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Overview and Definitions

Credit card processing is defined as the acceptance of payment cards that are attached to a revolving credit account (usually Visa, MasterCard, or Discover) or accounts that require payment in full every month (like most AMEX accounts).

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Credit Card ProcessingSince the 1980s, more and more businesses have accepted credit cards, and the rates for card acceptance have dropped considerably. Countless studies have shown that customers are likely to spend more money when using charge cards instead of cash or checks, and most companies will mark up all retail prices in order to account for fees related to charge cards, which can be upwards of 5% of the transaction.

Background:

Credit cards became more common in the late 1950s, when they were printed on celluloid, to the 1960s, when the magnetic stripe was introduced to the back of the card. (It is only in the 2010's where companies are starting to phase out this feature in favor of embedded EMV microchips.) In the past, cards were used by more affluent people and business travelers, but became more common for gasoline purchases and dining expenses. In a famous case during the 1970s, the ARCO company tried to eliminate its credit cards, and its competitors quickly snapped up the customers that had used them. Another backlash in the 1980s came where gas station operators offered separate prices for cash vs. credit, but this practice largely stopped when card company contracts forbade the practice where it was legal to do so. Starting in the late 1980s, card companies became far more active on college campuses, offering premiums such as free airline tickets to students who signed up for cards. Since that time, cards have become ubiquitous and the cash only store is the exception rather than the rule.

For years, the growth of credit card companies was slowed by usury laws in most states, so interest rates may have been too low to offset the risk of default by a large groups of customers. However, the ability for card companies to operate out of card-friendly states (like South Dakota) meant that banks may now charge interest rates as high as 30% on credit cards. This provided card companies an incentive to blitz customers nationwide with "pre-approved" offers, and this practice was commonplace until the Great Recession when easy credit essentially dried up and banks had to curtail credit limits for millions of customers in order to avoid massive default risks. By this time, however, cards had already become so entrenched in the landscape of stores that just about every shop had a credit card terminal next to the cash register.

The 1990s brought debit cards that were affiliated with brands such as Visa and MasterCard, and banks moved from offering plain ATM cards to sending check cards to their customers. In advertisements at the time, celebrities were unable to present checks to their favorite stores, but branded cards were accepted without additional ID. (Following a spate of identity and card theft, it is much harder to present a card without showing ID at many stores.) Many self-service gas stations which require advance payment became a popular choice for these cards, as it removed the necessity to wait in line to buy gasoline. Supermarkets, in addition, hastened the acceptance of these cards in concert with preferred shopper and discount cards, since the user was already swiping a card through a terminal for a discount. The use of PIN pads (first at gas stations and convenience stores, then integrated into supermarket checkstands) enabled cheaper processing since the Personal Identification Number acts as a hedge against identity theft, save for the hapless souls who write such numbers on their cards.

In the last 5 years, a new trend has emerged where consumers are able to accept cards for payments via smartphones. Brands like Square and PayPal Anywhere offer a dongle which plugs into a phone's headphone jack, and an installed app processes the transaction. This has caused the use of cards to skyrocket in places where they had not been seen before, such as yard sales, lemonade stands, flea markets, and personal services like lawn maintenance and babysitting. As a side effect of this practice, many small businesses that had not previously accepted credit cards have gotten a taste of the money involved and will switch to professional solutions that cost less once a certain sales volume has been achieved.