When you run a small business, different forms of payment mean different things for your bottom line. As new forms of payment become common, businesses face decisions over whether to allow customers to pay the way they want or to keep things simple.
Both have their advantages. More payment options can mean more customers. It can also result in more advantageous terms for the business, depending on the methods of payment chosen.
On the other hand, more options can lead to disadvantages if customers regularly pay using a method that takes a large cut from the company.
Trends in Consumer Payment Choices
According to the 2019 Diary of Consumer Payment Choice from the Federal Reserve, consumers today use debit cards more than any other instrument, accounting for 28% of all transactions. Credit cards accounted for 23% of purchases.
Consumers still greatly prefer cash for small transactions. The Fed’s research found that buyers used cash for 49% of payments under $10. For all transactions, however, that number dropped to 26%. Unexpectedly, people ages 18 to 25 use cash more than any other group, at 34%. They even beat out people ages 65 and up, who came in at 33%.
In-person payments still reign supreme over e-commerce payments at 73%. However, that fell a full 4% from the Fed’s last study, suggesting e-commerce’s growth is making a real dent in brick-and-mortar projections. The average study participant made about 43 payments per month, up from 41 for the previous group.
Results from this study confirm that non-cash payment methods, both online and offline, continue to grow as preferred options. While young people in the study used cash more than their older peers, that trend will likely discontinue as they exit school, begin their careers, and make larger purchases. For merchants, offering a variety of payment options will be essential.
As you decide which forms of payment to accept, consider the pros and cons of each:
To accept credit cards, you must set up a merchant account with the credit card companies. Most businesses accept some combination of Visa, Mastercard, Discover, and American Express — often, all four. Credit card companies can charge different interchange rates for different industries, so run the numbers before deciding whether to accept a certain brand. Merchant account providers also charge processing fees.
Compared to debit cards, credit cards typically offer more consumer-friendly protection policies. If customers are unhappy with a purchase, they can usually issue a chargeback, which causes headaches and forces merchants to prove they provided the goods or services they claimed they did. Keep accurate records on hand for at least the past few months, and develop a system to respond to chargebacks quickly and fairly.
Prevent chargebacks before they happen by encouraging customers to reach out to you about problems before contacting their banks.
Debit cards carry lower fees than credit cards across the board. Businesses still use merchant accounts to accept debit cards, but unlike credit cards, in-person debit purchases come in two forms: signature and PIN.
Signature payments route through the same processing networks as credit cards, which can mean higher fees. A signature payment occurs when a customer swipes a debit card and chooses to run it as credit instead of typing in a PIN. The second type of debit transactions, PIN debits, occur when customers insert or swipe their cards and enter a PIN.
All debit cards are subject to interchange fees, like credit cards. Interchange fees can vary depending on which method of debit payment customers use. Prepaid debit cards operate the same as regular debit cards, so users can choose whether to run their transactions as signature or PIN.
Mobile Pay and NFC
Mobile payment methods such as Apple Pay, Google Pay, Samsung Pay, and Chase Pay allow customers to use smartphones and other smart devices to pay with their cards, even when those cards aren’t present. Most merchants allowing contactless payments can accept any of these forms of payment using the hardware they already have.
Apple Pay and other mobile payment methods don’t charge merchants extra fees. Merchants pay standard interchange fees to credit card companies; the credit card companies pay basis points to the mobile pay providers on each transaction. If you decide to accept mobile payments, you could face a few upfront costs in upgraded equipment, but your payments will otherwise process as standard credit card payments.
Depending on the setup of your website, you can also accept mobile payments online.
Early adopters have begun to accept cryptocurrencies, most commonly Bitcoin, at their brick-and-mortar businesses. Cryptocurrency lovers embrace the technology because it offers a blend of transparency and anonymity. Rates for cryptocurrency can vary substantially from moment to moment, however, which means business owners must educate themselves before diving in.
To accept crypto payments, merchants can display QR codes, which users then scan with their smartphones to transfer money. This method doesn’t charge a fee to the merchant, but consumers often pay fees. Businesses can also use payment processors like BitPay to accept cryptocurrency. BitPay operates like a standard credit card processor and charges a 1% fee for its services. BitPay and other processors can convert cryptocurrency to cash on your behalf.
Remember to track and report your crypto income the same way you would track and report income for regular transactions. While cryptocurrency stayed under the radar for several years, governments expect merchants to understand their crypto liabilities and account for them come tax season.
Accepting payments from customers gets tricky when they go for cards and crypto over cash, but don’t let complexity prevent you from accepting a wider variety of payments. Listen to your customers’ needs, upgrade your equipment if necessary, and make the right decisions for your business.