Definition: A bank-issued card that allows people to purchase goods or services
from a merchant on credit
When you accept credit cards, you make it easy for your
customers to buy from you because you're offering convenience and
the chance for the customer to buy on "float." Yet the money isn't
coming out of your pocket--quite.
A kitchenware store in Atlanta might take a Visa card purchase
from a customer who lives in Milwaukee and has a credit card that
was issued by a bank in that city. The sales slip is deposited
along with the other receipts in the store's bank account.
The Atlanta bank credits the amount of the sale less a handling
fee, generally 4 to 7 percent. Assuming the sale was $20 and the
handling fee is 5 percent, the Atlanta storeowner actually receives
only $19. The loss of the one dollar is built into the store's
pricing and profit structure and passed along to the customer.
Then the Atlanta bank transfers the debt to the customer's
Milwaukee bank, which stands behind the debt and transfers the
necessary funds to the Atlanta bank. The Milwaukee bank then bills
the customer for the $20, plus interest if payment isn't received
by a certain date. The bottom line is that the storeowner in
Atlanta offered credit without much risk, the Milwaukee customer
received the merchandise, and the banks in both cities made
money.
Since the credit card companies are shouldering the risks in
granting credit, they expect merchants to help them cut their
losses. Both Visa and MasterCard publish regular lists of card
numbers that are unacceptable for some reason, and they send them
out to merchants and expect you to look at this list before
granting credit.
American Express, Discover and Diner's Club are also credit
cards you may decide to accept. They differ considerably from
bankcards because their credit requirements are generally higher.
Most bankcards grant credit if a person has a job, a permanent
residence, and no questionable information in a computer credit
file.
These so-called "entertainment cards" generally have a higher
credit ceiling. Bankcards will put a credit line to a customer's
account and hold the person to that limit. Entertainment cards are
geared to the more affluent consumer with lots of discretionary
dollars to spend.
The final difference is that entertainment card companies expect
to be paid in full each month, while the bank cards give the
customer two options: Pay the balance in full or pay a minimum of 3
percent of the total balance plus interest monthly. With high rates
of interest, banks profit handsomely if cardholders don't pay off
their entire credit card bill at once.
If you haven't already been approached by one of the major
credit card representatives, approach them. Their sales associates
work on commission and are happy to pitch the advantages of the
various programs.
Offering a credit card program eliminates the time you waste
handling credit sales. When you consider that certain costs of
credit are fixed (posting accounts, billing and so on) and will
cost you the same for a $10 sale as for a $500 sale, this argument
also makes sense.
A marketing benefit that helps your advertising sales is the
automatic mailing list the credit-card sales slip provides you
with. You can (if you ask customers to fill in their name and
address) have a day-by-day record of that customer's purchases and
use your mailing list to promote future sales by mail.
Another benefit the sales personnel will tout is the security of
credit card sales. You will (if you follow the credit card
company's guidelines) be able to collect your money even if the
cardholder skips town. The credit card operation assumes the risk
and pursues collection, which helps you spend your time more
profitably running your business.