Using payment cards to buy and sell goods or services

Using payment cards – such as credit or debit cards – can provide many benefits for your business. As a buyer, they offer a range of alternative ways of paying for goods or services instead of using cash or cheques. And, as a seller, accepting these cards could help you sell more and reach new customers.

This guide looks at the different types of payment cards available – including charge cards and pre-paid cards – their pros and cons, and how these might help you manage your business’ expenditure.

The guide also outlines what’s involved in setting up your business to accept card payments from customers and key things you should consider first. For example, the additional costs involved like transaction fees, the risk of financial losses due to card fraud and security measures that can help your business reduce this risk.

---

Types of payment cards available

If you are looking to buy or sell goods or services using payment cards, there are six main card types to be aware of. These are:

• credit cards
• debit cards
• charge cards
• pre-paid cards
• business travel cards
• purchasing cards

Making or receiving payment with each type of card is a similar process. What differs between each card type is their terms and conditions, and how they are funded.

Credit cards:

• allow the cardholder to spend up to a specified credit limit
• offer the account holder an interest-free period
• require the account holder to repay at least the minimum amount each month, but charge interest on the unpaid balance
• incur no interest if the bill is paid in full by the specified date

Debit cards:

• are issued in conjunction with a bank or building society current account
• limit the cardholder to the funds available in that account plus any overdraft, if available

Charge cards:

• may require the account holder to pay an annual fee
• allow the cardholder a period of credit, but – to avoid additional fees – this must be paid off in full each month

Pre-paid cards:

• can be provided pre-loaded – eg for staff to pay expenses
• enable businesses to manage and monitor spending
• are available in different currencies, so can be used as an alternative to business travel cards
• usually incur various fees and charges – eg issuing costs, management fees, and transaction or ATM withdrawal fees

Business travel cards:

• operate in the same way as other business credit or charge cards
• can offer a convenient way for staff to pay for business travelling expenses
• often offer additional benefits, such as travel insurance or currency facilities

Purchasing cards:

• are generally restricted to buyers for large businesses or public sector bodies
• are designed to cut down on paperwork and the need for purchase orders

You can read about different payment card types on the UK Cards Association website – Opens in a new window.

Issuing payment cards to staff

With the exception of debit cards – which must be used by the signatory – all the other types of payment cards outlined above can be issued to staff for them to make business-related purchases. This can have a number of advantages, but there are also some potential pitfalls. See the page in this guide on the pros and cons of using payment cards for purchases.

Contactless payment technology

Contactless payment technology is being added to UK payment cards. Contactless cards utilise the security built into chip and PIN cards, and can be used for low value transactions of £15 or less.

The aim of contactless payments is to speed up transactions. Customers make their payment by holding a contactless-enabled card up to a secure reader – without needing to enter a PIN. However, after a certain number of contactless payments or for contactless payments for certain amounts of money the PIN entry device will ask the user to enter their PIN to verify that they are the cardholder using the card.

Find information on contactless technology on the Contactless website – Opens in a new window.

---

Pros and cons of using payment cards for purchases

There are many benefits to using payment cards in your business – particularly when cards are issued to staff. But there are several potential drawbacks to be aware of too.

Business benefits of payment cards

Using company credit, debit, charge or pre-paid cards to make purchases offers a number of key business benefits:

• Convenience – cards are quicker and might be cheaper to use than cheques. They’re useful for everyday expenses and can be used over the phone and internet.
• Credit – credit or charge cards can offer an interest-free period of up to 56 days, dependent on which card issuer you use.
• Most cards are globally recognised – using cards for foreign travel purchases may give you better exchange rates. It also reduces the need to change cash before and during travelling.
• Ability to monitor expenditure – you can specify which employees receive cards and set different credit limits for each card.
• Fast access to cash – cash can be withdrawn from ATMs. However, card issuers may levy a commission and – if given on credit – interest is payable from the day the cash is withdrawn.
• Reduction in administration – with a company credit or charge card, you pay one bill each month, no matter how many purchases you make. Itemised monthly statements can help with your accounting and administrative procedures and make it easy to distinguish business from personal expenses. Your provider may also be able to supply a report of your annual expenditure and a breakdown of the VAT charged on purchases.

