Credit and debit cards make shopping more convenient for several reasons: Fewer people carry cash these days, some prefer online shopping, and others simply like the ease of use of a credit card. As a result, many consumers find spending easier with cashless payments. Market reports also show that credit card usage continues to grow in spite of increasing interest rates. Most business owners consider credit card payments at some point—for good reason—but does accepting credit cards have any drawbacks?
For most retailers, particularly those selling online, credit card purchases stand to make up a considerable amount of revenue. You might find that customers expect or request credit card payments options for your business. Accepting credit cards improves your customer experience with added flexibility—while allowing your customers who prefer using cash to continue to do so.
From the consumer standpoint, the only major disadvantage of credit card payments is the vulnerability to fraud or theft, but again, those who choose not to use credit cards lose nothing from businesses simply offering the option. Basically, you can assume accepting credit cards will be positive for customers who want card payment functionality, so the real question is if the cost of transacting is worth it.
Depending on your business model and how many transactions you make each month, accepting credit card payments may be more costly than you think. While cashless payments are increasingly the norm, other payment methods like cash or personal check continue to work for some businesses. In addition to cash businesses, business-to-business revenue models might not benefit financially from credit card payments—for example, infrequent transactions with high dollar amounts.
Businesses that are already transactional (i.e. open for business) should evaluate all sales records to get an idea of monthly volume and average monthly revenue. The cost of credit card payments is the monthly fees a credit card processor charges, as well as a set percentage of each transaction—the more credit card sales you make, the more you pay the processor. Startup costs of adding credit card payments and monthly fees alone can cost up to hundreds of dollars, in addition to individual transaction fees. Depending on processor and payment type, per transaction fees and interchange fees typically cost between 0.5% and 5% of a transaction amount.
Credit card processing fees add up and contribute to your major business expenses—depending on revenue, the combined costs might necessitate raising prices or aggressively increasing sales.
New business owners considering whether or not to accept credit card payments should use their business plan to estimate how many transactions they expect in the first few months. A good business plan outlines your sales model, and informs how many transactions you need each month, which will help you determine if credit card payments are right for your business.
The major drawback of cash is the physical limitation. Cash inhibits consumers from spending more than the contents of their wallets, whereas card purchasing extends as far as one’s credit limit allows. People tend to carry cash in relatively small amounts, and so making cash sales for expensive items might be difficult, even if you have eager customers.
There’s a good chance your favorite coffee shop, restaurant, or convenience store doesn’t accept cards, without any noticeable difference in business—if you have a dedicated customer base, or simply cater to a cash-carrying demographic, you might not necessarily need to add credit card payments. Your personal business experience and industry knowledge should give you an idea of how important payment flexibility is for customers.
Past transactions can help—start with your business’s sales records or accounts receivable in order to get an idea of monthly sales volume and, if relevant, find the average dollar amount of individual sales. If you don’t have enough sales on record for this, try making an estimation based on your business plan.
New and fast-growing businesses can be difficult to predict, so you might not know how many transactions to expect. Rather than making the decision about credit card payments based on sales numbers you aren’t sure about or don’t have yet, another approach to understanding and comparing credit card transaction fees and rates is to choose an example you’re familiar with to model sales and costs. This will show a relationship, not actual values, so keep in mind it’s a tool, not a projection. To get an idea of how transaction fees would impact revenue, pick one product or item your business offers and figure out how many per month you need to sell on average.
Fees are the biggest downside of accepting credit cards or other third-party hosted payments. Each processor is different, and so there is no single determined cost of accepting credits cards, but you can estimate how much fees would add up to for your current revenue and transaction patterns.
Each transaction between a customer and merchant is hosted/facilitated by the credit card issuer, in exchange for a small percentage of each transaction deducted from the purchase amount. The processing fee for retail businesses varies depending on the type of transaction and the card issuer—for in-store credit card purchases (or “card-present transactions”), most major credit cards (Visa, MasterCard, Discover) have a processing fee between 1.5% and 2.5%, although these rates may be higher.
When a customer pays cash for your product, you make a direct sale, and money changes hands once. Credit purchases involve additional processing, by the cardholder’s bank and the merchant bank, which means two parties take a cut of each transaction before you see a profit. Interchange fees are subject to change, and most many major credit cards post updated interchange rates online.
