The Merchant’s Guide to Credit Card Processing

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Caculating Losses, by Lisa Solonynka, morguefile

This chapter is an excerpt from my new e-Book, Retailers’ Guide to Merchant Services and can be obtained at Gelise 1’s Storefront.

Chapter 1

Making a Decision to Accept Credit Cards

Start-up business owners have to make many decisions about their cash flow and if they are not currently accepting credit cards, this may not be a priority when all seems to be running well. After all, people are coming into the store and paying in cash. Once in awhile, someone asks if you accept credit cards and the answer is “No.” If the customers really wants the product and has the cash, they just pay in cash.

However, if the person does not have the cash, the business owner loses out on a sale. But, this does not seem to matter, as most of the patrons come in with cash. The business owner may even direct the customer to the nearest ATM machine, at which time, the customer returns with the cash and pays for the merchandise.

Money in the Competitor’s Pocket

But, what is really happening here? When the owner directs the customer to the nearest ATM machine, he pays for the use of the machine and the owner of the other business receives a fee for the transaction.

What about that customer who desperately needs or wants your product so badly and prefers to pay with a credit card? He leaves and finds another business which sells the same product, but accepts credit cards. Because he has found the product and payment terms he wants, he opts to become a regular customer.

Let’s say you own a restaurant and the customer likes to go out to eat dinner with his wife once a week. Your average dinner is $15.00. That computes to a loss of $60.00 a month or $720.00 per year. This does not seem to be much of a loss for your company on a yearly basis, but what if you turned down five customers per day and they all found another restaurant as the first customer did?

Calculating the Loss

You are open six days per week, so you turn down 30 customers per week. That’s 120 customers per month at $15.00 each which computes to $180 per month. At this rate, the annual loss would be $21,600! What could you do with another $21, 600? If you are cost conscious, you cannot afford to let this continue.

Your competition is earning another $21,600 per year because you will not accept credit cards! If you are profit motivated, you will think about your losses in this way. Could you ever imagine that letting people walk out of your establishment because they are unable to pay in cash could lead to losses of this magnitude?

Let’s imagine what could happen when a customer leaves your establishment to cash an ATM card. He goes next door to cash the ATM card. It costs the customer an average of $3.00 per transaction to use the ATM machine which is the business owner’s profit. If the customer is desperate for your product, they will use the ATM machine.

However, they may decide that $3.00 is too high to pay for acquiring cash out of a machine and leave the store looking for another store which sells the same product and accepts credit cards.

If the business owner receives $1.00 for every customer who uses the machine and you send him five customers, he makes five dollars a day. If you are open six days a week, he makes $30.00 a week or $120 a month. After one year, he makes $1440.00, all because you are not equipped to accept credit cards. So now, you are losing $21, 600 + 1440.00 = $23,040. I ask you again, what would you do with an extra $23,040 per year?

Studies have shown that people spend an average of 12 – 18% more when they pay with a credit card. The owner must be prepared to accept the credit cards when customers present them for payment. If you were the owner of a restaurant and a customer came in to use a credit card, you would have to turn the customer away if you did not accept credit cards.

Suppose the customer ordered a meal and paid cash for it. If he enjoyed the meal he may decide he wants to share it with friends who are coming to visit on the weekend. However, since he prefers to pay for large orders with a credit card, he decides to plan a catered event at his house. Let’s suppose that the charge for a catered event is $500.00. You miss out on an additional $500.00 in profits.

You may not feel that losing $500.00 a year amounts to much and you could make it up on other sales, but suppose one customer per month wants to pay for a catered event by credit card. Because you do not accept credit cards, you turn the customer away and end up missing out on $6000.00 per year. This loss could amount to more during the holidays.

If you add the $6000.00 to the previous losses, it totals $29,040, all because you do not accept credit cards. What could you do with an extra $29, 040 per year? Sooner or later the business owner is going to resign himself to the fact that if he accepts credit cards at his business, he will make more money.

How many years are you going to wait until you decide to purchase a credit card terminal? If you wait one year, you lose $29,040. If you wait two years, you lose $58,080. If you wait three years, you lose $87,120. What could you do with an extra $87,120?

