Credit cards are essential for businesses. However, the costs and challenges associated with accepting credit cards are significant. Here’s what you need to know:
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The Dominance of Credit Cards
Credit cards remain a dominant payment method, with 53% of overall purchases and U.S. transactions totaling $5.6 trillion in 2023. The COVID-19 pandemic accelerated the shift to digital payments. In 2023, one in every five retail sales was made online—a 7.6% growth over 2022.
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The High Cost of Processing Fees
Credit card processing fees can significantly impact your bottom line. Let’s break it down:
– Visa and Mastercard interchange fees range from about 1.15% to 2.50% plus a fixed fee (usually 5-10 cents).
American Express tends to have slightly higher fees, ranging from 1.43% to 3.30% plus a fixed fee.
Assessment fees: The range of 0.13% to 0.15%:
Visa: 0.14%
Mastercard: 0.1375% for transactions under $1,000; 0.15% for transactions $1,000 or more
Discover: 0.13%
American Express: 0.15%
Payment processor fees: The 0.5% to 2%
For more on credit card processing fees, see our post “What Credit Card Processing Realy Cost in 2024.”
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The Challenge of Chargebacks
Chargebacks pose a significant risk, especially for online merchants. The average chargeback rate across industries is 0.60%, which means that, on average, 6 out of every 1000 transactions result in a chargeback.
Some key points about this average chargeback rate:
It’s an overall average across all industries, but rates can vary significantly by sector.
Generally, a chargeback rate below 1% is acceptable, while rates close to or above 1% are often considered high risk.
Industries selling physical goods tend to have chargeback rates at or below 0.6%. In contrast, those selling services, time, or digital goods often have higher rates.
Some industries with higher-than-average chargeback rates include:
Education & Training: 1.02%
Travel: 0.89%
Health and wellness: 0.86%
Gaming: 0.83%
Industries with lower-than-average rates include:
Retail: 0.52%
Restaurants: 0.12%
Businesses should monitor their chargeback rates closely, as exceeding certain thresholds (typically around 1%) can lead to penalties, higher processing fees, or even account termination by their payment processor.
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Changing Consumer Preferences
Younger generations are shifting away from traditional credit cards. Approximately 50% of Gen Z has a credit card, which is lower than the credit card ownership rates seen in older generations at the same age. For instance, 66% of Millennials had credit cards when they were the same age. While younger generations are indeed moving away from traditional credit cards in favor of alternative payment methods, they are not completely abandoning credit cards. Their approach is characterized by a cautious and strategic use of credit, influenced by financial pressures and a desire for flexibility.
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The Rise of Alternative Payment Methods
To address these challenges, merchants are increasingly adopting alternative payment methods:
– Digital wallets (e.g., Apple Pay, Google Pay)
– BNPL services
– Direct bank transfers (ACH/eCheck)
– eCash – for consumers who don’t have access to traditional bank or credit card accounts.
Conclusion
While credit cards remain essential for any business to accept, savvy merchants are diversifying their payment options to reduce costs and meet changing consumer preferences. By embracing alternative payment methods and optimizing your payment processes, you can improve your bottom line and enhance customer satisfaction.
To learn more about optimizing your payment strategy, consider talking to the payment experts at IntelliPay: sales@intellipay.com or 855-872-6632, option 3.
