Your Business Credit

A business may spurn debit cards, but why?


Small businesses running subscription-type services may find debit and prepaid cards a hassle. But think carefully before refusing to accept them

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Dear Your Business Credit,
Is it possible to accept only credit cards at my business but not other types of cards? — Jason

AnswerDear Jason,
I posed your question to Scott Tivey, president of CNP-Solutions, a consultancy in Weston, Connecticut, that helps merchants improve their card processing efforts. I assume you are asking because you run a subscription-based business and are trying to avoid having to update cardholders’ account information if a debit card payment does not go through or if the money on a prepaid card gets depleted.

He told me that yes, there are situations where a merchant can decide to accept credit cards, but not other types of cards. Let’s say a merchant gets set up to accept Visa cards. Under Visa’s regulations, merchants have two options: They can decide if they want to accept all of the Visa association’s branded payment vehicles — meaning credit, debit and prepaid cards. Or they can opt for credit cards alone, in what is known as the limited acceptance category.

“We’ve found this to be a rare instance,” Tivey says. “What merchant would potentially want to remove 50 percent of the ways to be paid?”

In case you’re wondering, there is no option to accept credit cards and debit cards but not prepaid cards, he says. Prepaid cards fall under Visa’s debit card rules, he says.

MasterCard’s rules say that merchants that accept its cards may accept MasterCard debit cards only, other MasterCards only or both debit MasterCards and other MasterCards.

All kinds of cards can pose authorization problems for subscription-based services. The account linked to a debit or prepaid card can be out of funds; a credit card account may be closed for any number of reasons. If merchants have to phone a customer to manually update their account information when a card can no longer be used, these clients might not want to renew. One reader who owns a gym, for instance, wrote to me about customer turnover when credit card issuers reissued their cards following a data breach.

While you can’t insure against all of these situations, you can at least mitigate some of the damage, which may help offset the costs and hassles of accepting debit and prepaid cards. Visa offers a service called Visa Account Updater that notifies merchants about changes to their customers’ account information. It sends new account numbers and expiration dates and tells you when an account has closed.

The MasterCard Automatic Billing Updater performs similar services for merchants who accept MasterCard.

But services such as these aren’t a cure-all. “Not every Visa or MasterCard participates,” says Tivey. He estimates that about two-thirds of MasterCard and Visa cards participate in such a program.

Nonetheless, these services can help merchants hold onto customers who might not renew if you had to call them up and update their information manually. Tivey says that merchants who use them to keep cardholder information current will typically receive updated information on about 15 to 20 percent of the cards if they bill once a year. Those who bill monthly see a 2-5 percent update per month, on average.

So which option should merchants choose? Generally, the more electronic payment options merchants offer, the better. It’s more convenient for customers.

A word to small-business owners: If many customers don’t want to keep buying what you sell when it comes time to renew, then it’s time to rethink your business model. It may not be sustainable. Offer something they want and need — and treat them well — and you’ll be able to keep attrition to a minimum without severely limiting your payment options.

See related:Rules for businesses adding surcharges for card-paying customers, Charging customers to use credit cards, Which credit cards should your small business accept?

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