Evaluating the True Cost of Accepting Credit & Debit Cards vs. Checks

What is the true cost of accepting plastic from your customers, and is really worth it?

Introduction

In today’s economy, both merchants and consumers have more options than ever to provide and accept payment for goods and services. Some may still prefer the mantra that “cash is king,” but the ease of using alternative payment methods like checks, credit, or debit cards cannot be disregarded. While those “easy” payment methods may give merchants access to customers who prefer them, they aren’t always a financially feasible option for the business.

In this article, we will evaluate the true cost to merchants of accepting credit and debit cards versus good old-fashioned checks.

The Popularity of Plastic

The Federal Reserve Bank of San Francisco published their findings from a 2021 study that helps shed some light on the popularity of plastic (credit and debit cards) in the US. According to that study, credit cards were used to make 28% of all payments in 2021.

The study found that credit card usage jumps according to household income, with 34% of households earning between $100-$149k using them, as well as 44% of households earning over $150k. This can be an important metric to pay attention to for merchants dealing with higher-income customers. 

The same study found that only 9% of Americans still prefer to use cash for their purchases, which may be an indicator that the “cash is king” crowd is changing their ways. Plastic (debit and credit cards) is by far the most popular payment method in the US, with 54% of Americans (overall) using a physical or virtual debit card, and 36% of Americans (overall) using a physical or virtual credit card.

According to the data, apparently “plastic” payments are quite popular.

Convenience

The increasing use of plastic payments by Americans has largely been a result of convenience. It must be noted that the pandemic and lockdowns created a necessity for online and cashless payments, which helped further increase their usage.

Americans also have a higher sense of protection from plastic payments versus cash. If your cash is lost or stolen, it’s gone and there is little hope of ever getting it back. With a credit or debit card, however, funds stolen through fraud are reimbursed by the card issuer, and a lost or stolen card is easily replaced.

Despite the public’s increasing usage of plastic payments, there are still quite a few service providers that typically do not accept credit card payments, such as:

• Insurance companies
• Utility companies
• Non-elective medical providers
• (Some) service providers
• Contractors (although many freelance workers do)
• Loan payments
• State and local tax authorities

Is There Any Downside to Plastic Payments?

For the consumer, there is little downside to using plastic payments, as they provide a level of protection that other payment methods do not.

There are two sides to every financial transaction, however, and plastic payments may not be the best option for some merchants or service providers. “The devil is in the details,” as they say, so let’s dive into those details now.

What Do Merchants Need to Accept Credit or Debit Cards?

While plastic payments may make things easy for consumers, they add several levels of needed infrastructure and potential costs for businesses. Just to accept payment via physical credit or debit card, a merchant or service provider will need an appropriate payment terminal that can accept them.

Square and Stripe have become extremely popular with small businesses over the past several years, but even that format requires a terminal to be plugged into the cell phone or cash register to accept cards.

These terminals can often be purchased or come as part of a package deal from a third-party service provider, which may be in the form of a payment gateway or merchant account. For the transaction aspect alone, the merchant or service provider will need specialized software and/or hardware according to the third-party provider that they use.

In addition to the costs just to have the ability to accept card payments (which are outlined below), merchants or service providers can also be charged various fees every time they process a customer's credit or debit card. There may be one or more of these types of fees charged, but all will have an “interchange fee” at a minimum, which is a percentage of the total transaction.

Depending on the payment processor that the merchant or service provider chooses, they may also have to pay monthly maintenance or another per-transaction fee. If you’ve ever wondered why some mom-and-pop businesses don’t want to “get with the times” and instead insist on being cash-only, it’s because those costs to accept plastic can add up quickly.

What Are the Fees for Accepting Credit Cards?

The Byzantine nature of the financial transaction processing industry means there is no single answer to this question. To begin with, each card issuer has its own unique fees that they charge. The financial institution that underwrites the card may have its own fees. The fees for standard vs prepaid credit cards are also different.

The processor or merchant account may or may not charge its own fees, and those fees may be per transaction or a monthly charge based on the total number of transactions, amount of transactions, or some other metric. Some even have tiers of pricing for fees that can increase or decrease as the total number or amount increases or decreases.

