Two Cents - Insights Brought to you by Vectra Bank

Cash or credit? Modern American consumers tend to overwhelmingly prefer the latter - as much as 78 percent of shoppers in the U.S. say a credit or debit card is their preferred method of payment . With the convenience and incentives that cards offer, it's not hard to understand why this trend remains consistent. But while paying with plastic is now second-nature for most, unbeknownst to most consumers, it can still be a point of frustration for the business on the receiving end of the transaction.

Consumers primarily pay for the convenience of credit cards through the interest charged by the card issuer on balances that go unpaid for a certain period of time. But businesses that accept cards also pay for the privilege in a way that is arguably more mandatory - interchange fees.

While interchange fees often amount to only 2 or 3 percent of the value of each transaction on a card, they are taking a larger role in the revenues of card issuers and payment networks - from an average of 2 percent of annual revenue in 2010 to nearly 6 percent in 2013.

Interchange fees are a boon to card companies, but can be inconvenient for merchants, particularly small businesses that already operate on thin margins. This may explain why an estimated 55 percent of small businesses in the U.S. don't accept credit cards, according to a survey from Intuit.

As Intuit explained, interchange fees aren't even the complete picture when it comes to the cost of credit card acceptance. There are other related expenses that add up quickly, including:

• Setup fees for merchant accounts, which may total $200 per account.
• Purchase and implementation of point-of-sale terminals.
• Chargeback fees, incurred if a customer disputes a transaction.
• Fraud liability, if it is determined the merchant was at fault for any particular incident.
• The need for more complex accounting of credit card purchases and reimbursement that can consume additional time and money.

Upgrading to credit card systems may take some time for smaller businesses.

Costs and benefits

So it's clear that credit cards come with their own costs for businesses. But at what point do those expenses outweigh the potential losses incurred by not accepting cards? According to one study cited by Intuit, shoppers spend up to 18 percent more per transaction, on average, when they pay with credit cards rather than cash. And while it's not clear whether or not consumers tend to avoid cash-only businesses entirely, the statistics seem to lean in favor of accepting credit cards.

Fortunately for small businesses, the increased popularity of credit cards has also invited new ways for merchants to accept them. There are a number of POS systems that now offer payment and accounting solutions that are less equipment-intensive, relying on an internet connection and online web interfaces to store and manage payment information. Square, PayPal and Intuit's QuickBooks are a few popular providers of POS hardware and services.

New technology and regulations are also cracking down on credit card fraud, helping to reduce the risk of loss to businesses. In October 2015, retailers that accepted credit or debit cards were required to adopt a new standard of payment method known as EMV chip card technology . These systems accept cards embedded with a special electronic chip rather than the magnetic stripe of previous cards. While it required a change of habit for consumers and some additional effort on the business's part to get up to speed, EMV cards are much less fraud-prone than their magnetic stripe equivalent. Ever since the adoption of EMV cards, the U.S. Small Business Administration noted that fraud rates have declined.

Switching to credit cards from cash-only may constitute a big expense for a small business. However, if you've done the planning and research beforehand and decided it's a good move, you may find more benefits than initially expected.

To learn more about business credit cards; please contact your local Vectra Bank or complete the short form below and we'll reach out to you!

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