Credit Cards

Credit cards play an integral role in much of small business financial activity. About seven out of eight small business employers have one or more credit cards that they use for business purposes, and half accept them as a form of payment. Cards pay approximately one of every six dollars of sales small businesses make, demonstrating their importance to the operation of smaller firms.

Conflicts between small business and the credit card industry are nothing new. Small business owners are also credit card users. Sevety-four percent have a business credit card and 39 percent have a personal card they use for business purposes. As consumers, they often have experienced abusive practices by the industry, such as not receiving credit for on-time payments, interest rate changes on previously incurred debt, and short notice of payment due dates. These complaints led to our support of the Credit Cardholder’s Bill of Rights Act of 2009.

Small businesses share an uneasy but mutually beneficial relationship with card companies. Credit cards improve small business cash flow by increasing the number of transactions, providing more efficient and speedy payment and reduced accounting demands. According to a report published by the nonpartisan Government Accountability Office, the business owners’ benefits of accepting cards also include increased sales and reduced labor costs. Some business owners, however, reported that increased payment costs were not made up by any increase in sales.

These same merchants stated their inability to refuse specific cards and other network rules limited their ability to negotiate payment costs with card companies. Small businesses tend to shop around for different cards frequently, indicating that they are not always happy with their existing arrangement.

Our credit research pinpoints two steps that could be taken to improve this relationship: payment minimums and debit at par in regard to checks (please see the following article in Business Week for more information on debit card fees).

Additionally, card companies require that business owners who accept cards also accept them for all purchases regardless of how small the transaction. The practical result is that those who accept cards will likely lose money on very small transactions.

Debit cards and checks are often confused as being identical methods of payment – often referred to as ‘debit at par.'  Accepting a debit card as payment costs the merchant more than it would to process a paper check. It's especially true that business owners lose money on smaller sales paid for by debit card due to the transaction fees. For a typical $100 purchase, the business owner pays up to 43 times more in processing costs for a debit card transaction than it would for a paper check. We support a common-sense reform that would align the cost of processing debit cards with paper checks.

As noted, small businesses report that they often lose money on small transactions since profit margins are so low and any profits may be eaten up by their credit card fees, which are typically higher for smaller businesses than larger ones. Credit card companies prohibit businesses from setting minimum transaction amounts, such as a $5 or $10 minimum for purchases, and businesses found to be in violation could be subject to punitive fines of up to $5,000 per day. We support allowing businesses the opportunity to set minimum transaction levels for credit and debit card use.