Credit Card Payments: 5 Facts Merchants Need to Know
Updated 12/18/2024
Accepting credit cards is essential for business success. However, accepting credit cards comes with high costs and challenges. Here’s what you need to know:
Credit Cards Dominate
Credit cards remain a dominant payment method, with 62.6% of overall purchases (online and in-person) In 2023, one in every five retail sales was made online—a 7.6% growth over 2022.
The High Cost of Processing – Interchange 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.”
The Challenge of Chargebacks
Chargebacks pose a significant risk, especially for online merchants. The average chargeback rate is 0.60%, meaning 6 out of every 1,000 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. A chargeback rate under 1% is typically acceptable, but it’s usually considered risky when it reaches 1% or higher. Industries that sell physical goods usually have chargeback rates of 0.6% or less. 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. Exceeding certain thresholds (typically around 1%) can lead to penalties, higher processing fees, or even account termination by their payment processor.
Changing Consumer Preferences
Younger generations are shifting away from traditional credit cards. About 50% of Gen Z own a credit card. This is lower than the number of older people with credit cards at the same age.
For instance, 66% of Millennials had credit cards when they were the same age. Younger people are trying new ways to pay instead of using credit cards. However, they are not completely giving up on credit cards. They carefully and strategically use credit. Money issues and a need for flexibility influence their choice of payment.
The Rise of Alternative Payment Methods (APMs)
To address these challenges, merchants are increasingly adopting alternative payment methods:
- Digital wallets (e.g., Apple Pay, Google Pay)
- BNPL ( buy Now, Pay later) services
- Direct bank transfers (ACH/eCheck)
- eCash – for consumers who don’t have access to traditional bank or credit card accounts.
APM Advantages
- Increased conversion rates: Offering APMs can reduce cart abandonment and increase sales by giving customers more payment choices.
- Enhanced security: Many APMs use advanced encryption and fraud detection measures, making them more secure than traditional payment methods.
- Improved customer experience: APMs often offer faster, more streamlined checkout processes, increasing customer satisfaction.
- Cost savings: Some APMs have lower transaction fees than traditional payment methods, potentially reducing costs for merchants.
- Localization: Offering popular local payment methods is crucial for competing in specific markets and meeting customer expectations.
- Fraud prevention: Many APMs offer additional security features that can help reduce the risk of fraud and chargebacks for merchant
Merchant Adoption
According to The Fintech Times, 56% of merchants accept digital wallets. Small businesses: Less than 60% of small businesses accept digital wallets.
For large businesses, according to a Federal Reserve survey, digital wallet usage increased from 48% in 2022 to 64% in 2023
Conclusion
Credit cards are essential for businesses to accept payments. However, smart merchants are adding more payment options. This helps them save money and meet changing customer needs. Different payment methods, options like dual pricing, and improving payment processes can help you earn more money and make your customers happier.
To learn more about optimizing your payment strategy, consider contacting the payment experts at IntelliPay: sales@intellipay.com or 855-872-6632, option 3.
