Credit or Debit, all small business needs to be looking at taking that plastic

By 2017, just 23 percent of all point-of-sale purchases are expected to be made with cash, says a study by market research firm Javelin Strategy & Research. If you’re a small business owner, there’s no escaping credit and debit card transactions. “But those fees!” say you. New solutions are available with more on the horizon that will help reduce your costs and keep your finger on the pulse of consumer demand.


Most traditional credit and debit cards work through what is known as merchant accounts. An agreement with a merchant account vendor will give you access to accepting credit and debit payments through a central authorizing service and usually, merchant bank accounts that act as a holding place for funds until approved. The merchant services company then transfers the money, less its fees or “commissions”, directly to your business account.  Fees for merchant services can range from the typical 2.5 to 3.5% per purchase. That percentage doesn’t include the additional charges of a credit card swipe terminal and other monthly fees charged by the service company. Watch those low introductory rates offered by merchant service vendors to lure you into a contract and then those rates will gradually increase followed by fees, gateway charges, processing costs, statement fees, Interchange costs, rental charges, not to mention the fees charged by the credit card providers like MasterCard, Visa and American Express. What was originally a 1.75% rate will ultimately settle in around 3.75% plus $.30 per transaction by the time you’re all said and done. That’s not to say that merchant accounts aren’t an often necessary part of a small business’ operations.


Merchant accounts can be provided as:


Retail merchant accounts – for bricks and mortar retail businesses that use swipe payment terminals.

Internet merchant accounts – mean for businesses being run online using an e-commerce website.

MOTO (Mail or telephone order) – typically used for catalog sales organizations and other businesses that take a majority of their business via phone sales and ordering.

What about card security and fraud protection?


Merchant service providers not only provide tools and credit card access for your business, but also much needed compliance with the rules and regulations associated with accepting these types of payments.  Payment Card Industry (PCI) Data Security Standard is the industry organization that dictates how personal information must be handled and more importantly, secured by those who have access to it.  If you think you’re too small to worry about business fraud liability, guess again. Failure to comply with PCI security standards can result in large fines from credit card providers, never mind the financial and legal consequences of a data breach. PCI applies to ALL businesses that interact with personal credit card data, so don’t assume that your business is too small to take precautions.


There are new options for small business owners that work as well as traditional merchant services but without all the fees and bulky devices. The top three most popular are: Square, Intuit Go Payment, and Paypal Here. These devices attach to the business owner’s mobile device at the headphone jack and transmit credit card data using an app and central processing account. For businesses like food trucks, crafters and mobile services that need card scanning flexibility these handy devices may provide the best of both worlds, a secure processing system that is portable and easy to use.


For consumers, there are pros and cons for using either debit cards or credit processing. Trying to sort your way through the plethora of services, products and information can be a full time job.


What are the pros and cons for using debit versus credit?


For the small business, debit purchases provide near instant cash for your sale.  Credit purchases can take one business day or longer for funds to be available.  For consumers, debit cards often carry many of the same protections for fraud or theft. The card is directly attached to your checking account so it can be difficult to get the stolen funds reimbursed causing a serious short term cash flow problem. Have fraud protection, but if the card is stolen, the funds do come out of the checking account immediately, causing instant financial impact on the consumer.  Customer liability is $50 if the financial institution is notified of the loss within 24-hours and $500 within two months. If the debit card also carries the backing of Visa or MasterCard, depending on the issuer’s rules, the full amount stolen may be refunded.  Additionally, if the checking account is overdrawn, the high fees charged by banks and others. Reward programs do exist for debit cards, but they aren’t typically as robust as those offered by credit cards.


Credit card purchases provide greater fraud and financial protections than debit cards. The credit card is not attached to your business’ bank accounts, so any fraudulent amounts won’t impact business checking or other cash accounts.  Additionally, rewards programs can provide great incentives for air miles, free items or other cash back options.


To learn more about which processing system and credit card options may be best for you and your business, call us today.


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Copyright 2014 by Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, a PASBA member accountant, located in Londonderry, New Hampshire, with more than twenty- five years experience on Federal and New Hampshire issues affecting small business.


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