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It’s looking like I can’t tap into the kind of funds I’d like to get without taking those disgusting credit cards after all.  Before I give in to the whole CC thing, I’d like to share some more information on why I don’t want to take credit cards and what I’ll have to do as a very small business owner to deal with the increased cost of business that card-taking entails.

First of all, credit cards take a cut starting at about as low as 1.7% but typically higher, depending on the conditions of the sale and type of card.  “Rewards cards” that give extras such as, say, 1% of the purchase price back to the purchaser work by taking that 1% away from the company that makes the sale.  If I take a normal card for a $100 item, I may lose 1.8% plus a flat $0.20 transaction fee, giving me $98.00 instead; with a 1% back rewards card, I would instead lose an additional 1%, meaning I get only $97 instead of $100 for the $100 item.  Because of these kinds of oddities, it’s almost impossible to determine how much each kind of card costs to process, and therefore how much higher prices must go to compensate (we’ll get into that in a minute.)

One of the newer trends in the banking industry is to give you a phenomenally high-interest account in exchange for swiping your card as credit a certain number of minimum times a month.  You could get an extra 2% interest or so if you swipe your VISA debit card as a credit card at least seven times a month!  Every swipe takes money from me, the business owner, and gives part of it to you via the higher interest rate, and part of it to the bank to make such a program profitable.  You are being actively encouraged to pay as credit, and therefore actively encouraged to rip off the businesses for a few percent of every transaction!  This kind of thing is absolutely dirty, and does not actually benefit anyone but the bank, because the net result is a price inflation at retailers to compensate for the additional loss to the CC companies.  That 2% interest is more than gobbled back up in the form of additional inflation across the board.

It helps to look at any typical for-profit business as some kind of a machine.  It exists solely to make money for its creators or shareholders.  If the business incurs an expense of some sort, it has to repackage that expense into the price it charges to you in order to continue making money at the same rate it was before that expense showed up.  If credit card fees take $300 per month out of monthly profits, the $300 per month has to be rolled into the cost of each product.  How does this work?  The formula is easily found with some simple algebra:

Final cost with CC compensation included =

(Total billed to customer + flat transaction fee) / (100% – average per-transaction % fee)

Plug in values as desired.  For a $3,000 (would-be retail price to you) high-definition television with 7% retail sales tax charged to a rewards card at 4% + a flat $0.30 transaction fee, the business has to compensate for your credit card transaction costs by jacking up the price as follows:

($3000 + $0.30) / (1.00 – 0.04) = 3000.30 / 0.96 = $3,125.3125 =

$3,125.32.

How card fees affect you.

But if you don’t use a credit card, who cares? You do, because credit card companies have a clause in their contracts with merchants that explicitly prohibit charging any kind of additional fee to take credit cards.

That means that, even as a cash-paying customer, a merchant has to spread the credit card “cost of doing business” across all of their products and services. They can’t show card users that card users directly hurt the business every time they swipe a credit card, because that would discourage the use of credit cards and the contract says that’s not allowed. You, the cash-paying customer, are punished for the credit card users’ costs to the business you’re buying from. Isn’t that wonderful? (end sarcasm)

Ultimately, what this means to my business and my customers is that I will have no choice but to increase prices in anticipation of approximately 40%-50% of my sales becoming credit cards.  I’ve actually taken the time to produce a chart of actual prices of some of my store items, from cheap stuff like USB flash drives to entire computers, and how much I will have to boost my prices to compensate, per the above formula.  I assume a 5% rate because with a rewards card and/or large purchase amounts, the rates increase significantly and 5% is not unheard of by any means.

cc-price-increase

It doesn’t look like much at all when you’re dealing with a $13 2GB USB flash drive (the formula I used tacks on $0.89 in my spreadsheet), but the story starts to change when you reach larger orders and higher prices. Our display-model computer system, a brand new and complete unit designed to demonstrate what we can build for a customer, sells for $750. The formula spits out $789.68 as the new retail price I’d have to charge if I start taking cards. That’s basically $40 extra for whoever buys the system! If the person is getting an extra 2% interest for swiping their card seven times a month, and they have $20,000 in savings, I just charged them an entire month’s additional 2% interest on their savings account for that one purchase!  The problem is that I’d have to charge a cash-paying customer the exact same amount because the credit card companies won’t let me take cards at all if I discriminate against their credit cards versus other payment methods.  Granted, there’s the “cash discount” method, where you offer a discount for cash purchases, but that puts you in a grey zone where the CC company COULD say that the cash discount is simply a surcharge by another name, and therefore violates your agreement anyway.  It’s not like you can stop them from terminating your contract with them if you don’t do what they want, after all!

