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Why do shop keepers accept credit cards?

why shopkeepers are willing to accept credit card even though he must be incurring expenses in encashing the credit card charge slip that you sign.

Harsh Roongta

14 Mar 2007

I am sure you have sometimes wondered why shopkeepers are willing to accept credit card even though he must be incurring expenses in encashing the credit card charge slip that you sign. A long time ago, before I was initiated into the world of retail banking, I asked this question to a relative of mine, who ran a large consumer shop. credit cards were just beginning to make a mark in India and I knew my relative (we belong to the thrifty Marwadi clan with a reputation for making the buck go much farther than the creator intended it to go) would not pay 2.5% charge to the bank without valid reasons. The charges have reduced substantially now. Nevertheless, back then, very few of his his competitors accepted credit cards. So, it had to something other than competitive pressure that made him accept these cards.

He then let me on the secret. Consumers who pay by card invariably shopped for far larger amounts on average than consumers who paid by cash. So what he lost by way of bank commissions he more than made up through increased margins on additional sales. To prove his point, he in fact asked me conduct an interesting experiment, which I duly did.

The next time I took a client out for lunch I paid for the bill by credit card. I realized much later that I had left a much larger tip than I would normally have left if I had been paying by cash. Somehow the fact that I was not counting out actual currency notes but just signing on a charge slip made me far more generous than I normally would feel. If this was the case with me, I can imagine the situation with other consumers not blessed (or should I say cursed) with my thrifty gene pool!

So does this mean that the credit card is something to be avoided because it makes you spend more? That is clearly not so. In fact, after the experiment I became very conscious and worked out a good balance. I now pay the original bill by my credit card and leave the tip in cash. Trust my genes to come out with a win-win solution.

In fact, all of us can work out similar solutions. As long as you are conscious and aware that credit cards can make you spend more unwittingly you will be on your guard and spend accordingly. So the moral of the story is to use this convenient tool responsibly and be aware of the potential pitfalls.