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> Business to Business > Business Finance > Plastic Pays
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Plastic Pays
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Richard Rheault is an Account Executive with First National Merchant Solutions. He can be contacted at rrheault@fnni.com.
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A primer for credit card processing, By Richard Rheault
It's an industry that grew out of the relationship between the customer and the retail merchant. Some merchants would extend a line of credit to their customers thereby allowing their customers to pay for goods over a period of time. However, not all merchants could afford to extend this courtesy to their customers. This inability to so do offered an opportunity for banks to aid their merchants. And come 1940, the credit card concept was introduced.
Fast forward almost 70 years and the industry includes credit cards, debit cards, gift cards, corporate cards and, in the works, smart cards. McDonald's even accepts credit cards partly as a courtesy but also, according to the Wall Street Journal, because McDonald's found that the average transaction rose from $4.50 to $7.00 when customers used plastic instead of cash (CIO Insight January 2006). The cost of service was no different, so their profit on the two dollar increase was almost twice as much as on the initial four dollar sale.
The Basic Process
Whether your company currently accepts credit cards or is considering offering customers that "courtesy", here are some basics to consider, and they include the credit card processor, their fees and the cost of equipment.
There is a cost associated with every credit card transaction. Most credit card processors collect their fees at the end of the month. So if a company runs through $1,000.00 worth of charges today, the processor will take their fees on the last day of the month or the first day of the following month and pay the company the balance. Some processors deduct their fees every day. That can get a little confusing for the business owner because they see a $1,000 sale but $952.84 goes into their account after the fees are deducted and that can be accounting nightmare. Most processors trust that the money will be there at the end of the month.
Processing Fees
Fees can vary depending on the type of card, i.e., debit or credit cards, rewards cards, purchasing cards, and business corporate cards. Fees also depend upon whether the card is being physically swiped or the information from the card is entered manually. All rates are calculated on the card-issuing bank (Capital One, for example) not getting paid on that card. So the least possible coverage would be a debit card because a Visa or a MasterCard won't approve [the transaction] if the money is not in the card holder's checking account. Therefore, those fees are very small as compared to a credit card where the card holder may have a $10,000.00 line of credit. With the latter, there is a risk involved to the card issuing bank maybe the person dies, or the person files for bankruptcy, so in that case, they write it off from all the fees they charge business owners in aggregate.
Credit Card Savvy
For the business owner who wants to accept credit cards, good advice is to look at three different processors and ask which, for example, offers the best rate and charges the least for equipment. All processors operate differently, but each is charged an interchange rate, to which they add their cost of doing business and their profit. If a company can deal directly with a single processor the fees should be lower.
Also some processors have a sales arm called an ISO (Independent Sales Organization) or an MSP (Merchant Service Provider). The processor wants to make money, and the sales arm wants to make money. So the more people involved in the process, the more the fees will increase. By analogy, if you purchase a loaf of bread from a bakery, it is less than from a supermarket where shipping, handling and profit are added.
What to Ask
Credit cards can still be a courtesy to the customer and an incentive. A Dunn & Bradstreet study found that people spend 12-18% more when using credit cards than when using cash (July 2007). But the savvy merchant will ask the processing company about monthly rates, any hidden fees, the cost of the equipment (rent or lease). All processors buy the interchange rate at the same place and we add our costs of doing business, maintaining computers, salaries and a profit. So one company may offer a lower rate but charge more for the equipment or tie you into a lease. It's not just the rate.
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