Owning a small business requires maintaining an ever-watchful eye on your bottom line and cutting costs wherever possible. Unfortunately, most business owners overlook one huge expense: credit card processing.
All too often, business owners sign up with the first payment processing company they find and then continue to stay with them, never even considering they could save a substantial amount of money by taking their business elsewhere.
If you’re planning to start accepting payments in the near future, or you already do, it’s necessary to understand how credit card processing fees work and follow this advice to save hundreds or even thousands every year.
1. Use The Competition To Your Advantage
If you already have a payment processor, don’t assume that the rates and fees you pay now are set in stone. The same goes for a business owner preparing to sign up for services for the same time. Even if you’re happy with your current processor, a simple phone call can get your rate lowered without going elsewhere.
To succeed at negotiation, you need to understand how much you could be paying with another company first.
The trick is to compare apples to apples, which means getting quotes from other companies based on your typical transactions and not some fictional circumstances.
The best way to do this is showing a few other payment processing companies your most recent statement and asking them what they would charge for the same thing. Now, use this as leverage and ask your processor to match or beat these rates. If they flat-out refuse, it’s time to take your business to someone who will appreciate you.
2. Avoid Long Contracts with Hidden Fees
One of the oldest tricks in the book in the credit card processing industry is locking you into a long contract and then forcing you to pay higher-than-average fees with no way out except a massive early cancellation fee that may top $1,000.
These long-term contracts are nothing more than a right for the company to overcharge you, or provide poor service and penalize you for wanting to go elsewhere.
The average contract length in the United States for payment processing is 3 to 5 years. Why? Because most processors operate at a loss for some time, even if they charge business owners a setup fee, and this contract is a way for them to make sure they generate revenue from you.
To demonstrate just how expensive these contracts can be, consider that the typical early termination fee is based on your monthly fee. If you have a typical 3-year contract and cancel after only 12 months, you will be required to pay the remaining 2 years on your contract. If your monthly fee is $50, that means you’ll need to fork over a whopping $1,200 to get out of the contract!
The solution to this problem is finding a credit card processing company that offers month-to-month contracts with no early termination fees. While this is not the norm, the truly best processing companies will offer this is they know they have unbeatable rates.
Along with this, don’t forget to watch out for volume commitment clauses which are usually buried somewhere in the contract. This commitment requires you to agree to process a certain amount of dollars every month and, if you fail to, you will be hit with a huge increase to your discount rate or some other financial penalty.
This is particularly hard on small businesses. Read the fine print before signing a contract and, if there is such a clause, make sure it’s a low enough commitment that you are sure you can meet.
3. Understand Interchange Fees
If you don’t know how Interchange fees work, you’re in a position to be taken advantage of. Interchange fees are rather complicated, but a basic explanation is this: these fees are charged by credit card companies and determined by Mastercard and Visa. The fee you pay is split between credit card networks and the banks that issue credit cards.
The fees that you pay are then passed along to the consumer in the form of various credit card rewards programs.
Interchange fees are made up of over 120 categories and there’s a discount rate that applies to each, depending on the risk involved, which type of card is used, if your customer is present or the transaction is completed online or over the phone, how much information you collect, whether the transaction is processed as credit or debit and much more.
Unfortunately, most small business owners don’t know the true Interchange rate their transactions qualify for as their payment processing company gives them just one discount rate.
This rate includes the true Interchange rate and a per-transaction fee, although as a business owner you have no way of knowing how much of what you pay goes toward the Interchange rate and how much your merchant account provider is actually making from you.
It’s important to note here that Interchange rates are set in stone and, unless you are a major corporate like Wal-Mart, you cannot negotiate them. These rates are also the same regardless of which processor you choose. Still, this mark-up, or difference, between the real Interchange rate and what you pay is where payment processors vary.
Payment processors have three primary pricing models you’ll notice: fixed, tiered and Interchange Plus pricing. Fixed pricing means you pay a single discount rate for every transaction (common examples include Google Checkout and PayPal) while tiered pricing takes those 120+ Interchange categories and condenses them to only 3. This model means most of your transactions will be downgraded to make you pay more.
The solution here? While your statements will seem more complicated, switch to a merchant account provider who offers the Interchange Plus pricing model. This means you will pay the exact Interchange rate for every transaction you process, “plus” a small additional markup.
4. Buy Your Processing Equipment
Are you currently leasing your credit card terminal? If so, it’s time to stop! Did you know most terminals cost around $200 to $300, while a monthly lease fee can be up to $45?
Terminals are not nearly as expensive as most business owners believe although the cost of that lease can add up quickly. In an extreme example, a business owner paid over $2,100 over his lease period for a basic terminal that retails for only $90. To top it off, he didn’t even own the equipment when the lease ran out!
When you buy your own terminal, you also have the freedom to change to another payment processor without switching out your equipment. Most processors will also reprogram your existing terminal for free.
Finally, a note about credit card processing fees: while cost is certainly one of your biggest concerns while trying to run your business, remember that focusing only on price while selecting a processing company can cost you in other ways. Don’t forget to consider factors like customer service and how long it takes for deposits to clear your account for cash flow purposes to find a payment processor that will work well for you in the long run.