
Credit cards and digital wallets are top-choice payment methods for many consumers these days. Not only is it convenient, but compared to 20 years ago, not all Canadians carry cash on them day-to-day. So, why do a surprising number of businesses choose not to accept credit cards and other forms of digital payments? Let's get into it below.
Understanding credit card networks
In Canada, there are three major credit card networks at play: Mastercard, Visa, and American Express. These networks are the backbone of what creates the virtual payment framework that enables business owners to accept certain credit cards.
Under these three major credit card networks, we have issuers, which are essentially the credit cards you apply for from your bank, credit union, or other financial institution. Issuers take on the financial responsibility of lending credit to cardholders. These credit card companies set the terms and conditions of the card, determine what rewards points the cardholder may receive, and more.
Issuers and credit card networks work together to process payments, which go through two separate stages:
1. Payment is processed
When someone pays using their credit card in person or online, the network will verify with the credit card issuer that the card is active and that there is enough money on the card to make the intended purpose.
2. The issuers pay the business
Once verified, the issuer pays the business on behalf of the customer, which is when you'll likely see the green checkmark appear on the payment terminal. The purchase amount is then recorded on the customer's account, which is due in their next billing period.
Does it cost business owners money to accept credit cards?
You're probably wondering, "Does it cost a business to accept credit cards?" The short answer is yes, and it all comes down to credit card processing fees. Credit card processing fees are a major cost for businesses, especially small businesses, and represent the cost of using the network's infrastructure and services that allow credit card purchases to happen.
Credit card transaction fees
Now, when it comes to credit card transaction fees or merchant fees we mentioned above, they can typically be broken down into the following:
Interchange fees
Every time a credit card payment is made, the cardholder's issuing bank or credit union charges a fee. These charges account for a substantial amount of the entire transaction expenses and are intended to offset the issuer's liabilities and administration expenses.
The fee varies according to the kind of card used, like a credit and debit card, whether the payment was made in person or online, and the purchase price of the items purchased.
Assessment fees
The credit networks we talked about earlier (Visa, Mastercard, and American Express) charge assessment fees. These fees are used to maintain the credit card network infrastructure but represent a smaller percentage of overall transaction fees when compared to interchange fees. These assessment costs are relatively similar for all businesses, but there's a chance they could vary slightly, depending on the credit network.
Payment processor fees
Credit card processors, which manage the exchange of payment methods between the financial institution and the business's actual bank account, also charge fees. These credit card fees are used to ensure that when a customer pays, their payment methods are secure, as consumer protections are imperative when it comes to credit and debit card payments. Additionally, processor fees are also charged for the technology used to accept credit cards (the payment terminal).
Ultimately, costs can vary according to the payment processor, the number of transactions, and the pricing structure chosen by the business.
Fixed-transaction fees
Fixed-transaction fees, also known as swipe fees, accumulate each time the business takes and accepts payments from customers, regardless of the total checkout amount. These monthly fees can add up quickly and tend to play a major role in why a lot of small businesses opt out of credit card acceptance and other mobile payment apps, especially if the small business has a high transaction rate with smaller checkout amounts.
When considering these fees, it makes sense why many business owners choose cash-only business practices to ensure their profit margins are successful.
What do credit card processing companies do?
We talked about credit card processors above, but what do credit card processing companies do? These companies oversee the exchange of credit and debit card payments between businesses, card networks, and banks. The main function of these businesses includes the following:
Authorizes payments: These businesses authorize the payment methods used by the customer to ensure there are enough funds to accept the card during the transaction.
Funds transfer: Once the payment is confirmed, they transfer the funds from the issuer or bank account to the business account.
Security and compliance: They also protect transaction data through encryption and ensure the transaction itself is compliant with industry standards.
Chargeback issues: Processor businesses also handle refunds should a customer dispute charges or make a return.
Technology: Most businesses provide terminals, POS (Point of Sale) systems, contactless payment solutions, and online payment gateways.
What other options besides credit card payments can a business accept?
Beyond credit card payment methods, large and small businesses are likely to offer different options, including:
Cash payments
Debit cards
Cryptocurrency
E-transfer payments
Cheques
Cash apps
Can shops refuse to take credit cards?
Yes, businesses can refuse to take credit cards and choose to operate a cash-only business. One of the main reasons for this is the associated fees they must pay to a processing company to accept card and digital payment methods.
