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Nov 5, 2011

Saving Money on Credit Card Processing as a Small Business

As many small business owners know, one of the most complicated and expensive costs can be accepting credit cards. Since consumer-spending behavior has shifted towards a plastic-first environment in the last decade, businesses are forced to accept credit cards in order to stay competitive. 

Unfortunately for many owners, a lot of organizations in the merchant services industry prey on small businesses and try very hard to keep them in the dark about their contracts. The result is often high costs and long-term commitments.

One important thing to know when looking for a merchant services company is that many organizations are very forthcoming with information and will provide you with a good deal. The problem is there are a lot of bad apples that have tarnished the payment-processing field. As a small business owner it is important to thoroughly research each company before signing a long-term contract.

Merchant Services Pricing

The majority of payment-processing agreements setup a three-tiered (or bucket) pricing structure, which categorizes each type of credit card or debit card transaction into one of the buckets. The bucket names are usually referred to as Qualified, Mid-Qualified and Non-Qualified. Each of the tiers carries a predetermined transaction rate, often times written like this:

1.45% +$0.20

The percentage represents a variable fee based on the amount of the transaction. The $0.20 in this example represents a flat fee charged for each transaction created, regardless of the total transaction amount.

In a merchant services contract, the Qualified rate will be the lowest while the Non-Qualified will be the highest. The issue with many processors is that they only advertise and make readily available the Qualified rate. So many merchants sign up thinking they are paying the lowest rate when on average only about 20% of all transactions run are categorized as Qualified. This means the majority of transactions they will run will usually fall into the more expensive buckets.

For small business owners looking over a merchant services contract, it is extremely important to verify the Mid and Non-Qualified tier prices. In some extreme cases, merchants sign up thinking they will be paying around 2% and end up near 5% of their total processing amounts.

Fees

Another favorite place for merchant services companies to make money is in the fee section of the contract. There could be monthly statement fees, PCI compliance fees, verifications fees, and even early termination fees.

Even the most reputable processors will end up charging something in the fee section, but they should be happy to explain what each fee represents and what you are getting in exchange. If they are hesitant to explain or the reasoning sounds off, move on to someone else.

Independent sales reps are often given a lot of leeway when it comes to adding fees to contracts. These additional fees typically go to them as added commission and it is important to get to the bottom of each one. Any small business owner in the process of negotiating a merchant services contract should demand an explanation of each fee and attempt to get it lowered. There will some fees that are set in stone, like a monthly statement fee, but pushing back on each one will allow for you to get a clear picture of whether that fee is mandatory or being tacked on as extra profit.

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