- Accepting Cards
- Brand Names and Fee Shopping
- a. Visa
- b. MasterCard
- c. American Express
- d. Discover
- e. Related Matters
- Customers and Contracts
- Reconciling Records
- Using Credit Cards
- Card Abuses
- Verification of References and Records
- Final Comments
Credit cards have changed and continue to change the way small business does business. While cards remain primarily a means of administrative convenience, they also provide an important – if expensive – source of credit for many. They facilitate customer payment which in turn generates sales. And, while cards are invisible in many industries today, they may not be invisible in those industries tomorrow. Unfortunately, their proliferation has been accompanied by business practices that have been termed abusive. Such charges are currently topical as is the substitution of credit cards for credit lines. These issues deserve attention. So do less topical, but more enduring questions about small business and credit cards. Since most small business owners and managers have one or more cards that they use for business purposes and half accept them as a form of payment, this issue of the National Small Business Poll addresses Credit Cards.
Virtually half of the small business population (49%) accepts credit and/or debit cards as a form of payment (Q#1). The average percent of total dollar sales paid by card among those who accept cards is 33 percent with smaller, small firms having a somewhat higher percentage paid in this manner (35%) than larger, small firms (27%) (Q#2). Cards therefore pay approximately one of every six dollars of sales small businesses make, a staggering sum, demonstrating their importance to the operation of smaller firms.
Card sales vary enormously across the population. While 49 percent accept cards, a majority (51%) do not. Others accept cards, but find their acceptance marginally important. Almost one-third (32%) of those accepting cards maintain that cards pay 10 percent or less of their total dollar sales volume (Q#2). Yet, cards can be critical. Eleven (11) percent report that cards pay 76 to 100 percent of their total. That 11 percent translates into 5 – 6 percent of all small, employing businesses whose sales are substantially paid by either a credit or debit card.
The most common type of card transaction is face-to-face for the obvious reason that most sales are face-to-face. Eighty-seven (87) percent accept cards under those circumstances (Q#3); 81 percent accept them for telephone sales (Q#4); and, 26 percent accept them for Internet sales (Q#5). It appears small businesses that accept cards, accept them in any milieu in which they do business.
Customers use credit cards more often to pay for small business originated goods and services than debit cards. The difference appears substantial. Despite the push by businesses to have consumers use debit rather than credit transactions due to the lower fees charged on them, small employers estimate that on average 69 percent of their dollar card sales are credit cards (Q#6) and 14 percent are debit cards (Q#7); 10 percent could not or refused to make an estimate for either. To underscore this distribution between credit and debit cards, 55 percent estimate more than three-quarters
of their dollar card sales are credit while 61 percent estimate 10 percent or less of their dollar card sales are debit.
All small business owners who accept cards accept VISA (Q#8). Not a single respondent who accepts any card, failed to accept VISA cards. The brand effectively has a 100 percent market share, omitting those who do not accept a card.
Businesses that accept credit cards pay a fee on credit transactions. There is a base fee though supplements are added to
cards which carry unique customer benefits, such as airline miles. The average fee small employers pay for accepting VISA is about 2.3 percent of sales (Q#8a). The most common rate is 2.0 percent. However, there is variation with 3.0 percent also a common rate. Part of the variation is likely respondent adjustment for supplemental charges from special cards as the survey question implied they should do.
Thirty (30) percent could not or refused to provide an estimate of the fees paid. That is a very high proportion. One possible explanation is that this group has relatively few card sales, making them inattentive to what clearly is a minor cost. Yet, owners not making an estimate have about the same proportion of sales paid by cards as do those who offer one. A second explanation is that respondents who have someone else reconcile their credit card reports with the banks
or service providers do not see the charge continuously and therefore are less likely to know it. The evidence does not support that explanation, either.
Still, small business owners appear sensitive to the cost of card fees. Sixty-five (65) percent shopped to find a better deal before settling on the rate that they now pay; 33 percent did not (Q#8b). Shopping proved fruitful for a large number. Over half (55%) of shoppers switched from a different vendor to the one they now use (Q#8c). And, a modest relationship exists between shoppers for better rates being more attentive to the rate than non-shoppers as a third possible explanation to the large number who cannot estimate the rate pay. Yet, it appears once a decision has been made and the service purchased, the rate is not important enough to remember for almost onethird who accept cards.