Like personal credit card fees for monthly maintenance and account minimum balance, a payment processor might charge monthly fees for transaction minimums, statements, and reporting.
Transaction fees aren’t the only cost of accepting credit card payments for your business. The machines used at the point of sale can cost up to thousands of dollars, and comes with its own security liabilities. The credit card host might also charge additional monthly fees for equipment and maintenance.
At some point, one of your customers will dispute a charge, ask for a refund, or make a different complaint about a payment—it’s the nature of consumer-retail relationships. Whereas legitimate cash transactions are relatively difficult to defraud—i.e. properly kept books—credit cards and online payments expose both a merchant and customer to data breaches.
Unfortunately, stolen cash and legitimately obtained cash transact exactly the same, and there is very little recourse for recovering stolen money once it has been spent. That said, in the absence of theft or using counterfeit money, making a fraudulent cash purchase is extremely difficult.
Credit card fraud gets a lot of attention, but customer payments aren’t the only aspect of your business vulnerable to threats. Any third-party host you use in customer transactions should be a security concern, and there are precautions you can take to keep your business and customers safe.
Credit cards are liable to theft and use of the physical card, as well as the possibility of cyber attacks targeting banking information and personal data. In the event of suspicious activity or a stolen card, customers may dispute a charge on a credit card.
If you need to offer customers more payment options, but aren’t sure about opening a merchant account, a payment service provider (PSP) facilitates debit and credit transactions. You’re probably familiar with PayPal, Stripe, and Shopify if you sell online. These systems still carry transaction fees, but might be less hassle for business owners who do not want to open a merchant account.
The rates and fees for Square payments vary depending on payment type—fees range from 2.75% to 3.5%, with the possibility of additional flat fee per transaction. The supported payment methods depend on the Square device and if transactions are in-store, online, mobile, or an invoice.
In an increasingly cashless marketplace, it might seem like business owners have no choice but to follow the trend of credit card and online payments. But accepting credit cards can actually be very costly for businesses with low sales volume and purchase amounts, because each transaction incurs a fee. There is also an added degree of financial risk inherent in credit card payments, namely fraudulent usage, and the possibility of having to pay fees.
Ultimately, the payoff depends entirely on the nature of your business—you know your business better than anyone, so use that information to inform your decision about accepting credit card payments. Here are a few situations in which it might not make financial sense for your business to accept credit card payments.
Credit cards are what make purchasing possible for most online shoppers, so consumer retail businesses with online storefronts are a good fit for online payments. There are few alternatives to credit card payments for businesses that transact online. If you aren’t ready for a complete ecommerce storefront, including payments, you might start with showing your inventory online and offer customers the option of ordering online for in-store payment and pick up.
B2B models that use traditional paper invoices to collect payments can work as an alternative to credit card payments, as long as customers are willing to comply. Retail businesses and restaurants rely on frequent transactions, whereas business-to-business subscription services collect payments in the form of monthly invoices.
Most cash-based businesses would probably attract some customers with card payments, but the additional business might not always outweigh the cost of transacting. This could be true in the case of an ice cream truck or newsstand, for example, where purchase amounts and transaction volume are unlikely to differ significantly between card and cash users.
You’ve probably been to a convenience store with a credit card minimum or an extra fee for using a card payment method—that’s because credit card processing fees make a big difference in small purchases. Some business owners compensate for this by requiring a minimum purchase for credit cards, but credit card surcharge legislation varies by state, so you’ll have to check your state’s rules before setting a minimum or surcharge.
If the numbers aren’t making the choice clearer, try talking to customers about credit card payments, and ask for frank feedback about the payment process. If you currently own an established business in the community, customers willing to provide feedback can give you insight into the demand for alternative payment methods. It sounds intuitive, but it’s also worth consulting employees about customer complaints or comments.
Looking for information about using credit cards for your business? Learn more about using credit cards in operating your own business, you can learn more about applying for business credit cards here.
Margaret Spencer writes about small business finance and entrepreneurship. She is interested in financial empowerment for small business owners across industries, and passionate about sharing insights on accessibility and communication to help entrepreneurs grow.