Merchant Services: What they Include and How they Can Help your Business

America is often impugned in the international press for exporting its consumer culture to the rest of the world. Huge corporations from the States sell everything from cars to shoes to hamburgers anywhere and everywhere they can. Many foreign leaders believe that American consumer culture is vapid and possibly even inimical to cherished customs and traditions. From a political standpoint, these critics might just have a point. But from an economic one, they have a skewed view of the real America. While it is true that the U.S. is home to hundreds of the world’s top corporations, most Americans are employed by small businesses. A stunning 52 percent of workers in the private sector work for small businesses, according to the U.S. Small Business Association (US SBA). These companies represent 99.7 percent of all employer firms. How important are they? Though the corporations get most of the headlines, small businesses have generated nearly two-thirds of all new jobs over the past fifteen years. Firms that employ fewer than five hundred workers (the official definition of a small business) create more than half of the country’s gross domestic product (GDP). At last count, there were 27.5 million small businesses in the U.S, which means that corporations are actually quite rare. For every McDonald’s or Coca-Cola, there are approximately three hundred small businesses. Hair salons, pizzerias, diners, Laundromats, antique stores and custom printers can be found in most American towns. The money that is spent at the local level in these stores has a profound effect on the U.S. economy, since about two-thirds of the country’s GDP comes from consumer spending. What does it take to survive and thrive in this ultra competitive environment? American shoppers are not easy to please. Even at the local level, they expect businesses to cater to their needs. This often means paying for services from outside providers. One service every new business owner should closely consider is merchant services. What are they? Every business that processes credit or debit card payments must obtain a merchant service account from an authorized provider, often a bank or financial institution. These providers not only check to see that a card is valid, but they also collect payments for their merchants. As you might expect, they charge fees to complete these essential services. Who needs them? The number of businesses that can legitimately remain cash only has dwindled in recent years. A small general store, a car wash or a diner may be able to get away with offering limited payment options. Since they sell mostly inexpensive items and most of their customers are locals, they often make more without merchant service fees. However, when a small business sells more expensive items, its customers expect them to offer additional payment options. After all, six out of every ten retail transactions are made with a credit or debit card. Rejecting a customer’s preferred payment option at the register is invariably bad for business. Pros and Cons As we mentioned, these accounts cost money. Merchants are charged a series of fees each time they swipe or process a credit/debit card payment. Like all financial institutions, providers consider each applicant individually. They examine things like credit scores, business history, and the industry the merchant competes in. But the single most important factor is whether the merchant will be accepting payments in person. When the card is present, the merchant can ask for ID, check to see if the signatures match, or call the cardholder’s bank. As a result, incidents of identity theft and fraud are much lower when the card is present. But when orders are placed over the phone or on the Internet, the merchant has no way of knowing if he is doing business with the real cardholder. Because the risk of returns and refunds (chargebacks) is so much lower when the card is present, these merchants are charged much lower fees from their providers. In fact, most credit card companies do not charge merchants for refunds even if the card they processed was stolen. The risk is that small. It is also important to note that the average credit card purchase is twenty dollars more than the average cash purchase. Customer surveys also confirm that shoppers have a higher opinion of businesses that offer additional payment options. They tend to view them as more reputable and legitimate. And because human beings are slaves to instant gratification, accepting plastic has been proven to increase impulse buys. The little items by the register are almost always picked up at the last minute and shoppers often pay for them with a credit or debit card. Every new business owner should at least consider applying for a merchant service account, especially if they accept payments in person. Increases in the average sales price and monthly sales volume is often enough to cover any costs or service fees.