Cost of Accepting Credit Cards

If you spend any time reading about trends in the card acceptance space, you will have (undoubtedly) heard substantial discussion about the topic of interchange. Interchange is, in essence*, a percentage fee that is paid by the merchant for the purpose of covering card acceptance. The range varies, based on a variety of factors (industry, type of transaction, data passed in transaction) and the fee goes to a combination of the card-issuing bank and the card association. It, in some ways, can be thought of as a pass-through fee that is often marked up by the organization who owns the relationship with the merchant.

On one side of the discussion is the industry players (processors, ISOs, Issuers, etc)…on the other side the merchant and related associations (in particular, the National Retail Federation or NRF). And, somewhere else entirely…perhaps lost in the middle…the consumer.

My opinions on the interchange legislation are fairly firm. And they are based on the perspective of the entirety of the ecosystem…I will discuss this in greater detail tomorrow.

But, whenever the topic arises, someone invariably wonders why merchants bother with credit card acceptance.

What, then, is the cost of NOT accepting credit cards?

The standard reply centers on lost revenue. In addition, there is the argument that the prevalence of credit in the wallet of the modern consumer indicates that card acceptance has become a near requirement. I, for one, am always taken aback when a merchant has no credit option. It is rare, these days, that I have cash on hand and instead choose to manage my finances through usage of cards (a combination of debit and card rewards programmes seems appropriate for my family).

It is this prevalence, and assumption of acceptance, that drives a portion of the debate on fee percentages. And yet, those replies to the question of credit acceptance are just too intangible for my tastes.

Fortunately, I was presented with an opportunity to digest in greater detail.

Let me set the scene…

In Colorado there is a fairly well-known “landmark”. A giant hot dog. Yes, you heard right…a restaurant that is shaped like a like an enormous Coney Island hot dog. No…I’m not kidding. Some statistics:

  • 14 tons
  • 42 feet from edge to edge
  • 34 feet of hot dog bun
  • Extremely bright yellow coloured mustard
  • Built in 1966
  • Moved to Conifer, CO in 1970
  • Reopened this year just outside Bailey, CO***

Some of my earliest memories in Colorado center on somewhat mediocre hot dogs eaten during road trips with my Father and Grandfather. After the reopening I haven’t yet been back for a quick bite of history slathered with childhood memories. But this past weekend, my Father passed by and stopped for a hot dog.

There were 3 cardboard signs up that read, in various forms, “Credit Card machine down. Cash only.”

Knowing my work, and my intrigue with all things payment related, my Father chose to do a bit of digging for me. There are numerous things you could find at fault with the analysis below. It is of one vendor, not an industry statistic, the merchant already accepts cards, there are unfounded assertions, the analysis of gross revenue ignores operating costs, etc. But stick with me on this, if only for the mental exercise.

Those items that were based on the impromptu interviews and analysis of the downtime that my Father experienced are bolded. Other assumptions are left in plain text.

For this little piece of Colorado road side delight, what is the cost of not accepting credit cards?

  • Average Meal Cost – $20.00
  • Hours without processing (period) – 20
  • Transaction Fee % – 4.00%
  • # of customers per hour – 15
  • % of customer attrition due to tender – 30.00%
  • % of customers paying with credit – 50%
  • $ made in a period (gross) – $6,000.00
  • $ made in a period (less Credit fees) – $5,880.00
  • Net Difference – $120.00
  • Amount spent on each transaction (average) – $0.80
  • $ made in period without Credit – $4,200.00
  • Net Difference without Credit – $1,680.00
  • Hourly losses during period – $84.00

In this partially hypothetical, partially real-life scenario. The cost of NOT accepting credit cards was $84.00…an hour…for the duration of the outage.

Ever wonder why merchants are so passionate about card acceptance? It makes, or costs, them money.

Is it a light-hearted take? Absolutely. Did I find it compelling to actually run the analysis? Absolutely. As promised above, I will blog tomorrow on my perspective of the interchange discussion in greater detail. Until then.

What’s your perspective? Agree? Disagree? Anything to add? Critiques? The comment form is below…

NOTE: The information above lives in a happy little excel calculator on my desktop that I’d be happy to share. Let me know in the comments or via other medium (social, email) if you want a copy.

* This according to the modern NTE** dictionary.
** New Tyler Edition – focused on making things simplistic…at times, overly.
*** A humorous aside, the stand was sold because the land it was on was sold for the development of a bank.

July 17, 2009

3 responses to Cost of Accepting Credit Cards

  1. stephaniewickes said:

    Now you should blog about the cost to the consumer to use a credit card! How much would your $20 meal cost after you paid the average APR of ________ for ________ years with interest that accrues daily. Now, what would that same meal cost if their were an unexpected loss of income.
    Your comfy average APR of _________ is now a daunting 29.9%. The difference after your APR increase is ________ .
    🙂

  2. abevan said:

    In my opinion, the merchants not offering their consumers the ability to pay by credit card will seriously impact their bottom line. In a number of countries the use of credit cards far outweights the use of debit cards.

    Cardmembers typically in this economic environment either max out their credit cards or pay it off in full each month to avoid hefty interest charges, there currently seems to be little in between of these two situations, therefore there is a lot of spend coming through this form of payment type.

    Additionally with the offers, packages and loyalty schemes credit cards provide such as cash back or airmiles etc this further enhances card member spend and therefore would in turn boost merchant sales and profit.

    Granted the merchant profit margin is reduced but i believe this is outweighed by the increased sales. Furthermore if merchants accept American Express who typically have a high affluant card member base then average sale amounts will be greater resulting in more sales and more profit for the merchant….

    Therefore it can be concluded that there are benefits for the merchant and the cardmember to have a credit card and those merchants that dont accept credit cards will loose out against those that do. Especially as many people shop online for cheap prices, more choice and its easier and quick to find a merchant that takes your card.

    Dont take credit cards….. what about dont accept debit cards!?

  3. abevan said:

    In my opinion, the merchants not offering their consumers the ability to pay by credit card will seriously impact their bottom line. In a number of countries the use of credit cards far outweights the use of debit cards.

    Cardmembers typically in this economic environment either max out their credit cards or pay it off in full each month to avoid hefty interest charges, there currently seems to be little in between of these two situations, therefore there is a lot of spend coming through this form of payment type.

    Additionally with the offers, packages and loyalty schemes credit cards provide such as cash back or airmiles etc this further enhances card member spend and therefore would in turn boost merchant sales and profit.

    Granted the merchant profit margin is reduced but i believe this is outweighed by the increased sales. Furthermore if merchants accept American Express who typically have a high affluant card member base then average sale amounts will be greater resulting in more sales and more profit for the merchant….

    Therefore it can be concluded that there are benefits for the merchant and the cardmember to have a credit card and those merchants that dont accept credit cards will loose out against those that do. Especially as many people shop online for cheap prices, more choice and its easier and quick to find a merchant that takes your card.

    Dont take credit cards….. what about dont accept debit cards!?

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