Some of these benefits can also be achieved by using a personal credit or debit card. However, there are a number of pitfalls that you should be aware of. See the page in this guide on the risks of financing a business with a personal credit card.

Drawbacks of payment cards

Even though you can usually set maximum spending limits on employees’ cards, be aware that you’re giving your employees the opportunity to spend company money unchecked. There’s the risk they could buy unsuitable or unnecessary items which can’t be returned.

At the very least, it’s a good idea to combine card use with a normal reporting system to minimise the risk of unnecessary transactions. It may also be worth choosing cards that restrict what can be bought – eg petrol cards – as your business will have to honour every payment your employees make.

As with personal payment cards, you are also open to the possibility of two further major drawbacks.

• Card fraud – if the card details are discovered or revealed, you may find fraudulent purchases appearing on your statement. If this is due to an employee’s negligence, your business will be liable for the payments. In addition to the potential financial loss, such situations can be time-consuming to resolve. You can read guidance on preventing card fraud on the Financial Fraud Action UK website – Opens in a new window
• Debt – with the convenience of a plastic card and the time lapse between purchase and payment, it can be tempting to overextend yourself and build up debts for the business. Remember, if you make purchases with a credit card and don’t pay off the bill in full, you’ll incur interest charges – which can easily mount up.

---

Choosing a payment card provider

When you have decided which types of business payment card to use for your business, you will then need to find the right provider.

Debit card choices may be the most straightforward. Your business bank account is most likely to offer a debit card free as part of the package.

However, for other types of card it’s worth considering a range of providers as well as your own bank.

Business charge cards are offered by most business banks, and companies such as Barclaycard, American Express and Diners Club. It’s worth examining the different deals available and considering a number of key points:

• Is there an annual fee? If so, how much and is it payable for each cardholder?
• Can you give individual cards to chosen employees?
• What are the minimum and maximum spending limits?
• What are the penalties for late payment of your bill?
• Are there any extra perks – eg Air Miles or hotel discounts – that would be useful to your business?

The same considerations generally apply if you’re choosing a credit card for your business. But here it’s essential to compare the interest rate – usually expressed as the APR (annual percentage rate) – of different deals. The length of any interest-free period is also an important consideration. You can compare business credit card deals on the MoneySupermarket website – Opens in a new window.

Be aware that not all comparison guides are completely independent and may be sponsored in some way to recommend certain products over others. They also may not feature all card companies.

Whichever type of card you are looking for, it is advisable to shop around and negotiate. Interest rates, charges, interest-free periods and benefits can vary significantly. Your bank account provider may be prepared to amend its terms if you can show that another provider offers a better deal.

To find out about the deals on offer, go into local bank branches or visit the websites of banks with small-business accounts. Compare business bank accounts on the Moneyfacts website – Opens in a new window.

---

Risks of financing a business with a personal credit card

Personal credit cards can be relatively easy to obtain and convenient to use. And with a range of cheap deals offering introductory interest-free credit periods, it can be tempting to use them as a supplementary form of finance for your business.

However, if you use a personal credit card to fund the business that you’re running,  and your business is a limited company, there is a significant risk that you, rather than the company, will be held personally liable for any debts.

In addition, it doesn’t make financial sense to fund your business using a personal credit card – particularly on an ongoing basis. Although initial rates of interest may be attractive, in the long term credit card rates are generally much higher than for other forms of business borrowing. It is also notoriously easy to end up accumulating business debt on personal credit cards.

Using a personal card to pay for business purchases also makes it more difficult to keep personal and business expenses separate. This then makes it harder to monitor and account for business expenditure.

A business payment card, bank loan or overdraft will offer much better interest rates and can be matched to your business’ requirements. For more information, see our guide on bank finance.