For small businesses, accepting only cash can help them save money on these fees. For larger businesses, offering these payment options isn't something they need to worry about as much, given that their profit margins are much higher.
Another reason why a small business may choose to be a cash-only business is customer disputes. For example, let's say a customer disputes a charge on their card following a payment to a business. In this case, the business not only has to refund the individual but also charges a chargeback fee, which will cause them to lose money at the end of the day.
Further, when it comes to where the small business is located, there may be connectivity issues that prevent them from offering card payments, which is why they operate as cash only.
Why do some business owners only accept some credit cards?
Again, some businesses only accept some credit cards and not others because of transaction fees. Some card networks offer lower transaction fees than others. And, if you're a small business, the fees relative to their profit margin simply aren't worth it.
What are surcharge fees?
Understanding credit card surcharge fees is also important in our overall conversation about credit cards and why some businesses refuse to offer these payment options.
A surcharge is an add-on fee a business may add to your card payment to cover the cost of processing your payment, which is imposed by card processor businesses. These surcharges can range between 1% and 4% of the transaction. We should mention that not all businesses have surcharge fees, but it is possible that some small businesses do, so they don't bear the brunt of accepting credit and digital wallet payments.
Surcharges are only charged on credit cards. If customers pay debit, no surcharges will be added to the final total. Additionally, surcharge regulations vary between provinces and territories in Canada.
For example, while businesses can add surcharge fees during the checkout process, they must legally inform customers that a fee is being added. There is also a cap on these fees, which sits at 2.4%. Lastly, if a surcharge fee is added to the final purchase tag, customers must have alternative options available to them.
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Why small businesses can benefit from accepting credit card payments
While there are some advantages to not accepting credit cards and operating as a cash-only business, there are some potential downsides as well that business owners should be aware of:
Establishes a paper trail: Come tax season, small businesses can benefit from car payment options as it establishes a trail of transactions, making it easier for them to pay their share of business taxes for the season.
Attract more customers: Offering various payment options, rather than opting for a cash-only basis, can help attract new customers. And, for small businesses looking to increase sales, card payment options really are a straightforward strategy.
Could lose money from customers: We live in a digital world where cash isn't as prevalent as it used to be. By not allowing your customers to pay using car payment options, you could be losing money at the end of the day.
Why is my credit card not being accepted?
So, you've gone to use your credit card to pay, only to realize that your card isn't accepted, leaving you wondering, "Why is my credit card being denied?" There are a couple of reasons why you could be having trouble with your card:
The merchant doesn't accept card payments from your network: Have you ever tried to use your American Express card to pay? While some businesses accept payments from this network, others no longer do, given that the interchange fees are too high.
Insufficient funds: Another reason why a merchant may not accept your credit card is because the network has confirmed with your credit card issuer that there are not enough funds on your credit line relative to the purchase price of your items.
Technical issues: Sometimes, it has nothing to do with your card but rather technical issues with the credit network.
Security: There may be security issues with your recent transactions that your credit card issuer has noted. When this happens, the issuer will put a hold on your account until an investigation is conducted.
Your personal information is incorrect: If you're making a credit card payment online, you may have incorrectly entered your card number, security code, or other information.
If your credit card is not accepted, you may need to find an alternative payment method until you speak with your issuer about what the issue may be. We recommend always keeping a bit of cash on you at all times in case of an emergency or if your other payment options are declined.
The bottom line
Modern consumers continue to favour cashless transactions, but for many businesses, the high transaction fees aren't worth the investment, which is why you'll notice that some operate as cash-only businesses. Because of this, having alternative options like cash or debit cards on you at all times can come in handy when you need to make a purchase.
At KOHO, we offer numerous financial products to Canadians that can help them take control of their finances. Whether you're looking to build credit with KOHO by applying for a virtual credit card with overdraft protection coverage, streamline your plans for spending and saving by opening a high-interest spending account so you can make a return on the funds you save for the future, get a cash advance when money is tight, or a free credit score check, trust that KOHO has something, no matter where you are on your financial journey.

About the author
Niki is a communications specialist with years of experience as a freelance and marketing agency content writer. With a knack for storytelling, Niki enjoys working with businesses from diverse industries to craft engaging content that resonates with target audiences worldwide.
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