Opening a retail business today, whether an online or a traditional “brick-and-mortar” store, requires a budding entrepreneur to address a plethora of business issues right out of the gate. Finding reliable sources of product, managing inventory, and, not to mention, marketing to consumers consume an inordinate amount of time on the front end.
The acceptance of payments, however, can suddenly present a surprise if you have no experience in this key process of doing business.
Confronted with unanticipated costs for debit and credit card processing is one thing, but having to pay more monthly fees for terminals, their set up and maintenance, and then charge-backs for purchases that did not follow overly complex legal rules are just a few of the details that no one ever fully explained. Many newcomers, frustrated by the seeming unfairness of it all, quickly and recklessly begin searching for less expensive options. Unfortunately, you truly get what you pay for in the debit and credit card processing industry. What may appear as a cheaper alternative usually “morphs” into more indirect and hidden fees and, sometimes, outright fraud.
There are reasons for the present cost structure. Online options naturally involve more risk since you are not dealing “face-to-face” with your customer, and overseas transactions must be accepted with much more caution than you might expect. The basic “Merchant Discount Fee”, typically in the 3 to 5% range depending on your type of business, can, however, be the most galling aspect of accepting card-based payments from your customers. There are lawsuits pending in this area, an attempt by the merchant community to lower this cost factor, but this type of suit will take years to resolve in our court system.
Bankers are loath to give up any portion of this revenue stream, due to the overall costs of both processing payment transactions and extending unsecured credit to the general public at large. Recent legislation has helped. New lower item-based fees have been set for debit card payments, viewed by many as simply a replacement for checks and cash. Credit transactions, however, remain as an item charge and a percentage of the actual purchase value.
From an historical perspective, bank credit cards actually replaced the practice of stores managing their own proprietary credit-issuing programs. Operating costs for such programs were high, in excess of 8%, but stores justified their existence because they thought they engendered more loyalty from their customers. Bank credit cards successfully “debunked” that theory and reduced overall costs for everyone, but, over the years, the merchant establishment has forgotten these benefits from long ago.
Unsecured credit is costly. Card programs must also fund what is called “convenience usage”. Fees today barely cover these costs, if at all. Banks accept this reality, because over time, convenience users tend to upgrade to a bank credit product where the profits reside. These risks translate into higher “point-of-sale” fees that retailers learn to accept as a “cost-of-doing-business” and factor into their prices.
About the Author: This was a blog post by Tom Cleveland of merchantseek.com