Small businesses have gone through quite an evolution when it comes to payment methods they accept. Gone is the cash-only small business. Even sandwich trucks and garment district clothing outlets have embraced the electronic age. Point-of-sale retail locations are increasingly moving toward the latest technologies that allow credit card readers to be plugged into smart phones. And, if you’re doing business on the Internet, online payments and shopping cart services have become de rigeur.
While there are still a few companies focused on the immediacy and low risk of cash payments, this way of doing business no longer fits with how customers function in the world. Most people have become comfortable with credit and don’t carry enough cash to cover a major purchase. From the small business’s perspective, running a cash-only operation is the surest way to be audited by the IRS, and the IRS requires the filing of Form 8300 for purchases of more than $10,000 from any single buyer.[i]
Since electronic check verification companies and check guarantee technology have greatly lowered the risk of fraud or insufficient funds, small businesses would be well advised to continue to accept checks. However, if you do so, you should know that there are guidelines for creating a customer check payment policy. For example, checks should be drawn on a local or at least a same-state bank; companies should not accept checks for more than the amount of a purchase, i.e. in exchange for cash back or to cover a tip; starter or non-personalized checks should not be accepted; and all check writers should provide a valid drivers license or alternative ID card as identification.[ii]
The convenience and delayed payment inherent in using a credit card can lead customers to exceed their budgets or make impulse purchases. While this may be something individual consumers want to curtail, for a small business this way of thinking can lead to great increases in the average sale and in the ultimate bottom line.
On the other hand, there are some risks associated with accepting credit of which small businesses should be aware: There are laws that require you to protect your customers’ privacy and keep their personal information secure and failing to comply may result in significant fines and penalties. Additionally, processing credit card transactions can add to your bookkeeping burden.
And, most important, there are fees associated with credit card processing that warrant careful attention. While credit card merchant account salespeople may offer unbelievably low credit card processing rates, many small businesses don’t know how to evaluate these offers because they are unfamiliar with the concept of “interchange.” Interchange is the wholesale price structure charged to processors, who then mark up and resell these services to small businesses. The problem is that interchange comprises more than 125 separate rate categories and many of them have high surcharges attached to them that dramatically increase the fees merchants pay for credit card transactions.[iii] These higher rate categories include non-swiped sales, and the use of reward cards, corporate credit cards, cards from foreign countries, and government purchasing cards.
Although more than 74 percent of U.S. families have one or more credit cards, according to a 2006 U.S. Federal Reserve study, debit cards are becoming even more popular. Debit card use has grown by 20 percent a year since 1996 and has surpassed credit cards as the most common form of payment.[iv]
Smart Phone Card Readers
Small business merchants who are mobile can use their smart phones as payment kiosks through the use of matchbook-size credit card readers that allow customers to swipe their card, use the touch screen to sign, and then get a receipt via e-mail or text. The card readers are free from companies like Intuit, Square and Verifone, and come with a per transaction fee of approximately 15 cents per swipe and 2.75% of the transaction. While this technology didn’t exist a few years ago, payments via smartphone credit card readers are expected to total $11 billion this year and $55 billion by 2015.[v]
Online Payment Services
If your small business does all or even some of its business over the Internet, online payment services are imperative. Less expensive and easier to implement than traditional merchant accounts, online payment services allow you to accept payment from any customer with an email account and a bank account. These services are available through many banks, as well as services like PayPal and Bill Me Later – all of which enhance the security of customers’ financial information through two-factor authentication.[vi] Finally, online payment services require the use of a virtual shopping cart that calculates the total, tax and shipping costs of an order. These are sometimes offered by online payment services, or can be purchased through a third-party shopping cart service.
In addition to the above payment options, there are some additional innovative technologies currently being introduced or under development. For example, most electronic payment processors already translate payments into U.S. currency no matter where in the world your customers reside. Customers will soon be able to reduce transaction time by waving their credit card at the register and having a Near Field Communications (NFC) technology read it wirelessly. Additionally, online payment services like Paypal are developing smart phones apps that will allow person-to-person fund transfers by bumping two i-Phones together.[vii]
While all of these payment options have their value, the best approach for most small businesses is to offer a variety of options to customers. Demonstrating flexibility will enhance your professionalism, facilitate increased sales, and enhance customer loyalty by meeting a wider variety of payment preferences.