Despite itemizing these losses, some business owners will not be impressed. In their own mind, handling credit cards is just another burden. Having to learn how to make transactions on the credit card terminal, learning the record keeping and watching out for fraud are very time consuming duties.

The business owner would have to learn new terminology, keep abreast of the compliance issues, and work to avoid charge backs. These are added responsibilities for which he has to set aside time to perform these tasks. In some cases, the business owner is already overwhelmed with the day to day operation of the business.

How will the business owner fit this into his schedule? Will the representative be there to assist in the areas where he needs help? What if he cannot get in touch with the representative? These are all valid questions and the owner should not proceed with ordering a credit card terminal unless these questions are answered. Is the extra time spent on learning about credit card transactions worth the $29,040 saved?

Let’s answer these questions one by one. The first question, is one of time management. The owner is going to have to examine his schedule very closely and see when he will have extra time to devote to learning all about accepting credit cards. He may have to delegate some of his duties to his employees in order to free up some time.

There is much to learn, including the operation of the credit card terminal, how to batch out, recognizing fraud, and when and how to call credit card numbers into the credit card companies. Then he has to review and become familiar with the compliance issues.

A good representative will assist the new business owner in learning everything that he needs to know. He will answer questions, make himself available when necessary, and provide a telephone number where he can be reached. The representative should be able to answer most of the questions. In order to retain the customer and receive referrals, the representative should ensure that this process is as efficient for the owner as possible.

In the event that the representative is not available, there should be a technical support department which will assist the business owner and answer any questions he might have. Most credit card processing companies have a technical support department available twenty four hours a day seven days a week, including holidays. Most questions and problems with the terminals can be handled over the telephone.

Your patrons will take you more seriously when you install a credit card machine. Your current customers will go out and tell their friends that you accept credit cards and then they, in turn, will tell their friends. Advertisers say that the best advertising for a business is word of mouth.

The ones who pay in cash now, will probably continue paying in cash. But now, you will gain new customers who prefer to pay in credit cards. Customers prefer to have a choice in payment methods and studies have shown that you will retain your customers when they have a choice.

Credit card terminals also accept debit cards which are a safer transaction for the consumer. Debit cards require the use of a PIN number which only the owner of the debit card has.   In order to use the debit card, the owner must enter his PIN number into the machine.

The business owner incurs a charge for the debit card which is below the rate for the lowest priced credit card, the qualified VISA or Master Card. The savings in processing debit cards is around sixty percent. This means that the fee to process debit cards is about sixty percent lower than the qualified rate.

In order to process the debit cards, the owner must purchase a PIN pad in which the consumer enters his/her PIN number. If the owner does not purchase a PIN pad or ask the consumer to enter his/her PIN number, then the fee for the transaction is at the check card rate which is a about double the rate for processing a debit card. Because of the savings involved, some business owners choose only to process debit cards.

Debit cards have become very popular as many people carry them in lieu of cash. When people use the debit card, they have the option of receiving cash back from the purchase. This means they can receive an amount over and above the amount of change they would receive from the transaction. The maximum amount is determined by the owner.

Receiving cash back is another very attractive benefit for the consumer to use his debit card instead of a credit card as he would not be able to receive cash back from a credit card. Now the customer has a choice of using cash, check, credit card or debit card.

What do you gain by turning down a customer? Studies have shown that a customer is more likely to recount a bad experience rather than a good one. When he relates the experience, people tend to believe the story teller and boycott the place rather than investigate on their own. You may still continue doing business, but your business will not grow as much as it would have, if you were accepting credit cards.

Some business owners do not believe in credit cards for the social reasons of how customers misuse them. While this may be a valid point, most people are responsible in handling their credit cards. We are living in the “Age of Plastic” and people are able to purchase things that they normally would not purchase because they possess a credit card.

Credit cards make it possible for people to have businesses and make more profits than they normally would have if they did not accept credit cards. When the merchant accepts the payment by credit cards, he receives cash in his business checking account within three to five days. As long as the credit card machine accepts the credit card, the merchant is guaranteed to receive the money.

