New Credit Card Laws May Mean Less Profit Retailers | Vista Professional Services, Inc.

New Credit Card Laws May Mean Less Profit for Retailers

August 25th, 2010 | Author: Chuck Silva

Under the new credit card laws, the government is removing some of the advantages for businesses that accept credit cards.

It used to be that retailers were unable to to offer discounts to customers using cash. Under the new laws, retailers may offer a cash discount for those customers who do not use a credit card. This means that many retailers will start offering anywhere from 2 to 10% discounts to those customers who choose to pay by cash.

What does this mean to you, the business owner?

If a competitive retailer offers a cash discount, you may be forced to match that discount, whether you want to or not. Why? Because many customers will insist on a cash discount and if you don’t offer one, they may shop elsewhere.

Some retailers may even offer cash discounts of 10% even though they’ll save only 2 or 3% on credit card fees. Why? Because with the cash in hand those retailers may not be declaring it as income for tax purposes. This is illegal and I’m sure it’s not your business. However, it may be the business next door.

So, your business keeps good records and you pay all of your taxes while the business down the block offers customers a 10% cash discount and pockets the tax savings by not reporting their real income. How does this effect your business? If you can’t match that discount, it could mean the loss of revenue due to a loss of customers. If you match the discount, it directly effects your bottom line because of the 5 to 8% loss you incur. So, that $100,000.00 gross just turned into $95,000.00 or even $92,000.00.

The fact is, consumers who pay by cash take away from your retail shop’s bottom line. Those consumers who use credit cards tend to spend more on average than those using only cash. Credit card users don’t experience the instant punishment of cash leaving their pocket. They can buy now and worry about paying for it later.

Removing a significant percentage of credit card usage from the economy means removing a very significant amount of money. Ninety-eight percent of the total U.S. revolving debt of $852.6 billion, as of March 2010, was credit card debt. Today, credit cards are responsible for more than $2.5 trillion in transactions a year. By offering a cash discount to customers, you are encouraging consumers to spend less money, not more. This could result in a significant decrease in spending which means less money in the retail business owner’s pocket.

From a retail business point of view, accepting credit cards is a good thing for business owners. It helps grow and stimulate your business by providing consumers the opportunity to spend. If you offer a cash discount, any savings in credit card fees are likely to be offset by the discount.

This new law, coupled with the decrease in consumer credit card usage (down by 4%) would appear to bode ill for retailers by providing consumers yet more incentive to spend less money. Good for consumers, but not necessarily good for retailers.

Some credit card stats:

176.8 million credit cardholders in 2008 (Source: “The Survey of Consumer Payment Choice,” Federal Reserve Bank of Boston, January 2010)
Eighty percent of consumers currently own a debit card, compared to 78 percent who own a credit card and 17 who own a prepaid card. (Source: “The Survey of Consumer Payment Choice,” Federal Reserve Bank of Boston, January 2010)
In 2007, 97 percent of consumers indicated they used a credit card in the past year. In 2008, that number plummeted to 72 percent. (Source: Javelin, “Credit Card Spending Declines” study, March 2009)
In 2008, 72 percent of consumers indicated they used a debit card in the past year. In 2007, that number was 65 percent. (Source: Javelin, “Credit Card Spending Declines” study, March 2009)
Total U.S. revolving debt (98 percent of which is made up of credit card debt): $852.6 billion, as of March 2010 (Source: Federal Reserve’s G.19 report on consumer credit, March 2010)

Be Sociable, Share!

Tweet