Credit Card Processing Tips for Small Businesses
Speak with any small business owner today that accepts credit cards, and they will more than likely have a bit of frustration when it comes to their monthly merchant account statement. With higher-than-expected processing rates and hidden fees, merchant account statements bring an unwelcome reminder at the cost of doing business in today’s competitive landscape.
As consumer-spending behavior has shifted towards debit and credit cards and away from cash, so has the power shifted towards the merchant service providers. Since it is almost a business death sentence to not accept plastic, small businesses are forced into expensive contracts with lengthy terms in order to compete. Combined with the fact that the industry as a whole is highly unregulated, the deck is stacked against the typical small business owner who does not have time to become and expert in payment processing.
While the topic of credit card processing is quite large, there are a few tips that will help a business owner during the research and negotiation process. They center primarily on cost and contract terms, as those are the most important part of almost any business agreement.
There is a dirty little secret in the credit card processing industry called “interchange plus pricing.” Interchange plus is basically wholesale pricing plus a small markup to cover processing costs and profit for the merchant services provider. Until recently, interchange plus pricing was reserved only for the largest processors like Wal-Mart or Safeway.
The typical pricing model pitched and sold to small business owners is what is called “tiered” or “bucket” pricing. There are usually three buckets or tiers, and each type of transaction is assigned to a specific bucket. Each of the three buckets has a specific rate assigned, and all transactions in that bucket are run at the same rate.
The argument for this pricing structure is that is simplifies the process. And while that is true, it also increases the cost. In each bucket there could be as much as 200 different transaction types that are all assigned to the most expensive rate in the bucket. Furthermore, processors can put whatever transactions they want into each bucket, so it is impossible to compare apples-to-apples.
Interchange plus takes the actual wholesale cost of each individual transaction and assigns a markup to it. That means each transaction is getting run at the best rate possible. It is important to demand this pricing model because many sales agents will not be forthcoming with it. Additionally, the markup percentage is negotiable.
Credit card processors are notorious for tacking on numerous fees to monthly statements. They can range from a fee in order to receive a statement, to an annual retainer fee.
Small business owners need to be aware that most fees on a merchant service contract are negotiable. Furthermore, many fees can be added on as an extra profit center for the sales agent. Agents are paid on commission, and often have the power to write in any fees they see fit. They literally can make them up and call them whatever they want.
When negotiating a merchant service contract, go through each fee and make the sales agent explain what it is. Then negotiate each one individually. Many small business owners have contracts with little or no fees, so if an agent is not willing to budge, move onto a different one.
Credit Card Processing Contract Terms
The majority of merchant service contracts contain annual commitments and large cancelation fees. Some even include clauses that automatically renew the contract at the end of each term, or have a clause called “liquated damages” which entitles a processor to all of the money they should have made if the contract went to full term.
Annual contracts (especially ones that are longer than a year) can be very dangerous for small business owners who run on small margins. They prevent the flexibility of shopping around or getting out of a contract that doesn’t live up to its initial promises. Sole proprietors have to be extra careful, because even of their business closes they still may be on the hook personally.
Business owners should know that there are many processors that provide services with no annual commitments. During the negotiation, if a sales rep is unwilling to remove the commitment terms, find someone who will.
In recent years there has been an explosion in alternatives to the traditional credit card processing industry. Products like PayPal Here and Square have taken the business world by storm and offer credit card processing with no gimmicks.
These alternative companies offer technology to process credit cards at reasonable rates and no contracts. There is no minimum each month to pay, and there is only a charge when a transaction actually takes place.
The new alternatives to traditional merchant service accounts are great for businesses that do infrequent processing, are brand new, or need to take credit cards on the go. Business owners that operate storefronts or take regular credit card payments will be better served with a traditional processor and a well-negotiated contract.