Benefits of Accepting Rewards Based Credit Cards
October 15 2015 |
Our merchants often ask us how credit card types and brands differ and why the cost associated with processing a credit card varies depending on the payment card category. As you probably already know, processing of rewards based cards (e.g. travel points, air-miles, and cash-back) costs more than processing a basic one with no bells or whistles. Let's take a closer look at what rewards cards are and how you can benefit from them at your business.
What is a credit card?
Let's start with the basics. We all know that a credit card is a plastic card issued by a financial institution that allows its user to borrow pre-approved funds at the point of sale in order to complete a purchase.
Credit cards are essential components of ecommerce and play an important role in B2B companies' payment acceptance strategy. Suppliers recognize the benefits of receiving funds within 24-48 hours and improving cash flow, as opposed to waiting for a check to be deposited, as it could take between 5-7 business days for funding to occur. More and more industries choose to accept credit cards because it is convenient for their customers and because it is easier to keep track of sales.
Why merchants should encourage usage of credit cards within their clientele
Over the last few decades, credit cards have increased in popularity in all sectors of the economy. Credit cards allow cardholders to avoid carrying cash, earn frequent-flyer miles, and accumulate other rewards. Rewards become more generous and diverse to motivate consumers to use plastic. When the rewards are set appropriately, they will positively affect consumers, merchants and the payments system as a whole.
A large portion of the rewards are paid for by interchange fees charged to payment processors by card brand associations like Visa, MasterCard and Discover, who in turn charge fees to their merchants. Despite the higher cost of processing, accepting rewards cards can actually be quite profitable. Rewards card owners are motivated to spend more as well, as they tend to go for large ticket purchases more often than those with no rewards. Studies show consumers who use rewards-based credit cards typically come from higher income households and attract a higher spending client, which is great for the business.
A large portion of a merchant fee goes to the card issuer. The actual levels of fees vary by transaction. Merchant fees significantly vary by card type. In the example below, we use a $100 transaction as an example to illustrate the process and fictional fees just to show how it works.
Accepting rewards credit cards in general gives merchants a competitive advantage as well as helps them enhance the customer experience. In turn, this results in return business and potentially higher profit.
Resources used: Investing Answers; kansascityfed.org