---

Pros and cons of accepting payment cards for sales

Many businesses accept payment by card for their goods and services, which undoubtedly offer some distinct advantages. However, there are potential drawbacks that should be considered.

Advantages

• Responding to customer preferences – people expect to be able to pay by card.
• Encouraging impulse purchases – the customer doesn’t need to have cash with them.
• Avoiding lost sales opportunities – if a customer leaves to get cash they may not return.
• Reaching a wider customer base – you can accept payment by phone, mail and online from customers who can’t reach your premises.
• Cashflow improvements – card payments usually clear more quickly than cheques, although this depends on your merchant agreement. Funds can take up to four working days to reach a business’ bank account for face-to-face sales – this may be different for online sales.
• Improved security – you hold less cash on your premises.
• Easing your admin – a regular statement of card transactions is easier to reconcile than numerous cash transactions.
• Cards can be used internationally and currency conversions are handled automatically – offering an important payment method for tourist-sector businesses or those selling to consumers overseas.
• With card payments, the customer’s card is checked to see if it is valid and that it hasn’t been reported lost or stolen. In addition, in a majority of cases, the customer’s account is checked to ensure the funds are available. In most cases, an authorisation for the payment is given. However, a card authorisation does not guarantee that the payment will not be charged back in the future.

Disadvantages

• There are costs involved – though these aren’t usually prohibitive. See the page in this guide on the costs of accepting card payments.
• Accepting cards can increase your exposure to fraud. See the page in this guide on your liability for disputed card payments.
• To accept and process certain major charge cards – including American Express and Diners Club – you must reach a separate agreement with the charge card company.
• You will need to train staff – in the technical and administrative issues of processing a card payment, as well as in fraud prevention measures.

Take into account the expectations of your business sector. If you run a service-sector business or shop selling higher-price goods, life will be difficult if you don’t accept cards.

You can find out about the business benefits of card payments on the Electronic Payments website – Opens in a new window.

---

Accepting card payments: the key steps to take

Setting up the necessary bank account and equipment to enable you to accept card payments is a quick and straightforward process. In most cases your system can be up and running in less than a month. The main things you need to do are:

• Set up a merchant account with an ‘acquiring bank’ to process card payments. See the page in this guide on setting up a merchant account.
• Install the necessary equipment. Most card payments are processed using terminals or integrated tills where cards are swiped through or inserted. Your acquiring bank may provide you with a terminal on a monthly rental basis.
• Connect your terminal or integrated till to a standard telephone line so that transactions can be processed. This can be an existing phone line, but most businesses use a dedicated line.
• Discuss with your acquirer if you need to comply with the Payment Card Industry Data Security Standard (PCI DSS) requirements given the way that you are handling card payments. The PCI DSS is a worldwide security standard developed to protect sensitive cardholder information. Download a quick guide to the PCI DSS from the PCI Security Standard Council website (PDF, 3.02 MB) – Opens in a new window

Merchant accounts, in agreement with your acquirer, normally allow you to accept all major debit and credit cards – including Visa, MasterCard, Maestro and SOLO.

To accept and process a number of major charge cards – including American Express and Diners Club – you must reach a separate agreement with the charge card company. Your acquiring bank may be able to help you with an application.

If you are interested in accepting contactless cards, you should ask your acquiring bank about this too. For more information about contactless technology, see the page in this guide on the types of payment card available.

Card payment training

Before accepting card payments, make sure your employees are trained in how to:

• use the terminal
• avoid fraud – see the page in this guide on payment card security measures
• respond to any problems, such as a card not swiping properly or the terminal failing

---

Setting up a merchant account

If you want to accept payments directly from customers’ credit, debit or charge cards you may choose to set up a merchant account. These are accounts that allow card payments and chargebacks to be made to a merchant-nominated bank account.

You can also accept customer payments through a third party payment processing service or online shopping mall. You can find out more about these in our guide accepting online payments.

A number of UK banks – known as acquiring banks – offer merchant accounts. You could ask your existing bank whether they offer merchant accounts. But you don’t have to use the same bank to process card payments, so shop around.