People are responsible for their own credit cards and how they use them. Your decision to accept credit cards will not contribute to the customer’s lack of responsibility in controlling his expenses. This is an issue that the customer must address. It is not the business owner’s responsibility to ensure that the customer does not over spend or abuse his credit card privileges.

Just as the owner must be responsible in learning enough about the credit card processing industry in order to process credit cards, so the customer must be responsible in learning how to manage his debt. The customer, as an owner of a credit card, has certain responsibilities that he must undertake and he/she must make a conscious decision to accept the responsibilities.

© Gail Cavanaugh and The Merchant’s Guide to Credit Card Processing, 2008. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Gail Cavanaugh and The Merchant’s Guide to Credit Card Processing with appropriate and specific direction to the original content.

To order the e-Book “Retailer’s Guide to Merchant Services – From Storefront to Internet,” click here.

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Comments:
Name: Business blog
Website: http://www.in-business.org.uk
This is a good article that any business not already taking credit cards should read and especially in the present economic climate. In the UK for example, for a long time Marks & Spencer refused to take credit cards, so customers could only pay by cash or cheque, until eventually they started to loose customers to their comptetitors and in the end they had to bow to the pressure and ended up taking credit cards.

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Name: Jamwes
Website: http://tim-jim.blogspot.com/
Very good information. Thank you.

Name: Chuck Bartok
Website: http://www.chuckbartok.com

Gail, Very Informative Blog site.
Yes merchants can benefit from a well manged Credit Card Processing System.

Also another advantage is the Judicious use of the
“loans” available to Strong accounts.
But like all Credit, it must be managed well

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CIT to File for bankruptcy

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CIT has been unable to convince bondholders to finance more of their debt. This coupled with the fact that investors would lose money on the a pre-packaged bankruptcy, including the U.S., has caused the company to seek bankruptcy protection. The U. S. stands to lose $2.3 billion and opted not to supply more funds.

The only investor which seems to gain anything from this is Goldman Sachs, who will keep open its $2.3 billion loan in spite of the bankruptcy filing. CIT received a $4.5 billion dollar loan which will keep the company going during the bankruptcy proceedings and will not put the retailers at risk during the holiday season. CIT expects to emerge from this filing in a stronger position.

Many retailers have either gone out of business or cut back on their current operations as a result of the problems which CIT has had during the economic crisis. Retailers have depended on their support for factoring loans to purchase inventory. Many retailers, as a result are relying on their own money to keep their businesses open.

Should retailers set their own rates?

Once again this debate has surfaced, but now the President and a new Merchants Payment Coalition are taking this issue very seriously. The retailers and business owners want the priviledge of negotiating interchange fees with the banks.

In view of the recent new credit card Legislation, this issue will probably not go away. The Merchants Payment Coalition was formed to represent 2.7 million businesses and over 50 million employees in having a voice in the assesment of interchange rates. They claim to be helping to protect the interest of the consumer. The interchange rates are the rates that retailers and other business owners pay to accept credit cards at their establishment.

In addition to the Merchants Payment Coalition, President Obama and Representative Peter Welch of Vermont are conducting studies into the rates. This issue has been a long standing one with the retailers, who believe their rates are too high. The current economic crisis has hurt many businesses and the retailers feel lowering or at least being able to negotiate rates with the banks could help their sales.

Ananlysts have argued that if the banks are ordered to lower thir fees, the consumers could face rate higher rates and fees on their credit cards. Australia has gone through this process and consumers did not save any money as a result.

No More Bailout Money for Failed Banks

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The Federal Deposit Insurance Corporation is seeking private equity firms to buy out troubled banks so as not to put an unnecessary strain on their budget.

Many more banks are slated to fail in the coming months because of defaults on real estate loans. It will not be easy to find private equity buyers as many are reluctant to take on the losses of these failed banks.

Out of the seventy-seven banks that have been closed, sixty-nine buyers have been found. The danger of exhausting the FDIC’s fund has caused Walter Buffet to comment on the need for the U.S. to cut back on the amounts of money it has been pumping into the economy to rescue it from economic disaster.

