Why businesses don’t accept certain credit cards

There are more options than ever to make a payment in today's technology-driven world, especially for small businesses. For instance, with Square, businesses can allow customers to swipe, tap or insert a card on an iPad or scan their Mobile Wallet on their phone to pay — all for $49 in equipment. 

With these advances, many more people are choosing credit over cash. In fact, there were 44.7 billion credit card payments in the United States worth $4.0 trillion in 2018 — an increase of 11 billion payment and $930 billion since 2015, according to The Federal Reserve Payments Study 2019. On the whole, the study found that credit card payments grew at an annual rate of 9.9% by number and 9.3% by value from 2015 to 2018.

However, while credit cards as a whole may be more widely accepted by businesses large and small, not all credit cards are accepted everywhere. Cards like American Express, Discover and MasterCard may have some limitations.

Why is that, and what can you do as a consumer?

Understanding the credit card networks

There are four major credit card networks within the United States: American Express, Discover, MasterCard and Visa. Out of the four, Visa is by far the largest, both in the US and globally. Around the world, Visa has 100 million merchant locations (as of Sept. 30, 2021) and 3.8 billion Visa cards issued (as of Dec. 31, 2021), according to their recent Facts & Figures Report.

In addition to these networks, there are 10 major credit card issuers in the US: Chase, Citi, American Express, Bank of America, Capital One, Discover, U.S. Bancorp, Wells Fargo, Barclays and Navy Federal Credit Union. As of 2020, four of the 10 — Chase, Citi, American Express and Bank of America — had about half (49.5%) of the market share.

Also: The best credit cards for good credit: Reap the rewards 

Understanding the merchant fees

If the top 10 banks control 83.3% of the credit card market share (as of 2020), why aren't they accepted everywhere? Because of merchant fees.

What are merchant fees?

Merchant fees is the catch-all term for all of the fees associated with setting up a merchant account to can accept credit cards, as well as the fees to process those transactions. In general, businesses will face a group of fees to set up and maintain their account as well as pay a fee with each credit card transaction. Some of these costs include a one-time setup fee, monthly account fees, annual account fees, transactional fees, interchange fees, monthly minimum fees, statement fees, network fees, and more.

For most businesses, the setup and maintenance fees are a worthwhile investment — once you create your merchant account, you're able to accept any form of credit card. The reason businesses might not accept all credit cards is the transactional fees associated with each card.

How do merchant fees work?

To process a credit card payment, the merchant must pay a fee to three different “middlemen”: the credit card network (Visa, Discover, MasterCard or American Express), the credit card's issuing bank (Capital One, JPMorgan, Bank of America, etc.) and the acquiring bank (your banking institution). These fees can range from 1% to 3%, but for some cards, like American Express, they're as high as 3.5% per transaction.

These fees could start to add up. For instance, let's say a small business does $100,000 in credit card sales a month:

• If their sales only come from Visa cards that have a 1.15% transactional fee, the business will pay $1,150 a month in credit card fees.
• If 50% of their sales come from 1.15% Visa cards and 50% from 3.5% American Express cards, the business will pay $2,325 a month in credit card fees.

That's a difference of $14,100 a year in credit card fees alone!

Who pays the merchant fees?

Retailers pay all fees associated with setting up their accounts and processing the transactions. However, in 2012, a court settlement made it possible for retailers to pass along transaction fees to consumers in the form of a credit card surcharge. This was repealed and thrown out in 2016, though, putting the fee burden back on the businesses.

Additionally, unlike debit cards, credit cards have no fee caps. As part of the Durbin Amendment included in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, certain debit cards have their interchange fees capped at 21 cents plus 0.05% of the transaction value.

Because no similar sort of legislation exists for credit cards, the card networks and banks can set their own fee rates that retailers have to pay if they want to accept that credit card.

Also: The most exclusive credit cards: Oh you fancy, huh? 

Why do some cards charge higher fees?

It comes down to their business model — do they want to generate most of their income from transactional fees or interest payments? In the case of American Express, their business model is based around generating income from swipe fees, not interest.

Alternatives to not-widely-accepted credit cards

Credit cards that aren't widely accepted, like American Express and Discover, can still be used to make purchases at millions of retailers around the world. But you'll need to have a backup plan in place for when they aren't accepted.

1. Ask if there's a spend minimum

As mentioned above, once a retailer sets up their merchant account, they're able to accept any of the credit cards. In order to accept a card with high transactional fees, though, they may require you to spend a minimum amount to help offset those costs. If you'd really prefer to use a certain card that isn't widely accepted, don't hesitate to ask about the spend minimum first.

2. Carry a backup card, just in case

Keeping a backup credit card in your wallet is a good idea for those “just in case” moments where your primary card isn't accepted. For a backup card, it's a good idea to make it a Visa credit card since they're accepted at the most locations worldwide.

Additionally, why not make it a rewards credit card so you can earn points, miles, cashback and other perks as well? The Chase Sapphire Preferred Card, for example, earns 5x total points on travel purchased through Chase Ultimate Rewards, 3x points on dining and grocery purchases and some streaming services, and 2x on other travel purchases.

3. Keep a debit card handy.

If you'll recall the Durbin Amendment mentioned above, debit cards have caps on the amount that can be charged on transactional fees. This means that merchants are more likely to accept debit cards over credit cards. As with certain credit cards, though, there may be a spend minimum for debit purchases since there are some small fees.

4. Pay in cold, hard cash.

While we may be using plastic more often, cash is still king when it comes to making payments. If you'd prefer not to carry extra cards, make sure you have cash on hand at all times if your primary credit card is one that isn't widely accepted.

[This article was first published on The Simple Dollar website in 2020. It was updated in March 2022.]