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Credit Cards Drive Up the Cost of Everything

Credit Cards Drive Up the Cost of Everything

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Published by Richard Boettner
Everything thinks using credit cards is so easy and cheap, especially if they pay their balance in full each month. Think again. There are the hidden costs a merchant is forced to pay in order to accept credit cards. Read this and then decide for yourself whether credit cards are worth it.
Everything thinks using credit cards is so easy and cheap, especially if they pay their balance in full each month. Think again. There are the hidden costs a merchant is forced to pay in order to accept credit cards. Read this and then decide for yourself whether credit cards are worth it.

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Published by: Richard Boettner on Jun 26, 2009
Copyright:Attribution Non-commercial


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Credit Cards Drive Up The Cost of Everything!
 by Richard Boettner The challenges business face as they start-up are familiar to everyone who has gone through it: pulling together the money needed to start-up, fighting government red tape, acquiring licenses,hiring talented people, marketing to get the word out, and finding and keeping customers. This isall made worse for a small retail store and other small businesses who rely on foot traffic or Internet visitors, where the biggest frustration is setting up some sort of credit card system.This is a frustrating and not a simple task. MasterCard and Visa require a small business to enrollthrough middle-men, brokers like financial institutions such as the bank where the business hasits accounts, payment processors or independent sales organizations – commonly referred to asI.S.O.'s – which solicit business through telemarketing or with door-to-door agents. AmericanExpress is the exception which permits registration directly through its own center or throughintermediaries. This process is not cheap.As new business owners quickly learn, the process entails piling through complicated documentsanalyzing dozens of seemingly incomparable offers including varying terms for leasing aterminal to swipe credit cards, all for the purpose of accepting or rejecting credit cards and for issuing monthly statements, to name just some of the most basic services. Also differentintermediaries make funds available anywhere from 24 to 72 hours after a sale is made.Small businesses get a quick lesson in the hard-sell tactics some I.S.O.'s use in order to get themto sign up. As soon as a new small business is incorporated, unsolicited offers begin to pour in to process credit cards creating a flood of offers. They try to entice a business with all sorts of things, one example, "trips to the Bahamas or a $1,000 signing bonus."Relying on your bank can be a smart move. The bank where a business has its accounts mayhave programs, relationships or may be associated with an I.S.O." Alternately tradeorganizations or other industry groups can sometimes recommend a company.Once the credit card terminal or software, is set up, even the smallest sale sets off a whole host of complicated and sometimes costly transaction fees which whittle away at the bottom line. Feesvary by the size of the business, length of time they have been in business, the industry they arein and whether charges are done in person, by phone or online. It is up to the bank, payment processor or I.S.O. to establish the rates a merchant pays. A small business may pay less than 2%of each sale, but have additional transaction fees on top of that base rate. For example, amerchant pays 1.79% plus a fee of 32 cents for each sale and this varies with each type of creditcard. On a $300 purchase that may come to $5.69 in fees.More fees follow. Businesses pay extra when they manually type in any credit card accountnumbers on a terminal rather than swiping the card itself. This can be especially frustrating whenthe strip on the back of a card no longer works. The percentage rate can jump to 2.66% of the
 purchase price plus a higher fee of 42 cents. On the same $300 purchase it results in $8.40 fees tothe credit card processor, an expense that quickly eats away at profits, driving up the price of everything customer's buy.Credit card companies and banks use the excuse, for charging higher rates because, they consider transactions typed in, not electronically read to pose a greater risk of fraud. The higher fees areintended to cover the cost of "charge-backs," a refusal to pay by credit card holders either  because the card use was unauthorized or the purchase was returned or was defective. Higher rates do not provide a merchant any sort of protection program.An example: Jehv Gold, the owner of Manhattan Fruitier, a gift-basket company, learned thelimits of his protection the hard way. When a customer called to order two gift baskets, thecharges were authorized, initially. When the same customer called a third time, however, thecompany's terminal read "pick up card," a phrase indicating that the card was invalid. ManhattanFruitier rejected the order. At the end of the month, the company's bookkeeper discovered thatthe customer's first two charges, totaling $1,000, were also denied and thus charged back to themerchant, even though the baskets had already been delivered. When the bookkeeper approachedthe company's payment processor, Global Payments Inc., he was told that Global would notabsorb the loss. Merchants typically have no recourse for fraud, unless they had taken severalsteps to verify the customer's identity, including verifying that the billing and shipping addressesmatched. Some larger companies are able to afford insurance against such fraud, but not thesmall business owner who struggles to make ends meet and hopefully see a profit at the end of the year.Major credit card companies are currently seeking to change things, essentially requiring personal identification numbers to be punched in whenever a credit card is used or a kind of smart chip inside credit cards. Visa already has Verified by Visa, while MasterCard hasSecureCode and American Express uses an address verification program to protect merchantsfrom fraud. We have yet to see their true benefit or if merchants will have to pay yet a higher cost for accepting credit cards.Finding the best deal on leasing a credit card processing (swipe) terminal is another aggravationfor retailers who are trying to set up credit card terminals. Leasing fees vary widely from $20 amonth to $60. Those lucky few who do a lot of shopping around may be able to find a companythat charges no monthly fee whatsoever. But, one thing is clear, no one should pay the higher fees some companies charge and by looking around should get a lease for $20 a month, becausethey are out there.Merchants who try to save by not accepting any credit cards whatsoever pay in other ways. Somany customers anymore use a credit card for all their purchases for the benefits, such as to rack up frequent-flier miles or on cash back programs. So, customer's may not shop at a store thatdoes not accept credit cards. What customers don't realize, they are actually paying for theserewards, even if they don't see a fee themselves or pay off their credit card each month.

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