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Impact of Credit Card Usage on Small Businesses

Small businesses rely on many different things to keep operations running smoothly, especially financially. Many times they don’t have the same capacity or resources that large businesses do, which can make keeping business afloat more of a challenge. This applies to the fees that small businesses incur from consumers using credit cards when they make a purchase. There can be both downsides and upsides to allowing customers to pay via credit card as a small business, so here’s what you need to know.

Credit Card Fees Are Rising

Over the past decade, the processing fees of major credit card companies like Visa and Mastercard have more than doubled. When customers pay for products or services using a credit card, companies are obligated to pay a processing fee anywhere from 1.5% to 3.5% on every transaction. Between 2015 to 2021, the average fee went up from 0.3% to 2.22%. That’s a pretty big jump.

Two or three percent can sound like a relatively small number, but it can end up costing tens of thousands of dollars annually, if not more depending on the company’s yearly revenue. According to payments consulting firm CMSPI, U.S. credit card fees are among the highest in the world because of a higher quality of service. Ultimately, this can force small businesses to either raise their prices or take on smaller profit margins.

“Friendly” Fraudulent Purchases

When consumers use credit cards to pay for products and services, they can sometimes make what’s called a “friendly” fraudulent purchase, otherwise known as a chargeback, which means they dispute a charge to their credit card account even if they were the one to have made it. They are essentially claiming that a purchase they made to a merchant caused an incorrect charge in their account. Depending on how the card issuer rules over the scenario, the disputed charge will either stay on the cardholder’s bill or the payment will be voided, costing the company those lost funds.

Combatting Credit Card Fees and Chargebacks

There are a few ways companies can approach steep credit card fees and even chargebacks. As mentioned, small businesses can choose to raise their prices and shift some of the fee burden onto their customers. That lessens the risk of tight profit margins and keeps cash flow steady. If a business chooses this route, they must ensure that their products and services maintain a value that matches price raises.

The only way to fully avoid credit card fees and chargeback situations is to refuse payment by credit card. However, this can also turn away business. In fact, roughly 30% of U.S. consumers only use debit or credit cards for purchases, which could mean that businesses are turning away 30% or more of their potential customers by disallowing them to use credit cards. Studies have reported that businesses that accept credit cards often make more money than those that don’t, because credit card using customers are likely to spend more money than those who pay in cash.

Denying the use of credit cards also takes away convenience for customers, especially in today’s “tap-and-go” type of society. This can also reduce the trust customers have in your business, as they know that credit card companies provide protection over their accounts if something fishy happens with their purchases.

At the end of the day, the risk of allowing credit card usage at your small business or not comes down to your needs and your customers’ needs. Perhaps you can even meet somewhere in the middle—a local ice cream shop in Texas simply put up signage letting customers know that using credit cards charges them a lot of fees, and then ultimately the decision is up to the consumer.

If you want some additional guidance on running your small business, how to keep risk low, and how to make well-informed decisions, give us a call at 800-526-9127. Plus, visit our library of resources for other helpful financial tips.

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