Most who shopped chose a vendor with a fixed fee. Fifty-three (53) percent accepted an established price (Q#8d). However, 40 percent negotiated the fee directly or through their industry trade association. Owners of larger, small firms negotiated more frequently, though the difference between the smallest and the largest was only about 10 percentage points. Since the survey did not collect data on direct negotiations and trade association negotiations, it is not known if the 10-point gap is a function of business size, trade association power, neither or both.
Those who did not shop offered a variety of reasons for their decision. The most frequent (26%) reason was that they wanted to keep their banking business in one place (Q#8b1). Thirteen (13) percent offered the opinion that all vendors are the same, so why bother to look. Twelve (12) percent did not shop because they thought the fee was fair. Eleven (11) percent did not know that they might be able to get a better deal elsewhere. The remainder who gave a reason provided miscellaneous responses.
When the current contract expires, many small employers expect to shop for a new vendor (again) to process their credit
card receipts or, at least, they plan to explore their options. Forty-four (44) percent of those who accept VISA plan to actively search for a different vendor (Q#8e). But 47 percent will remain on the sidelines; 2 percent claim not to have a current contract; and, the remainder are undecided.
Presently, the overwhelming majority (84%) of small employers who accept cards deal directly with a bank to process their credit card receipts (Q#8f). Just 14 percent deal with a credit card services provider.
Ninety-eight (98) percent of small businesses that accept any form of card for payment accept MasterCard (Q#9).
The fee structure for MasterCard credit transactions that small business owners pay is virtually identical to that of VISA. The average fee is 2.3 percent, and 2.0 percent and 3.0 percent are the two most common rates (Q#9a). Again, a significant portion (31%) could not or would not estimate the fee.
Fifty-five (55) percent shopped to find a better deal (lower fee) before settling on the fee that they are now charged (Q#9b). That is 10 percentage points lower than shopped for a better VISA deal. The reason for less shopping on MasterCard is likely that the two frequently are issued from the same bank and when the business owner shops for one, he effectively shops for the other. Sixty-two (62) percent of those shopping switched from a different vendor to the one they currently use (Q#9c), suggesting that they are sensitive to the price charged. However, service quality, disputes, and other causes may also be important factors.
About as many negotiated their MasterCard fee as accepted the given rate (Q#9d). Forty-seven (47) percent report the fee negotiated compared to 46 percent who took the other fixed rate path (Q#9d). The data suggests that MasterCard is more willing to negotiate or have its agents negotiate fees with small business owners and/or their associations.
The overwhelming majority (85%) of small businesses accepting MasterCard use a bank to process their credit card receipts (Q#9f). Just 14 percent use a services provider. If a small business uses a bank to service credit card receipts for MasterCard, it almost always used a bank to process VISA receipts and vice-versa. The bank is highly likely to be the same for each. The same is true of a services provider. In only about 5 percent of cases is receipt processing divided
between the two.
The reasons for not shopping for a better MasterCard fee parallel those for not shopping for a better VISA fee. Fourteen (14) percent did not shop because they thought the fee was fair; 9 percent because a franchisor negotiated one for them; 9 percent because all providers are the same; 8 percent because they did not realize that they could get a better deal elsewhere; and 5 percent saw no reason to change. The exception was that 35 percent did not shop for a Master-
Card fee because they wanted to keep all of their banking in a single place; 26 percent offered the reason for not shopping for a VISA fee. The nine percentage point gap suggests that once a VISA deal is reached, a MasterCard deal often falls in line.
About half (44%) plan to shop when their current MasterCard contract expires (Q#9e).
Sixty (60) percent of small businesses that accept any card accept American Express (Q#10). The largest, small businesses were almost 10 percentage points more likely than the smallest to accept the card. No distinction was drawn between the company’s charge card and its credit card.
The average cost to a small business for a customer to use an American Express card is higher to the small business than either VISA or MasterCard. At an average of 3.2 percent per transaction, it is almost a full percentage point more (Q#10a). The most common fee is 3 percent, though 14 percent claim theirs is 3.75 percent or higher. A substantial percentage (34%) again would not or could not make an estimate.
Fifty-nine (59) percent of small businesses that accept any card accept Discover (Q#11), putting the card’s small business acceptance on a par with American Express but substantially less than VISA or MasterCard.