I don’t understand why an average person can be so oblivious–sometimes perhaps even downright ignorant–of “reality as marketed” versus true reality!  If it’s enumerated on a receipt: sales tax, food tax, bottle recycling tax, core charge for an auto part, battery disposal surcharge, government usage surcharge, 911 surcharge, property tax, vehicle tax–people soil their underpants over it, but if the same costs to them are hidden from them–payroll tax, unemployment tax, business liability insurance, “business-class Internet access” (often lower quality than the same residential access, yet for three times the price), income tax matching, and credit card fees–people will happily go along being ripped off.  This is why the government can get away with “we’ll tax the very rich to pay for everything we want to do!” as their excuse for any new government program or expansion of an existing one–no one considers the fact that the ultimate burden to pay those taxes falls on the consumers of a business’s products or services, because the “very rich guy” who runs the company rolls that $125,000-per-year tax on his income into the cost of the products the company sells…but you never know that this has happened and you go on, happily thinking that Joe C.E.O. is paying for your “free clinic” or your “basketball museum” or “free visit to the emergency room” or whatever other “freebie” you’re getting.  Pay no attention to the embedded costs hiding behind the curtain!  Never mind the fact that you’re still paying for the “free” stuff, but the payment you’re making is now hidden and not explicitly stated on a receipt!

Unbelievable.

The next time you swipe a credit card (or vote for a politician that claims an intent to “tax the rich and give back to the middle class” as both recent major Presidential candidates chose to position themselves), remember that you’re the reason that $3,125 television you just bought didn’t cost $125 less.  What can you do with $125?  Maybe buy a Blu-Ray player to hook to said new television?  Perhaps buy some movies or speakers?

Too bad.

You swiped those away.  But it was so convenient, wasn’t it?  And you get a “free” *cough*cough* flight to Hawaii in a year off your rewards points, too!  Yay!

Please educate yourself on what you’re really paying for when you buy something.  Ask any small business owner: “do you have to charge extra on all your products because of the fact that you accept cards?”  You’ll probably get some very consistent responses…or find a business owner that isn’t going to be in business much longer.

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Yesterday, we had a customer call up to get an external hard drive from us for $88.  I even offered to write him a quick backup script that would back his Windows user profile up to his external hard drive for no extra charge if he brought his computer with him.  Apparently he was coming from almost half an hour worth of driving distance, and at no point in the TWO telephone calls he made to my store did he ask about payment methods.  He liked our prices and I added further value to the service by offering to integrate the items he was purchasing for no additional cost.

When this man arrived at the store, he noticed my large green sign posted prominently on the front door stating that “we do not accept credit cards (but there’s an ATM next door!)”

The first words that myself, my wife, and one of my customers heard from this man were “I drove 25 minutes down here and was going to buy $160 worth of stuff, but you don’t take credit cards!”  His tone of voice was clearly hostile, as if I had insulted his mother.  He then said something which I cannot recall the exact wording of, but the gist of it was that “we just lost a sale because we didn’t tell him.”  My response to his poorly chosen attitude and words was “You didn’t ask, sir!”  That irked him enough to make him turn back around and say, “I’m not the one in business here, you are!” and subsequently storm out of the front door.

After an experience like this, you might be as perplexed as I was.  I did some thinking over the remainder of the day while my wife and customer issued some negative comments on this man’s handling of the situation, and felt that this topic was certainly important enough to deserve a very big blog post, explaining why this experience will NOT result in me taking credit cards.

I will openly admit that I am not blameless: I could have informed all customers on the telephone from the very beginning that we do not accept credit cards and prevented this scenario from occurring.  However, at the same time, this individual was dealing with a business which he knew nothing about, and made an (erroneous) assumption that “all businesses take credit cards.”  Common sense dictates that if one is dealing with a business that one has no experience with, the payment policy at that business is part of the information gathering process that a responsible consumer must engage in; while it’s safe to assume that Best Buy or Wal-Mart take credit cards, a lesser-known business such as mine is a great big question mark.  If you change auto mechanics, for example, and you’re calling a shop you don’t know anything about, do you ask the shop if they take credit cards, or do you make an assumption that they do and get flaming mad when they don’t?  It’s your payment method of choice, so it’s your responsibility to ensure that it’s accepted where you want to use it BEFORE you drive 25 minutes away.  While I am not blameless for failing to proactively inform potential customers, the customer is, at a minimum, equally at fault for the misunderstanding.

On to the main reasons why a very small business like mine does not take (and cannot afford to take) credit cards.  You need to understand how profit works, so let me explain it in brief.  Profit is easy: it’s just the price I charge a customer minus the price someone else charged me.  Let’s pretend that I purchase an item from a supplier for $60 each and resell the same item for $70 each.  On each item, I have made a profit of $10, because my price to a walk-in customer is $10 more than the raw amount I paid for it.  This would also be called a 17% markup.  (Cosmetics have markups as high as over 100%, but grocery markups are usually low single-digits.)  The bottom line:  my total profit on the $70 retail sale of an item is NOT $70, it’s $10.  The other $60 is just recovering the original cost of the item.  I’d have to sell $700 worth of those items just to make $100 in actual money for the business.

You also need to understand that credit card merchant services take a cut out of the total amount charged to the card before giving me my money.  As an example, this would usually be around 1.9% of the item’s cost plus $0.30.  I use 2% as an easy number to work with.  On a $100 item charged to a credit card, the card company takes a $2 cut, meaning I get $98 instead of $100.

