ProSales’ recent article Credit Card Bedevils Dealers But Few Refuse Them highlights the catch-22 dealers feel when one of their customers presents them with a credit card to pay their in-house account balance. Here’s the tradeoff in a nutshell: accept credit cards and effectively pay a double fee to get payment (i.e. costs of in-house account plus the credit card fee) or refuse to accept credit cards and risk losing customers.
The resulting decision made by many dealers—to continue to accept credit cards for charge accounts—is more depressing than surprising. It is also wrong-minded. It’s a recipe for making less money.
Let’s get some basic facts out of the way before I get to that. It is against card association rules to use a credit card to pay off other debt obligations (i.e., in-house accounts). Dealers should know that the possible penalties are significant, but it’s highly unlikely the card associations will know or do anything about it.
Now to the economics. The risk of losing customers is bigger in perception than in reality. It’s no different than the fear some dealers have about collecting interest charges for late payment. Communicated thoughtfully and with enough advance notice, you are not going to lose customers. Your customers must have no other reason to buy from you—or your relationship is already on thin ice—for this to induce someone to leave. That’s not to say some won’t grouse or even threaten to leave. They may not like it—but they get it. They’ll stay.
Don’t buy it? Ok, let’s entertain the possibility that you actually might lose customers. The right question isn’t “Will I lose customers?” but “Do I make more money with a no-credit-card policy or by accepting them on in-house accounts?”
The answer is crystal clear: You make more money with a no-credit-card policy. Do the math.
To keep it simple, let’s say you have a $12 million revenue company with 100 customers, and you make 5% net margin before fees. If 15% of your customers use credit cards to pay their in-house accounts and the credit card charge to you is 3%, you make 4.55% margin after credit card fees, or $546,000 a year in net income.
You then make a change to a no-credit-card for in-house account policy. Let’s say two of the 15 people using credit cards make good on their threat to walk away. While you lose the sales on those two customers, you gain the 3% margin on the other 13 customers who formerly used credit cards but didn’t leave. Sales drop a little to $11.76 million, but you are making the full 5% net on those customers, or $588,000. That’s $42,000 more than before.
Here's a further look at the numbers:
Using these inputs, you’d need to lose 9 of the 15 customers using a credit card before a no-credit-card policy would cost you money. That’s not going to happen.
Finally, if you are going to lose a customer (especially a big one), you can always quietly make an exception. They might feel special to be exempted from a change that others are not, and that might turn into an opportunity to gain something additional for you. I also think it’s smart money to take a credit card when you are breaking up with a severely delinquent customer—better to get paid than take a loss. Otherwise, it’s hard not to look at accepting credit cards as self-defeating if you do the math.
Dealers may feel imprisoned by this choice, but the jail cell is wide open. Walk out any time. There’s more money out here.