With more and more people preferring credit cards to cash, the only way to attract these potential customers to your business is to choose to accept credit cards. Credit card acceptance is possible only by business owners who have a special merchant account at a merchant service provider (MSP).
A consumer payment preferences study conducted by the American Bankers Association (ABA) and Boston-based Dove Consulting in 2005-2006 indicated that most of the erosion in paper-based payments is due to the increased use of credit cards. Of the respondents reporting lower cash usage, 40% have turned to credit cards, 31% to PIN-based debit, 22% to signature-based debit and 7% to paper checks.
Benefits of Credit Card Acceptance
The foremost reason for a business to decide to accept credit cards is to boost its sales. Providing clients an option to make payments for products and services through credit cards simplifies the process of placing an order and eliminates any hesitation arising from limited cash in hand. Moreover, the use of credit cards significantly:
- Reduces the check processing time, enabling businesses to receive payments faster.
- Lowers administrative costs.
- Improves cash flow. The period between purchase and payment dates could decline from 90, 60 or 30 days to two-to-three days.
- Lower payment tracking hassles.
- Lower risk of payment fraud and default.
- Improves relationship between merchants and customers.
Credit Card Acceptance: Parties Involved
If one opts to accept credit cards, the process will involve several parties. This means that apart from a card holder and a merchant (business owner), the process would include:
- The issuing bank: The moment cardholders pay for a product or service through their cards, the merchant contacts the bank issuing the credit card for authorization. The moment authorization is received, the issuing bank commits to pay the merchant the amount and the transaction concludes. The issuing bank bears the payment risk in case the card is used fraudulently. While earlier, merchants used to verify the credit history of a customer before extending any credit, the verification task is now performed by the issuing bank.
- Accepting banks: An accepting bank is the financial institution that accepts the payment for a product or a service on behalf of a merchant. These banks charge specific fees from the merchants for accepting credit cards.
Credit card acceptance can help businesses enhance their sales and eliminate payment problems.