A credit card charge can be thought of as a temporary loan or credit issuance. Credit cards use money that is borrowed against future earnings (a cardholder making payments to the credit card company), with an interest rate attached to those future earnings (your APR rate). The card issuer charges the merchant more for this type of transaction and charges the cardholder interest.

Are Debit Cards Any Better?

For debit cards, there is a difference between a pin and a signature transaction. When the merchant requires the customer to enter their pin number, the charge is routed through the debit network. If they have the customer provide a signature, these debit card transactions will be routed through the credit card network.

Merchants will also have to pay different debit card processing fees according to their industry, and whether the bank issuing the debit card holds more or less than $10 bn in assets (regulated vs unregulated). If the bank holds more (regulated), the transaction is capped at 0.05% of the transaction + $0.21. If the bank holds less (unregulated), the fees are variable. 

The Advantage of Check-Only Payments

Like a debit card, checks are meant to pull money directly from a bank account, and a customer writing a check for which they don’t have the funds can be penalized for a “bounced check.” While there are no direct costs for a business to accept and deposit checks from customers, there are some indirect costs:

• Banks may charge businesses that accept checks that bounce
• Busy stores may feel check writing slows their checkout line too much
• The accepting business must take the time to endorse and deposit the check(s)

When Merchants Should Insist on Payment by Check

There are some merchants and situations in which a physical check is preferable, which we will outline below.

High dollar amount

As we mentioned above, many credit and debit cards may charge a merchant or service provider a percentage of the total amount charged. If you are selling high-value items, it may not make sense for every single sale to incur fees that can range anywhere from 0.05% to over 5% per transaction.

Large volume, low profit

Margins are the way that businesses stay in business. Companies like Apple maintain an enormous margin between what it costs them to make products vs what they are sold for, but other businesses may focus on high volume and low margins per sale (like wholesale merchants). For the latter, adding card fees may not make financial sense.

When Does Accepting Credit Cards Make the Most Sense?

Data security laws used to necessitate the use of physical checks for recurring charges due to limitations on how long a company could hold your payment information. Data handling has now changed, however, to the point where cards may be a far easier way to do so - on the customer’s end, at least.

There are also many time-sensitive situations in which the payment for physical checks takes too long to be used, such as emergency or elective medical procedures that need to be done quickly. The technology and convenience of card payments also make them a wise choice for high-traffic locations like big box retailers and fast or fast-casual food service as well.

Failed Payments – Checks and Credit/Debit Cards

Accepting payments through checks and credit or debit cards has its risks for merchants, as they can encounter difficulties when faced with bounced checks and credit card chargebacks.

Bounced Checks

Merchants who accept checks as a form of payment are vulnerable to bounced checks, where the check is returned unpaid due to insufficient funds or account closure. Bounced checks not only cause financial loss but also waste valuable time and resources. Merchants often face the hassle of contacting the customer, requesting alternative payment methods, and potentially resorting to legal action. Moreover, banks often charge fees (often ranging from $15-30) for processing bounced checks, compounding the financial burden on the merchant.

Credit Card Chargebacks

Credit card chargebacks pose another challenge for merchants. A chargeback occurs when a customer disputes a transaction, resulting in the reversal of the payment. The dispute can be initiated on both credit and debit card transactions, for up to 30 or even 60 days after a charge has been made. Merchants face not only the loss of the sale but also very significant fees associated with chargebacks. These fees can include chargeback processing fees, retrieval request fees, and administrative fees, which can quickly add up and impact the merchant's bottom line.

Additionally, merchants that exceed the threshold of chargebacks against them may face account closure by their merchant processor, resulting in even a greater potential loss.

Conclusion

In the end, the question of what type of payments to accept has to ultimately lie with the merchant or service provider. What type of clientele do you serve, and would they be willing to pay via cash or physical check? Could your bottom line survive paying the costs and fees required to accept card payments? How would you handle the potential lost payments and fees that come about from bounced checks and chargebacks?

While the use of cash is steadily declining and is now only used in a small fraction of payments, the use of card payments is steadily increasing. If your business can afford to accept cards, it certainly adds convenience to your customers. But are they worth the cost to your company?