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Why some businesses choose to not accept Discover Card

Sunday, December 06, 2015

Deciphering limited acceptance at businesses

When it comes to accepting payments at your business, you know how important it is to offer multiple payment methods for your customers. And as credit cards increasingly become the way consumers want to pay, knowing how to accept each card type is important. You may already know that some merchants choose not to accept Discover. In this article, we’ll discuss the factors that make Discover not as widely accepted as other card brands and also some factors to consider as you determine if accepting Discover cards are right for your business. First, let’s see why Discover isn’t as widely accepted as other card networks.

Why isn't Discover as widely accepted as Visa or Mastercard?

As a consumer, you might notice that not as many retailers accept Discover as readily as they accept other card brand cards like Visa or Mastercard. There are a few key reasons why:

Discover is a direct-to-consumer issuer

This means that it doesn't partner with banks that help promote and distribute its products like the other credit card companies. Instead, they offer consumers perks including no-annual-fee credit cards, free FICO scores and a rewards program similar to other card companies. For example, Discover gives a percentage of spending as cash back when consumers use their Discover cash back card at places like Amazon.com, grocery stores, restaurants, gas stations and Paypal. They also may give special incentives to customers during their first year as a Discover cardholder. Discover can also offer more incentives like low rate balance transfers for those with good credit.

In contrast, Visa and Mastercard both partner with banks like Chase, Wells Fargo and Citi Bank to issue their cards through the banks. Because of these partnerships, they have a wider reach and larger customer base. To illustrate this, think about the disparity between the number of Discover cards and the number of Visa cards. Discover has one-seventh of the number of active cards as Visa. Because of this, many merchants determine that there’s not enough of an incentive for their business to accept these cards.

Discover charges merchants more for card acceptance

While Visa and Mastercard charge around 2% per transaction, the Discover rate can be 1% more for a total of 3%. And while that may not sound like that much, the extra 1% more than the other credit card network fees can be costly once you consider all the fees you must pay to operate your business. Many business owners choose not to accept Discover cards solely based on the increased costs they experience. Sometimes, small business owners like you will institute a minimum purchase amount for customers who make a purchase on their charge card in order to avoid the fees completely eating into their profit from the sale.

Discover has a return policy that’s notably generous

They offer incredible return/refund benefits to cardholders, including buyer protection for up to 90 days, covering theft or damage. Because of this policy, someone must bear the loss of revenue – and that’s often the merchant. Therefore, concerns from the merchant about the responsibility for the cost of the item can present a risk that many retailers don’t want to deal with.

Discover hasn't pushed into international markets as aggressively as its rivals

While Discover acceptance is higher in the United States than you might think, with 99% of U.S. merchants accepting it, it’s still not as prevalent in other countries. One notable U.S. merchant that doesn’t accept Discover is Costco, who only accepts Visa branded cards.

Its lack of acceptance in international markets makes it a less attractive travel credit card option. In fact, it still lags behind Visa and Mastercard in acceptance rates, but according to the Discover website, it is accepted in some forms in 200 countries and territories throughout the world. Due to a partnership with Diner’s Club, merchants who take credit cards from Diner’s Club also accept Discover cards. In addition, Discover has agreements with other payment networks that helps increase their acceptance. It’s also important to know that even if the merchant acceptance is low in a particular place, cardholders can use their Discover cards to withdraw from ATMs.

This is largely because Discover’s focus has been on the US market. Discover faces a similar problem abroad as they do in the US – higher fees that make it less attractive for merchants to accept at their shops. However, cardholders don’t have to worry about foreign transaction fees because Discover doesn’t charge them.

As you can see, there are a few reasons why retailers choose not to accept Discover cards at their businesses. Now, let’s look at exactly how Discover operates.

How does Discover operate?

We’ve already mentioned that Discover (and American Express) operate differently than Visa and Mastercard. Instead of working with banks, Discover and Amex both issue their cards directly to the cardholder. That means there’s no middleman and Discover provides the full suite of credit card services, acting as card issuer, merchant, transaction processor and network. This is a closed-loop network, and some contend that this type of network can offer better protection against fraud and provide better support for merchants who deal in multiple currencies.

Having so much data on their customers helps Discover serve their customers – because Discover can see transactions from the perspective of the cardholder and the merchant, they can extend offers that target the best credit cards for their customers.

How is this different from Visa or Mastercard?

Now, you may wonder the difference between how Discover does things and how Visa and Mastercard execute payment card transactions. There are a lot of subtle differences that make a big impact. Since Visa and Mastercard do not issue their own cards, they operate as a middleman to facilitate transactions through their networks. In a transaction with a Visa or Mastercard, there are four key parties:

  • A payment gateway that connects with the network and detects fraud
  • The retailer’s bank, also known as an acquiring financial institution
  • The cardholder’s bank, also known as an issuing bank
  • The network between both financial institutions

Every time a customer buys something using their Visa or Mastercard, the charge goes through the retailer’s bank or financial institution. The acquiring bank will then request approval from the credit card issuer to verify and authorize the transaction, ensuring the cardholder hasn’t surpassed their credit limit before completing.

In addition, because Visa and Mastercard partner with a variety of banks, they can offer more card options for consumers. These can include specific reward-based credit cards that give the cardholder points, redeemable for things like airline miles, hotel stays, or cash back rewards. In addition, Visa and Mastercard are able to offer branded debit cards for checking accounts. That’s something consumers can’t get through Discover or American Express since neither companies have relationships with issuing banks like the other card brands do. So, should your business take Discover?

Should my business take Discover payments?

After seeing why some businesses choose not to accept Discover payments, you’ll probably want to evaluate if you should accept Discover payments. One place to start is to talk to your payment processor. Chances are, they have an agreement in place that allows you to accept Discover card payments. That means you may not need to do anything else in order to start accepting Discover payments. You’ll just want to keep in mind the fee structure Discover employs and weigh that against the types of payments your customers are already making. Perhaps none of your customers use Discover, so it may not make sense for your business. However, if you start noticing more customers asking for you to accept Discover credit cards, it’s important to talk to your payment service provider to see how you can start taking Discover cards as a payment method.

Ready to work with a payment processor who can help you accept Discover cards?

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