Profitability Impacts
Profitability Impacts: The Cost of Accepting Credit Cards
By Patrick O’Boyle
Credit card use has now penetrated almost every industry. In fact, more than 5 million
With such widespread growth of credit card usage, and the added benefits of collecting payments the next day, businesses have become reliant on this critical financial tool to better manage their receivables. Unfortunately, the explosive use of credit cards is paralleled by the costs paid by businesses to accept them. These costs have long been considered a frustrating “cost of doing business” with no means of containment.
While all businesses understand there is a cost for accepting credit cards, few really understand the true impact to the business’ profitability. Accurate information regarding the mechanics, account options, and real operating costs associated with credit card acceptance is not readily available to businesses.
Consequently, businesses have no one with the expertise to assist them and therefore they fall into the typical pitfalls of the credit card processing industry. This has not gone unnoticed in the business community. The 2001 Wal-Mart case against MasterCard highlighted the issues many businesses have with the costs and billing practices common in the industry1. These billing practices led Forbes Magazine to write the following accusation in a 2002 article about the payment industry: “Visa and its banks skim $30 Billion a year in fees from businesses who accept credit cards.”
Business Impacts
There are several common issues that businesses face that significantly increase the cost of accepting credit cards. The most common issue is many businesses never receive the processing rate they believe they negotiated. For example, businesses are typically presented with a “qualified” or “base” discount rate, however only select credit card transactions will meet the requirements for this rate. Transactions that do not meet these requirements will be classified as “non-qualified” and penalized, thus driving up processing costs for businesses. Another common issue is elective fees. Fees such as annual fees, watts fees, capture fees, authorization fees, and surcharges on Travel and Entertainment transactions (i.e., American Express and Discover) are implemented which further increase processing costs. Likewise businesses are often advised to lease or rent credit card processing equipment. This is rarely a wise business decision. It is not uncommon for businesses to pay as much as 15 times more than the equipment would have cost if purchased outright.
Business owners often refer to their credit card processing charges as an invariable cost of doing business and never take the time to decompose the excessively confusing statements. These credit card processing statements take a certain degree of expertise to review and evaluate, therefore most statements are never critiqued. As a result, few businesses have the time or capability to question the charges and take action to reduce processing costs. This can have an added consequence of increasing the risk of fraud to a business.
Taking Action
In this industry, knowledge is power. It is important for businesses to take time to periodically review their credit card processing solution and look for areas to decrease costs and reduce risk.
Businesses should understand how credit card transactions are classified on their statements. If any transactions are classified as “non-qualified,” understand why this is happening and what additional costs are being charged for these transactions. There may be opportunities to implement a few simple business processes to reduce the number of “non-qualified” transactions and thereby reduce costs.
For example, by simply including a customer’s Billing ZIP Code when entering a credit card transaction, costs can be reduced significantly. Likewise, ensure the business is benefiting from the less expensive Check Cards that are becoming more and more common. A business does not need to implement a PIN Pad to benefit from these less expensive credit cards. The use of Check Cards continues to grow industry wide; some estimates indicate 40% of all credit cards are Check Card transactions.
Question all fees on the statement. Many of these fees are elective. Call the processing bank to understand what each fee is and why it applies to your business. In many cases these fees can be reduced or eliminated.
If your business is currently leasing or renting credit card and check processing equipment, consider buying the equipment. New processing equipment is not expensive, and purchasing the equipment usually pays for itself in less than 18 months.
When selecting a credit card processing solution, or when evaluating your business’ current solution, remember knowledge is power. With the right solution, your business can obtain all the benefits of accepting credit cards, while avoiding the excessive costs and penalties. Cost reductions of 20% or greater can be achieved by taking action.
If you are uncertain whether your business has the most cost effective solution, seek assistance from a knowledgeable advocate, such as a firm with specialized expertise or your CPA.
Patrick O’Boyle is a principal with Leadership Advocates Network, LLC. Leadership Advocates’ mission is to provide its clients with a knowledgeable advocate that can audit and explain the intricacies of non-cash payments, identify and implement the most cost effective solutions, and monitor the solutions on an ongoing basis. He can be reached at (913) 696-9888 or recover@leadershipadvocates.com.