The average fee Discover charges small business is 2.5 percent (Q#11a), almost the same as that charged by VISA and MasterCard, but lower than that charged by American Express. The pattern of Discover fees also more closely resembles the former two cards than the latter as the most common rate is 2.0 percent followed by 3.0 percent.
Small business owners periodically drop a card; they will no longer accept a card they once did. Eight percent currently accepting cards dropped one or more in the last three years (Q#20). An insufficient number of cases means it is not possible to determine the principal reason for their action.
The Internet has given rise to a new form of electronic payment that substitutes for checks or money orders, PayPal. This method of financial transaction occurs between two parties, allowing consumers to make secure Internet transactions using a major credit card. Seventeen (17) percent accepting cards use PayPal (Q#16). Since 26 percent accept credit cards over the Internet, the remaining nine percentage points presumably use another technology to secure their transactions.
Small businesses have contracts with credit card companies that among other things control terms of the transaction between customers using the card and businesses accepting it. One common term is that a business cannot charge the customer a fee for using the card, though nothing prohibits the business from giving discounts to customers paying in cash.
Fourteen (14) percent of small businesses that accept credit cards give customers cash discounts (Q#12). The reason for the policy is not clear and the survey did not delve into it. The trade-off, however, is a policy that equalizes the margin regardless of payment method while increasing the transaction’s complexity. Likely these policies are associated with volume purchases and/or transactions between businesses where discounts are commonly given for prompt payment. However, the smallest, small businesses are almost twice as likely to give cash discounts as the largest, small businesses.
Though theoretically equal, the “optin” or “opt-out” choice yields enormously different practical outcomes. The same general principle holds for charging customers to use credit cards and giving discounts for cash. While the number of owners who give cash discounts is relatively small, the number who would charge extra for card use, if they could, is relatively large. If given the opportunity, 29 percent of those accepting cards would charge extra for their use (Q#13).
Those with the fewest dollar volume sales, particularly 15 percent or fewer, paid by credit card are the most attracted to such an opportunity.
Very small credit transactions cause businesses difficulty not only because of the time wasted on a very small sale, but
because the fee typically has a flat minimum. That can leave the business with an absolute loss due exclusively to use of a credit card. Most contracts specify minimums cannot be imposed, but many small business owners do. Thirteen (13) percent report a minimum, the overwhelming majority of them in businesses employing fewer than 10 people (Q#14).
The business owner signs a contract to participate in a credit card program, granting the business an opportunity to accept the card and be reimbursed under terms of the contract. The survey questionnaire posed several questions designed to elicit small business problems with the contract and their relationship, problems that often were too infrequently encountered to elicit detail about them.
Eight percent report that they experienced a “hidden penalty” in the last 12 months (Q#17). In other words, the credit card issuer charged the small business violated a provision of the contract of which they were unaware and the issuer penalized them. The principal violators were owners of the smallest businesses, those employing fewer than 10 people, those least likely to have the advice of legal counsel. While the few cases available suggest the penalties imposed were not onerous, it was not possible to discern any pattern of contract violations or obtain the details involved.
Disputes will arise between a business owner and a bank or credit card services provider about some aspect of accepting cards as a form of payment. However, they do not appear common. Four percent report such a dispute in the last 12 months (Q#18). No detail emerged on those cases, however.
Someone in or on behalf of the business typically reconciles a firm’s credit cards receipts with the payments and records of the credit card company, bank, etc., servicing their account. Typically, it is either an employee or the owner/manager who performs the task. The former reconciles credit card receipts in 36 percent of cases while the latter completes it in 35 percent of them (Q#19). An outside bookkeeper or accountant takes the responsibility for 15 percent and a non-employee spouse or family member does for 8 percent. Three percent admit that they usually do not reconcile those records; most who do not reconcile own/manage the smallest firms, presumably having the fewest receipts.
Reconciliation is good practice. Credit card companies, banks, etc., make mistakes. Fortunately, just 1 percent of small business owner/managers think that credit card companies, banks, etc., make mistakes frequently, but 8 percent found more than one mistake in the last year (Q#19a). Revealing are the businesses employing more than 20 people, the businesses most likely to have more receipts to reconcile. Those reconciling accounts for owners of nearly one in four (24%) of these larger, small businesses discovered bank/provider mistakes in the last year. Those performing the task for owners of smaller businesses found mistakes less often, but they still found them.
Small business owners not only accept credit cards, they also use them. The survey alerted the respondent to the distinction between the business credit cards they use and the personal credit cards they use for business purposes as questions posed differentiated between the two.
