Plastic cuts both ways

Cash or cheque? This was the extent of payment options that John Gamble, president of Gamble Lock Door and Safe Inc., in Newmarket, Ont., used to present to customers after he finished changing their locks or copying their keys.

"But then about 10 years ago we started accepting credit cards," says Mr. Gamble, who has been running his locksmith business for close to 40 years. "We had no choice - our customers were coming in and wanting to pay by credit card."

With 71.6 million credit cards in circulation in Canada, it's become harder for small business owners to say "no" when customers whip out the plastic. Studies and anecdotal evidence show a majority of consumers like charging their purchases to a credit card. A 2006 survey by Pew Research, for one, found that close to 70 per cent of consumers said they used credit cards because they considered it to be a more convenient form of payment.

While there are no available statistics on how many small businesses in Canada accept credit card payments, anecdotal evidence and observations by those in the credit card industry suggest the numbers are growing.

It's easy to see why, says Kevin Stanton, president of MasterCard Canada. Businesses that accept credit card payments attract more customers, who tend to spend more than they would if they were paying with cash.

"What do merchants get out of it? Increased sales, they don't have to worry about whether a cardholder is credit worthy, they don't have to chase receivables, they get guaranteed payments, and they get investments in security," he says. "So they actually get a lot."

Anna Gladue, owner of Vancouver-based Anna's Incense, an online retailer of incense sticks and oils, says credit cards have helped her build a thriving business.

"It's basically my only major avenue to accept payments," she says. "I accept PayPal and occasionally I get a cheque or money order enclosed with a mail order, but I prefer credit cards - I wouldn't have a business without them."

But even as they enjoy the benefits that come with being a credit card merchant, many small business owners also lament the cost of these benefits. For each sale charged to a credit card, companies pay an "interchange fee" representing a percentage of the sale.

These fees are split among the companies that process the payment, also known as "acquirers," the banks that issued the credit cards, and the credit card companies themselves.

In the past, merchants generally paid one set percentage for interchange fees, but a new pricing structure that came into effect at the beginning of this month breaks out transactions into two main categories - qualified transactions, where the card is swiped and the customer's signature is obtained, and non-qualified transactions, which include online or telephone sales.

The actual percentages vary based on a number of factors, including volume of sales. Mr. Gamble, for instance, pays 1.67 per cent for qualified Visa transactions. With the new pricing structure, he is paying more - 1.9 per cent, to be precise - for non-qualified transactions. He is also getting charged 2.15 per cent for commercial credit card payments.

At the same time, merchants face higher interchange fees for premium cards that come with points programs and other perks such as travel insurance and collision insurance on rental cars. The card companies also charge more on purchases by customers with historically high spending levels.

For the average small business owner, this jumble of fees can be downright confusing, says Derek Nighbor, a senior vice-president at the Retail Council of Canada, a non-profit association that represents retailers across the country. And because it's impossible to predict what type of credit cards customers will use at any given time, the varying fees make it difficult for business owners to plan for their card processing costs.

"So if you're a retailer who has always planned your business based on a set rate, it can be very frustrating to find out at the end of the month that you now have to pay all these other fees," says Mr. Nighbor.

A Toronto running-gear retailer, who asked not to be named in this article, notes that returned items also incur a processing fee.

"Every time I take a credit card here I pay 3 per cent [of the sale total]," he says. "And if a customer brings something back that was paid for with a credit card, then I lose another 3 per cent."

Fee increases in recent years haven't helped, either.

"I'm paying a lot more in [interchange] fees now than I used to," he says. "My Visa fees in particular have doubled in the last three years."

So what's a small business owner to do? Ms. Gladue at Anna's Incense advises entrepreneurs to shop around for the best rate. Because interchange fees are based in part on volume of sales and the average ticket price, a small business owner just starting out may not be in a strong position to negotiate. But Ms. Gladue says entrepreneurs should persevere, especially once business really picks up.

"Check back with the acquirer and tell them your volume has gone tenfold and you want a better rate," she says.

Mr. Nighbor says it's a good idea for entrepreneurs to sit down with their accountant or bookkeeper to review their merchant agreement. This way, they can get a better grasp of the fees and how they might affect the bottom line.

Knowing exactly how much they're paying could also help business owners negotiate lower interchange fees, says Mr. Stanton at MasterCard. And there's nothing secret about these fees, he adds; all business owners need to do is ask and MasterCard will give a detailed breakdown of its fee structure.

Mr. Gamble says he was able to get lower fees by joining the Canadian Federation of Independent Business, which has negotiated a group discount for its members. Still, he encourages his customers to pay with cash by offering a 3-per-cent discount on cash purchases.

Of course, there's also that one other thing business owners can do about interchange fees: not accept credit cards at all. Many merchants choose not to accept cards because the cost of doing so offsets the benefits to their business, says Mr. Stanton.

Other business owners, especially those who sell directly to other businesses, still prefer to do things the old fashioned way: send an invoice and then wait for the cheque in the mail.

But for businesses such as Mr. Gamble's, not accepting credit cards is simply not an option.

"If you want to be in business today, you have to accept credit cards," he says. "That's just the way things are."

Just charge it

71.6 million

Number of credit cards in circulation in Canada in 2006

70%

Share of consumers who said they use credit cards because they are convenient

40%

Portion of consumers who have used their card to buy a high-priced item

Source: Pew Research