Now, let’s explain how credit cards have affected my business so far.  This man refused to buy $88 of equipment, on which my profit would have been about $13, because we don’t accept credit cards.  We have been open for a little over one month so far, and out of all other credit card requests, this has been the only one that actively refused to make a purchase; the others walked to the bank immediately next door and pulled cash from the ATM, or wrote a check.  Therefore we are currently losing one sale per month due to our refusal to take credit cards.

The true problem lies in the ~2% cut that the credit card companies take.  For taking credit cards to not be worth that one lost sale’s potential $13 profit, I have to make enough credit card (a.k.a. “CC”) sales that I lose $13 to the CC company cut.

[Math Alert!]….If the $13 I lost is 2%, then 1% is $6.50, meaning 100% is $650.00 in sales on credit cards instead of cash that I have to make per month to lose money by taking cards.  If that sounds confusing, let me say it another way:  if I sell $650.00 a month or in merchandise on CCs instead of cash simply because I made CCs available, then I’ve paid that $13 I would have earned to CC companies anyway!  $650 a month is roughly equivalent to 11 hours of PC service before I pay a contract technician $20 for each hour of labor! If you consider that my business only yields $40 per billable hour, yet I’d be charged the 2% rate on $60 instead, that’s $1.20 per billable hour and represents a 3% cut instead of 2%.  In other words, once you stop looking at a credit card fee as a percentage of the cost to the customer and start looking at it after some expenses are paid out, that “little” 2% fee starts to grow pretty huge.

Let’s take all this stuff and expand it out a bit more with a (simplified) hypothetical situation.  If you were to examine CC cuts in terms of my net profit (actual money made after all obligations paid) instead of gross profit (money earned beyond the original cost of the item or sale, meaning services are usually pure gross profit), the picture gets worse: supposing I sell two hours of service a day, about 25 days a month, and half of those hours are charged on a credit card.  That’s $3,300 in a month for services, half of which I lose a 2% cut on, which is $33.  Now, $33 out of $3,300 total sounds awful small…until you pull out the double-whammy:  expenses.  The power company ain’t givin’ us no free powah!  You think the plaza space is as cheap as your apartment, too?  No, sir!  Cut out $1,000 a month for the retail space, $120 a month for power, $30 a month for water/sewer, $120 for business DSL, and a random figure of perhaps $100 in consumables such as paper and toner.  Then, after that $1,370 or so is deducted, don’t forget that the tech got 1/3 of the labor charges, so $1,100 was paid out to the tech for his work as well!  (All that ignores my initial startup costs and interest on the small business loan for SIMPLICITY, so this is an UNDERESTIMATE!)

In such a simple example, we took in $3,300 total from customers for services.  By the time expenses were taken into account, $2,470 of the $3,300 was gone.  Before the CC fees, this example yields $830 in net profits.

Anyone who’s been in school knows that percentages are easy:  “part over whole, times 100.”  So take the CC fees of $33 and do the math:  (33/830) x 100 = 3.976% of my actual earnings lost to the credit card companies.

This assumes that no one uses a stolen credit card and issues a chargeback, which could potentially cost me hundreds or even thousands of dollars; for example, if someone buys a $750 computer with a stolen card and the card’s owner issues a chargeback because they (honestly) didn’t purchase the computer and shouldn’t be out that $750, the CC COMPANY TAKES THAT MONEY AWAY FROM ME WITH ALMOST NO RECOURSE.  One fraudulent purchase of a new computer could wipe out an entire month’s net profits.

How do bigger businesses deal with these issues?  There’s only one answer:  everything is more expensive.  Period.  I can give a 4GB flash drive to a customer for $17 while my small but established competitor sells them for $40 because these “costs of doing business” are not rolled into the price of my products and services.  I don’t have 4% or more of my actual earned income being eaten by CC fees.  I don’t have the threat of CC fraud and subsequent chargebacks.  Add to that the fact that my margins and rates are already quite low and my customer service and turn-around are a million times better, and there’s no way even an established competitor can actually compete.

(Granted, a check could do about the same thing to me, so adding cards to the mix makes the risk significantly greater, and CC fraud is far more prevalent and easily executed than check fraud.)

The point is that the cost of taking credit cards isn’t exactly worth it, and the risk of chargebacks is too hazardous.  If the customer wants to use cards so badly, they can always step next door and withdraw a cash advance from the ATM, and eat the CC fees themselves that way.  So far, I have yet to have that happen to my knowledge.

If the customer doesn’t want to eat the CC fees, why in the heck would I?

If it wasn’t against CC merchant agreements for me to charge an extra fee for taking cards, I’d take them without too much hesitation.  The only way I can charge customers extra for taking cards and not run afoul of merchant agreements is to price all my items and services with the CC fee increase included, then offer a “cash discount” for non-CC buyers.  It’s the same thing as charging a fee to the card user, but also causes all my stated prices to increase, decreasing my competitiveness.  Completely unacceptable.

When the CC companies learn and change their merchant agreements, I’ll probably take cards.  Until then, it’s too risky and expensive, especially to such a small business as mine.

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