Seventy-four (74) percent of small employers have a business credit card (Q#21) and 39 percent have a personal
credit card they use for business purposes (Q#22). Thirty-one (31) percent use both cards and 17 percent use neither. The use of business cards has been expanding rapidly while the use of personal cards for business purposes is slowly declining when comparing current levels to levels established five years ago by the Federal Reserve’s Survey of Small
Business Finances (SSBF).
Many think financial institutions are replacing lines of credit with large limit credit cards. The shift would be important because cards typically carry a much higher interest rate than a line of credit. But evidence of that shift is difficult to find. Sixty-two (62) percent of small employers claim to have a line of credit with 85 percent of those employing 20 or more people having one (Q#25). Those levels are notably higher than the level measured by the SSBF five years ago.
Combined, 49 percent of small, employing businesses now have a line of credit and a business credit card. That mix suggests potential confusion between the two. To avoid that confusion, the question establishing the percent with a credit line purposefully informed respondents that credit cards were NOT lines of credit. Thus, it appears both are growing in frequency of possession rather than cards substituting for lines. The actual use of cards and lines by their possessors is another matter.
Seventy-six (76) percent of small business owners typically pay off their credit card balances every month; 90 percent of those owning the largest, small businesses also do (Q#24). Nearly three in four therefore primarily use cards for their convenience rather than for the credit that accompanies them.
Credit card issuers have been charged with various abusive practices. Congress continues to investigate and is in the throes of legislation while the Federal Reserve promises new consumer protection-type rules to address identified problems. These efforts focus on consumers. However, large numbers of small business owners have experienced one or more of abusive practices on their business and/or personal credit cards.
One type of alleged abuse in simplest terms is creating a float and pocketing it. When customers make payments on their credit cards, the payments are not credited to the customer until well after the bank has collected the money. The effect is a bank profiting from the float at the customer’s expense. Fourteen (14) percent of small business owners with one or more credit cards used for business purposes claim to have experienced this practice within the last year (Q#23A). Two of three who experienced the practice maintain it happened on more than one occasion.
A second type of alleged abuse occurs when the card issuer unilaterally changes the interest rate on debts already incurred. In other words, the issuer adds a fee beyond that mutually agreed upon after the consumer borrowed the money. The exception is cases involving an introductory rate where the customer knows when he accepts the card that the rate changes on a specified date. Twenty-one (21) percent of small business owners using credit cards experienced such a rate change in the last 12 months (Q#23B).
A third type of alleged abuse is short notice of the due date for credit card payments. The “short” in short notice is arbitrary, but the questionnaire employed three weeks as short in accordance with legislative discussion. This practice apparently occurs frequently. Twenty-one (21) percent experienced the practice on more than one occasion in the last 12 months and another 4 percent experienced it once (Q#23C).
The fourth and final alleged abuse queried is charges on overdrafts that occur because the bank has put a hold on some portion of the account. In other words, the overdraft occurs exclusively because of bank attempts to protect itself from overdrafts rather than because the customer does not have money to cover charges he made. Eleven (11) percent experienced this problem in the last 12 months, 7 percent on more than a single occasion (Q#23D).
There are points of conflict between small business and the credit card industry, certainly nothing new. As credit cards users, they register many of the same complaints that led Congress and the Federal Reserve to move against certain industry practices. Further, their constant shopping for different banks and/or credit card service providers suggests they are not happy with the rates they are being charged or the conditions imposed. Their discomfort may rise further as interchange fees become more widely understood, separate and advantageous deals negotiated between card associations and individual large retailers publicized, and monopolistic control raising fees to Main Street firms accepting cards apparent. But at this time, the fees small businesses pay on average are about two and one-quarter percent of card-paid sales, a fee that leads one-third of those accepting cards unable or unwilling to even estimate the percentage they pay. In addition, the frequency of disputes does not seem unreasonably high, though a sensible point of comparison cannot be immediately identified and insufficient cases did not permit exploration of their severity.
Small business owners appear to have two ways to cut costs when accepting cards. They can negotiate the fee or have someone like a trade association representative negotiate it for them and they can encourage use of debit rather than credit cards. But even if successful in these endeavors, the newer augmented benefit cards will push average fees higher. So, the uneasy, but mutuallybeneficial, business relationship will continue to be profitable and the principal sticking points will continue to be debated.