Before setting up a merchant account, your acquiring bank will request a wide range of information. This is used to assess your business and to determine the level of charges you’ll have to pay for each transaction. You may be asked to provide information relating to:

• your business history and performance
• business accounts
• your projected turnover
• expected average transaction values and volumes on credit and debit cards
• transaction frequencies
• the type of goods you sell
• the proportion of transactions you expect to receive face to face, by phone, mail order, or online
• your suppliers’ details
• how you deliver your goods or services

You may need to open a number of merchant accounts if you want to accept card payments for different sales channels. For instance, if you sell goods from a retail shop and through an e-commerce website you’ll need separate accounts for your online and face-to-face sales. See our guide on accepting online payments

It takes between one and four weeks to open a merchant account. The process may take slightly longer for start-up businesses and banks may want to see additional information – such as a business plan and cashflow forecasts.

---

How the card payment process works

Unless a cardholder later disputes a transaction, the card payment process for card present or face-to-face transactions is very simple:

• When customers make a purchase, their card should be inserted or swiped through your terminal – or you key in their card number if you’re taking an order by phone, email or fax.
• You key in the transaction amount.
• If the transaction is face to face, in the majority of cases for UK-issued cards, the customer usually has to enter a PIN (personal identification number) to verify the purchase and that they are entering into the transaction. This is a crucial step in preventing fraud, as cardholders cannot claim they did not make a PIN-verified transaction. Customers undertaking a contactless transaction simply hold their contactless enabled card up to a secure reader to make their payment.
• The terminal checks to see if the card is valid. In addition, in a majority of cases, the terminal sends details of the transaction via your aquiring bank to your customer’s card issuing bank to check if sufficient funds are available to complete the transaction and that the card has not been reported as lost or stolen. Where these checks are pass the transaction is authorised and an authorisation code for the transaction is generated.
• Once a transaction is completed, your bank processes the transaction and credits your account with the customer’s money – usually within three to four days. A processing charge is applied by your bank.

However, an authorisation does not guarantee that a transaction is not fraudulent or that it will not be charged back at a later date.

All payment transactions using UK-issued cards and where the customer is present have moved to the chip & PIN system. In the majority of cases, transactions using these cards will be verified by the customer entering a PIN.

The exceptions to this system include transactions where the customer is conducting a contactless transaction, is using an old style or overseas card, or where a disabled customer has a chip and signature card because their impairment prevents them from using chip & PIN. The card will ‘tell’ your terminal what verification method is required.

Contactless cards are secured by the same technology that underpins chip & PIN. Although contactless transactions do not usually require a PIN to be entered, occasionally the terminal will ask the cardholder to undertake a full chip & PIN transaction.

Disputed payments

If a cardholder queries a charge made on their card and can show they didn’t authorise it – perhaps because the card was stolen – you could be told to refund the cardholder’s money. This is known as a chargeback. Chargebacks can be made up to 120 days (this timing may differ depending on the type of card used eg MasterCard or Visa) after the transaction has been debited from the cardholder’s account.

See the page in this guide about your liability for disputed card payments.

---

The costs of accepting card payments

You should shop around and check the costs of accepting card payments. Banks apply different charges depending on a wide range of factors – including the expected overall value of your card transactions and the bank’s assessment of your exposure to card fraud.

Remember that you are likely to be charged differently for credit card and debit card transactions. Credit card and charge card processing fees can range from less than 2 per cent to as much as 6 per cent of the value of each transaction. Debit cards are more likely to charge a flat rate of so many pence per transaction and the level may be determined by the number and average value of these transactions.

In addition to transaction charges, other costs you may face include the following:

• A monthly fee if you rent the terminal that is used to accept a chip & PIN transaction, swipe cards or key in card numbers from your bank.
• A service from a payment service provider (PSP) can be used to process transactions on your behalf, and is most likely to be used for internet transactions. PSP charges can be on a per-month or per-transaction basis. See our guide on accepting online payments
• Banks can ask high-risk businesses for a security bond to cover the costs of unauthorised transactions that are refunded later. Criteria can include the amount of online trading you do, average transaction values and the length of time it takes to fulfil an order.