The U.S. spent $180.7 billion in July 2009, the most it has ever spent in one month in U.S. history. If the FDIC’s funding is exhausted, the U.S. will go to taxpayers to finance the FDIC’s loan sales and short-term obligations.

In view of France’s experience in establishing a bank and making John Law the owner, the U.S. must be mindful of not repeating France’s history and putting unscrupulous individuals in charge of these banks.

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Gold, Another Economic Bubble?

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No doubt you have heard about the debate over whether we are in the midst of another economic bubble. Economists and financial experts say there are ten problem areas for us, and we need to pay attention to them.

Economic bubbles are not a new phenomenon. They have been occurring throughout history aand mankind never seems to learn the lesson associated with them. It seems people are prone to looking for a “pot of gold” at the end of the rainbow only to find out it was not what they thought. This was the case in the economic collapse of France caused by John Law in the eighteenth century.

The ten problem areas are: the Chinese economy, the “Green” bubble, the Gold bubble, the Federal Reserve bubble, the Trash (junk) bond bubble, the Education bubble, the Subprime bubble, the Life Insurance Securititation bubble, the Commercial Real Estate bubble and the Emerging Markets bubble.

It is interesting that the issue of increased gold prices is now an issue with the Chinese and Russian governments. The price of gold often increases when paper money is devalued by printing paper money.

It will be interesting to see how the Obama administration handles this challenge. We are fortunate that we have acces to research and technology which could help us out of this problem before it gets out of control.

Voices of the Economic Crisis

I thought you might find this video interesting. I invite your comments.

Expanding My Business

In case you have not heard, I have expanded my business servicees to include website design, SEO, and children’s book illustration. I have decided I would use more of my skills. I am not giving up any of my current services, but this means I will have more to share with you.

I have spent many years in financial sevrices and just as many, if not more in developing my creative side, which started out as a hobby. You will se some of my works on my website.

Consumer demands are changing and shopping habits have changed. I am pleased theat the economy is showing signs of economic recovery. I will continue to keep you posted on important developments. Thanks for your faithful following. I have enjoyed the comments.

FDIC Seeking Private Investors

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With fewer larger banks unwilling to purchase troubled banks, the FDIC is now looking to private investors to bail out these banks. Private investors recently extended funds to CIT Bank to keep it from bankruptcy filings.

Since private investors tend to cut costs by eliminating jobs, unions are against private investors getting involved with acquiring distressed banks.

The involement of private investors would relieve the U.S. of their intervention in some of the failed banks earlier in this economic crisis. Warren Buffet recently made a statement that the U.S. “must address the massive amounts of monetary medicine that have been pumped into the financial system and now pose threats to the world’s largest economy and its currency.”

The federal deficit reached an all-time monthly high of $180.7 billion for the month of July 2009.

Nervous shoppers send July Sales South
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Restaurants at Risk for Identity Theft

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Hackers recently targeted 7 Eleven stores and Hannaford Brothers customers for identity theft and secured information from 130 million credit card and debit card accounts. Fortunately, Albert Gonzalez of Miami was arrested. Gonzalez apparently cooperated with federal investigators on other cases of identity theft in the past. This is the largest case of identity theft so far.

Restaurants often fail to update their computer viruses and other security systems. If you are an owner of a restaurant, it would be wise to investigate your system to make sure it is updated. Since identity theft continues to be a problem in the U.S., you as a buisness owner cannot afford to be negligent in this area.

These hackers used a device to tap into wireless processing and read the customer accounts as customers entered the stores.

Asian Countries Showing Signs of Economic Recovery

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Japan, China South Korea, Indonesia, Singapore, and Hong Kong are all reporting quarterly growth for the first time in a year. Blaine Harden, of the Washington Post Foreign Service reports on August 17, 2009 that the growth is due to “a spurt in manufacturing, an easing of credit, and the health of Asian banks that were largely unscathed by the U.S. and European debt crisis.”

Germany and France are also showing growth, but not to the degree of the Asian countries. The U. S. on the other hand suffered a decline in growth for the second quarter as the Federal Reserve will pull back its intervention in the economic recovery soon.