Merchant Acceptance
While most merchants in the travel, entertainment, and retail sectors accept payment cards, cash and checks are still the primary means for many transactions in the economy.
Who Are the Players?
Merchants are in control of deciding which payment methods to accept. A merchant can opt not to accept checks are payment cards. Should the merchant decide to accept payment cards, he may decide which ones to accept and how to handle the transactions.
A credit card system generally uses a combination of their own direct sales force or third-party services to solicit merchants to accept their cards and provide ongoing support. The tasks involved are:
- Signing up the merchant
- Installing the equipment
- Providing authorization services
- Collecting transaction data
- Transferring funds to settle card purchases
- Responding to problems with card processing
- Providing other specialized services
The supporting services, from hardware manufacture through transaction processes, have themselves become significant industries, and standardization has occurred by virtue of common suppliers to the major firms, such that a merchant need only operate one point-of-sale terminal to accept any of several cards, and they may all be processed through the same clearinghouse.
Honor All Cards
When accepting a given card, a merchant is generally bound to honor all cards of that brand: the terms of their agreement prohibit them from honoring only gold cards, or cards from a specific bank, or only debit cards. Such requirements are standard for all major card issuers.
The author lists a handful of benefits, but they're largely common-sense (if a merchant accepts some Visa cards and rejects others, it's contrary to the value of having a "universal" card), and he doesn't mention that anyone has objected to this arrangement.
The Economics of Merchant Acceptance
Accepting cards has two effects on a merchant:
First, it generates additional sales. Customers may prefer to pay by credit card, and may refuse to do business with a merchant who refuses to accept their card. This may be because of the customer's desire to finance the purchase, or their preference for the convenience for cards over cash.
Second, it entails additional costs. In addition to the fixed costs of equipment and maintenance, credit card processors charge a commission to merchants for processing credit card transactions - so a merchant with a thin mark-up may incur a financial loss on each sale.
An additional consideration is the value of the average purchase. In a study of transactions (in 1996), it was found that customers use cash for small purchases (80% of transactions under $10 are conducted in cash) but not for larger ones (only 10% of transactions over $100). EN: This may have changed in the past decade - card issuers have been heavily marketing the convenience of cards for small purchases.
Also, security may be a concern. A credit card is a more reliable method of payment for merchants when compared to checks (a merchant often has no recourse if a check is forged, and must go to court if a check bounces) or even cash (counterfeit bills).
In the tourist industry, card payment simplifies transactions abroad: it is more convenient for customers to carry cards abroad than deal with foreign currency and exchange rates. The author elaborates on this, in great detail, but it's self-evident.
More and More Merchants Take Payment Cards
Over time, the widespread acceptance of payment cards by consumers and decreasing costs from suppliers has made accepting credit cards more attractive to merchants.
The cost of authorizing cards has decreased over time. Initially, merchants had to place a long-distance call to authorize a card (first by voice, later by modem) and maintain a separate telephone line to each point-of-sale. Presently, IP networking has enabled merchants to authorize card transactions at minimal cost.
The commission charged by card issuers has also decreased: Diner's Club initially charged a 7% commission. By 1991, commissions had decreased, with the most expensive (American Express) being 3%; and as of 1998, merchant discounts were 2.75% for AMEX, 1.8% for MasterCard and Visa, and 1.6% for discover.
Additionally, many card issuers will rebate the cost of equipment to merchants who do business with them in significant volume. It is not uncommon for an issuer to provide the equipment at no cost in the interest of gaining future transaction commissions.
History
Historically, charge cards were accepted by restaurants, hotels, and other travel-oriented businesses in the 1950's. The began to spread to retailers in the later 1960s and smaller merchants shortly thereafter.
In 1979, J.C. Penney became the first nationwide department store to accept national payment cards, though other major department stores were slow to adopt them for fear of losing revenue and customer loyalty from their proprietary card systems.
In the 1990's, the major coup in the industry was supermarket and convenience store penetration. In 1991, only 5% of grocers accepted credit cards, which grew to over 60% by 1997.
During the late 1990's, the national bankcard systems nearly doubled their merchant base.
The author asserts that "recent developments" promise to make card payment even more widely available - pay-at-the-pump technology has resulted in 42% of gasoline purchases at participating stations being made b credit card.
EN: I expect it's gone further still: pay-at-pump systems are ubiquitous nowadays, and even vending machines are being equipped with card readers.