You can read about the costs of accepting card payments on the Electronic Payments website – Opens in a new window.

You can also read about pricing for card payments on the UK Cards Association website – Opens in a new window.

---

Your liability for disputed card payments

Chargebacks can occur when a customer disputes a card transaction. Your bank can transfer liability to you and reclaim the value of the transaction from your account.

Chargebacks can be made where there has been:

• fraud – for instance, where a transaction has been made with a stolen card or account number
• inadequate customer service – for instance, if a customer did not receive their order or the goods were defective

Even if a transaction has been authorised and has been authenticated with a PIN it does not prevent all types of chargeback. A chargeback can be made up to 120 days after the transaction has been debited or from when the goods or services were due to be received.

Of course, your customers’ key statutory rights in relation to the goods and services you provide remain the same whichever payment method is used.

To minimise chargebacks you must verify the identity of people making card payments. In face-to-face transactions the customer’s PIN or, where a PIN cannot be used, signature is the most important security measure. If a PIN verified transaction is authorised through your terminal, you won’t be liable for a chargeback unless the goods or service are not as described or are faulty. Where you cannot accept a PIN, a clear signature will help but is no guarantee against a chargeback – as this can be forged.

Customer-/card-not-present transactions – such as internet, mail order or phone transactions – present a greater risk because it is more difficult to verify the customer’s identity. You therefore face a greater risk of fraud and the resulting chargebacks. Read about chargebacks on the Barclaycard Business website – Opens in a new window.

For advice on protecting your business from payment card frau, see the page in this guide on payment card security measures.

---

Payment card security measures

There are a number of steps you can take to reduce the risk of fraudulent card payments. Training is crucial – you should draw up a clear list of security measures and make sure your employees are fully aware of them.

Talk to the bank providing you with your merchant account. Ask them what security measures they recommend.

When the cardholder is present you should:

• check the card hasn’t been reported lost or stolen – your terminal will check this when it seeks authorisation
• make sure that the PIN entered verifies the transaction, or where the card is not chip & PIN-enabled that the signature matches the one on the back of the card 
• check the card is in the right format and hasn’t been tampered with – ask your bank for a card-recognition guide
• check with your bank’s authorisation phone line if the card won’t swipe – this can happen for innocent reasons but it may indicate a fake card
• beware of people who seem nervous or who try to distract you as you’re processing their purchase
• look out for people making hurried and seemingly random purchases, eg several pairs of designer sunglasses or high-priced electronics

For cardholder-not-present transactions, you can:

• ask for the card security code if you have the facility – usually the last three digits on the signature strip or, in the case of an American Express card, four numbers on the front of the card
• ask customers to bring their card when collecting goods
• ask for faxed confirmation of the order with a signature and proof of address
• check the name and address details you have been given with those held by the company which issued the card
• use the Address Verification Service offered by your bank, which checks the numerical details of the cardholder’s address with the card issuer
• take advantage of specific programmes aimed at preventing fraudulent transactions – like Verified by Visa and MasterCard SecureCode

You can find out about MasterCard SecureCode on the MasterCard website – Opens in a new window and read about Verified by Visa on the Visa website – Opens in a new window.

Find out about fraud prevention measures on the Financial Fraud Action UK website – Opens in a new window.

Data protection and security standards

As with any business that stores or processes customers’ personal information, you will need to ensure that your business complies with the Data Protection Act. Businesses that don’t properly protect their customers’ personal information can be fined up to £500,000. For more information, see our guide on how to comply with data protection legislation.

In addition to this, you will also need to ensure your operations meet the Payment Card Industry Data Security Standard. This is a worldwide standard developed to protect sensitive cardholder information. For more information, see the page about Payment Card Industry Data Security Standard compliance in our guide on accepting online payments.

---