Card Fees Present Challenges for Small Businesses

Credit Adviser

By Ray McCarty

Credit, debit and pre-paid cards account for nearly 70 percent of all non-cash transactions in the United States today.

For consumers, using a card is a convenient and quick way to make a purchase. But for the 500,000 Missouri small business owners—and for their peers in Kansas who have to offer credit sales to keep their stores current—understanding and negotiating the fees associated with electronic payments can be a daunting task.

Consumers expect that every business will accept their credit or debit card. And those who are not embracing the trend are missing an important opportunity to expand their business. As of 2013, small businesses that did not accept these forms of payment lost out on more than $4 trillion of consumer spending, according to the Nilson Report, the leading source of statistics and analysis on the payment industry.

Consumers also spend more when they pay with cards. The 2013 Federal Reserve Payments study found that customers spent an average of $39 per debit card transaction and $94 per credit-card transaction. When compared with the average cash payment—just $17—it’s hard to deny the benefits of accepting credit and debit cards.

Providing this service, however, isn’t free for business owners. Until recently, acquirers, who effectively act as the intermediary between the payer’s and payee’s banks, have charged fees based on complex structures resulting in businesses unexpectedly paying higher rates. There is, though, a light at the end of this tunnel. New industry-led transparency standards are helping small businesses better predict their monthly expenses.

For example, on April 1, MasterCard implemented new standards designed to protect small business owners from these types of fee increases, which can wreak havoc on their monthly business ledgers. The new rules require acquirers and payment processors to provide business owners with clear and detailed information about their fees and how they are calculated. The guidelines also forbid processors and acquirers from raising rates on small businesses without providing a minimum of 30 days’ notice. It’s important to remember that these electronic middlemen do not work for MasterCard, and having a major network require transparency is an important win for small business.

Choosing an acquirer is only one of the many decisions entrepreneurs make when starting small businesses, and before MasterCard’s standards, it was also one of the most complicated. The ramifications of unexpected fees can significantly impact the bottom line of any business. And when a business is new and its profit margin is particularly slim, an unplanned rate increase can be catastrophic.

According to Bloomberg, eight out of every 10 new businesses fail within the first 18 months. Though the specific reasons for failure vary, simply running out of cash is a common thread in the demise of many small businesses. For some, the inability to plan for unexpected charges, like additional credit card fees, means the difference between thriving and closing their doors.

Even for the most successful and stable small businesses, the ability to plan for expenses is critical to continued prosperity. In a recent survey of more than 7,000 small business owners conducted by Thumbtack in partnership with the Kauffman Foundation, respondents reported that transparency and simplicity of regulations and policies are the most important factors when it comes to their success.

At Associated Industries of Missouri, we work to make sure that the state legislature keeps this important business perspective front of mind. But there is a limit to how much the state can do, particularly in the field of transparency, if the industries that support small businesses are unwilling to also commit to clear standards about their practices. MasterCard’s announcement of new requirements for electronic payment service providers is an excellent example of the type of industry leadership that can help small businesses thrive.

At AIM, we’re committed to small businesses, which comprise 97.6 percent of all Missouri employers and are the heartbeat of the state’s economy. We hope additional payment technology companies will take similar steps to support the success of small businesses. Industry-led standards, like those recently implemented by MasterCard, allow small business owners to take better charge of their ledgers for success.

About the author

Ray McCarty is president/CEO of Associated Industries of Missouri.
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