
Martha’s example is one in which money is not very fluid. It’s challenging for Martha’s money to make it into the hands of the retailer and so no sale is made. Ultimately, fluidity has to do with how easily money exchanges hands from consumers to retailers.
As you might imagine, money has become increasingly fluid in recent decades. New inventions like the credit card and debit card have made purchasing incredibly convenient. Online payment services like WePay have made it possible for consumers to make complicated payments with the click of a button.
The increased fluidity of money matters. Martha was dissuaded from buying the jewelry because it was difficult to pay the retailer. If the jeweler above had accepted credit cards, then he could’ve done business with Martha.
This is the mindset that every retailer should adopt. Increase the fluidity of currency in your transactions — make it as easy as possible for customers to pay you and your business will reap the rewards.
Working with Credit Card Companies
We’ve talked about the pros of accepting credit cards: you get to increase your consumer base. However, we also need to talk about the cons of accepting credit cards. Namely, dealing with credit card companies.
For all the services that credit card companies provide to make conducting business easier, they are out to make a profit and they are not your friends. Credit card companies make money by charging retailers, among other things, so they’re always going to try to get the most out of you.
As a retailer, it’s up to you to make the right decisions about credit cards for your business. Here are some things to think about.
Should I Accept Credit Cards?
We already know that accepting credit cards will help to boost your customer base, but that doesn’t mean accepting credit cards is the right decisions for every retailer. It’s important that you consider the fees associated with credit cards in relation to the new business you expect to bring in. This will vary based on the kind of business you do — online retailers who deal through services like PayPal may not see much of a boost in sales, but retailers who sell their goods in-person could benefit a lot.
Make sure that you are able to pay credit card fees before you start accepting them. Paying credit card fees off regularly is a good way to build your business credit score.
Do I Need to Accept Every Credit Card Brand?
Not necessarily. Here’s where you get to be the client and exercise your power as a buyer. Credit companies aren’t your friends, but they will still do everything that they can to attract your business when it comes to fighting off the competition.
Look at demographics in your area and see which company has the most cardholders near you. You should also consider who you’re selling to — some credit card brands are held more frequently by certain kinds of consumers.
Flat Fees and Transaction Fees
Fees are unavoidable when it comes to accepting credit cards, but you should understand what kind of fees you’re dealing with so that you can make the best decision about accepting credit cards. Flat fees are a fixed amount that you will be charged by a credit card company, usually for opening an account with them.
Transaction fees are fees that you pay per each transaction that uses a credit card. Typically you will pay about 2-3% per transaction. However, transaction fees can go up for uncommon types of transactions. For example, you can expect to pay more if you are dealing regularly with international customers.
If your business is just getting off the ground, you may find that flat fees present the heavier load on your financials. Established retailers who routinely sell to many consumers every day will find that transaction fees are what drags them down.
Credit cards can be a great way to improve your customer base as a small business. Make sure that you crunch the numbers, think about how much your customer base might expand, and which credit card companies you want to deal with in order to help your small business thrive.
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Nick Cesare is a writer from Boise, ID. In his free time he enjoys rock climbing and making avocado toast.
This post was updated December 11, 2017. It was originally published August 11, 2017.