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Credit Card Processing and its Bearing on your Bottom Line

By: Jim Hildebrand   
Date Added : April 21, 2011 Views : 324

What does a modern business need to succeed? A dedicated staff, quality
products and a prime location are all obviously essential. But payment
options are arguably just as important. The days when businesses could
demand cash on the barrel head have come and gone. Accepting credit and
debit card payments is absolutely essential to long-term business

That is not to say that a business cannot profit if it
does not process plastic. Diners, barbers and car washes rarely accept
credit or debit cards. Many other traditionally small town businesses
can get away with asking for cash. Cash only businesses survive because
their customers understand that the products and services they offer
are typically inexpensive and that accepting plastic would cut into
their bottom line.

You see, it costs money to process credit and
debit cards. Every single time a card is swiped, a merchant is charged
a series of variable fees. Business owners must weigh the potential
profitability against the costs. For most retail establishments, the
benefits far outweigh the costs.

Merchant Service Accounts

merchants love cash. Cash is uncomplicated. The customer hands it over,
the cashier makes change, and everyone is happy. But processing plastic
is not nearly as easy. In order to accept these payments, business
owners must obtain something called a merchant service account. These
accounts are offered at banks and other authorized financial
institutions. Merchant service providers perform several important
tasks. First and most importantly, they check to see that the credit or
debit card is valid. If the transaction is approved, the provider will
send an electronic bill to the customer's bank. When the funds have
been received, a series of fees are then deducted before the remainder
is deposited in the merchant's bank account. The entire process takes
between two and three days.

What are the benefits?

merchants report an increase in monthly sales and average purchase
price shortly after they start accepting credit and debit card
payments. There are many reasons for this. Customer surveys confirm
that businesses that process plastic have a better reputation, on
average, than those that do not. Shoppers generally see them as more
dependable and more trustworthy. They also know that returns and
exchanges are easier if you have a powerful bank backing you up.

that is really just the tip of the proverbial iceberg. Believe it or
not, shoppers actually spend more when they pay with a credit card
rather than cash. There is no easy answer for this. Perhaps it is
because Americans have a penchant for spending money they don't have.
Whatever the reason, shoppers spend an average of twenty dollars more
when they pay with a credit card. As a result, many stores try to trap
these consumers by putting especially eye-catching items near the
register. These items increase the likelihood of an impulse buy,
especially when plastic is involved.

Because they clear much
faster than personal checks, it is also true that electronic payment
have a positive effect on current cash flow. Businesses that have
trouble paying their monthly bills would be well advised to start
accepting credit and debit cards.

We need to also mention online
sales. Well over 90 percent of all internet sales are completed
electronically. Even if they own a traditional storefront, companies
can benefit from selling their wares online. Whether books, toys or
antiques, online sellers have lower overhead costs, and they can
receive payments from shoppers anywhere in the world. With that said,
selecting the right merchant service provider isn't always easy.

What You Need to Know

a business accepts payments in person, their rates and fees are often
much lower. After all, a traditional merchant can ask for ID and check
to see if the signatures match. He can even call the card holder bank
to make certain that the customer is who he says he is. But when
payments are completed online, the merchant has really no way of
knowing if he is doing business with the real card holder. He doesn't
even have a signed and dated receipt.

While the rates do vary, all merchants are charged the same basic fees. Let us take a moment to discuss them.

Startup: Fee for setting up a new account.

Transaction: Fixed fee assessed for each electronic payment.

Discount Rate: Variable percentage fee of the total sales price.

Statement: Fixed monthly charge.

Chargeback: Fine assessed for a returned item.

A Word of Advice

most common mistake most new merchants make is that they focus solely
on the discount rate. While it is important, it really does depend what
kind of business you are in. If, for instance, you own a convenience
store, high volume sales are imperative. Since you sell inexpensive
products, you have to sell a lot of them to stay afloat. As a result,
most merchants who rely on high monthly sales volumes should pay more
attention to the transaction fee, i.e., the fixed fee that is assessed
on each and every purchase. A lower transaction fee will likely have a
more dramatic effect on the bottom line if you sell low cost items. On
the flip side, the discount rate is more important for merchants who
offer expensive products and have low monthly sales volumes.

Whatever your business, there is a merchant service account out there for you.

Jim Hildebrand is a freelance writer who writes about a range of topics including credit card processing.

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