Ben, a retailer, tells his entrepreneur friends to stay away from the last merchant service provider he tried. It was only after he started using their services for processing credit cards that he started being charged unexpectedly high hidden fees. Data protection alone cost $134 and early termination fee cost him as much as $500. He estimated that for most months his effective service rate was over 5%.
Stories like these are commonplace in the US. If you are a small business owner accepting credit cards, be careful when choosing a merchant service provider for credit card processing. Here are 7 things you must know:
1. Know the Parties You Will Be Dealing With
Credit Card Associations – These companies make the credit cards and decide the rules. Visa and American Express are some examples.
Issuing Banks – These financial institutions issue credit cards. Wells Fargo and Citi are popular issuing banks. Companies like American Express and Discover play the role of bank and credit card companies, too.
Processors or Acquirers – These are messengers between credit card associations and merchants. There might be many processors handling different tasks in just one transaction.
Payment Gateways – Payment gateways are portals that direct transactions to a processor.
Merchant Account Providers – These are companies that manage all the work that goes in credit card processing.
2. Know Your Base Fees and Markup Costs
Creating a merchant account for credit card processing involves two types of fees:
Base fees – Also known as pre-markup or wholesale fees, base fees are the wholesale charges for your sales via credit cards. Credit card associations and issuing banks determine these fees and are non-negotiable.
Markups – Markups are negotiable and vary with credit card processing companies. In Ben’s story, this is exactly where he needed to be careful while comparing processing companies. Sadly, processors use different pricing models and other hard terms which leave even the most experienced owners confused.
3. Merchant Account Pricing Models
Interchange Plus – The most transparent of them all, your wholesale fees and markup costs are clearly listed in your monthly statement. It will be a lot more difficult to read, but at least you’ll know the exact difference between your wholesale costs and other fees.
Tiered – Here, you pay processing fees based on whether your transactions fall under one of the following categories: qualified, mid-qualified and non-qualified. As a business owner, if you meet the processor’s criteria for how transactions should happen, then you are a qualified merchant. If you do not meet these standards, you downgrade to mid-qualified and non-qualified tiers.
Some credit card processing companies take advantage of these tiers and do not disclose which tier your transactions fall into, and could charge you excessive fees.
Membership – This model, like Interchange Plus, has separate charges for transactions and markups. But instead of paying a percentage of markup fees, you pay a small transaction fee. This model is new, but is catching on already. Merchants with large transactions can save a lot while having a good level of transparency.
4. Know all kinds of fees
Interchange Reimbursement and Assessment Fees – These fees are charged by credit card associations and issuing banks. Interchange fees has a percentage of each transaction and flat per-transaction fee (say, 2.15% + .10). Assessments are usually a percentage of the total volume of monthly transactions. These are non-negotiable.
The following are all flat fees that fall under markup. Get familiar with these and negotiate with processing companies after understanding them:
PCI fees – Fees paid to the Payment Card Industry. Complying with these standards can help save on non-compliance fees. Also make sure that your processing company is actually meeting these standards for you.
Terminal Fees – Merchants who own physical stores are charged this fee, where they directly swipe a customer’s card. Online businesses need not pay this. Some companies try to lock merchants into lease terminals but that is unnecessary. Good providers will tell you to buy your own terminal for a one-time fee which won’t cost you much.
Payment Gateway Fees – These are for ecommerce businesses. Some processing companies have in-house payment gateways.
Early Termination Fees – If you cancel your contract early, it will cost you this fee. Try to avoid this extra charge.
Monthly Fees – These are charged for usually paying for call center costs. But it is mostly mistakes by the merchant account providers that make call center costs necessary.
Annual Fees – These are for the basic use of the services a provider gives you. See if you can ask the service provider to drop this one.
Minimum Fees – Merchants who don’t reach a minimum total transaction amount every year are required by some companies to pay this fee. Most providers charge around $50,000 every year as minimum fees.
IRS Report Fees – Merchant account providers charge this amount for reporting transactions to the IRS.
Network Fee – Card networks charge a non-negotiable fee, which is passed on by service providers to the merchants.
Statement Fee – These are for printing and mailing credit card statements. Some merchants avoid paying this by opting for electronic statements.
5. Reduce processing fees
Find credit card companies that set up your merchant account and terminal well. Note that as a merchant, the more risk you pose to the companies, the more will they charge you. How can you avoid these charges?
Swipe every credit card possible. Apart from this, entering security information (like billing and security zip codes when asked for it) is a great way to cut costs.
6. What if you have a low credit score?
If you’ve got a low credit score, it’s hard for a merchant account provider to approve credit card processing. You have to shop around. There are a few providers that may be able to set up your account within 24 hours, with a few stipulations.
If it’s possible, offer reserve funds to cover your provider in case you default. In ACH delays, your processor withholds your funds for a few days more as guarantee.
7. Choose reliable credit card processing companies
Reliability is not an option when you are looking for a service provider. Look for a company that has a 24/7 customer support service in place, offers the latest technology and does not demand outrageous fees. Reading their agreement thoroughly before committing is a good way to assess what they’re providing.