3 Innovative Ways to Reduce Credit Card Processing Fees

How do you reduce your credit card processing fees?

It’s the age-old question.  How do you pay the lowest rate possible?  Can you get away with processing for free?  What’s the deal with interchange levels?  And, what the heck is a discount rate?

Suffice it to say credit card processing is a strange, multi-faceted beast.  There are lots of moving parts, and things going on that even your processing statement, which is confusing enough in itself, doesn’t detail for you.

Talking about it all would take me the length of a tome, and nobody wants that, so I’m just going to cover what you pay today.  Even what you pay has a few different levels to it – it’s not just a single rate that you sometimes hear about in advertisements on the web.  Without further ado, let’s move to the first item to look at to reduce what you pay out.

Wait too long, pay the price

Good things don’t necessarily come to those who wait – it’s best to strike while the iron’s hot, in my opinion.  While this is an adage I live by, it can very well be applied to credit card processing too.  If you’ve authorized a charge on a credit card and wait more than 48 hours to charge that credit card, you’ll be charged a “standard” processing rate – and, that can be as high as 2.95%, a fair bit higher than what you’ll usually pay.  (And, we’re just talking about the set interchange cost, not the processor’s markup!)

In order to alleviate those sorts of charges, simply make sure you’re settling authorized charges at the appropriate times, taking care not to wait too long.  If you use a virtual gateway, you can usually set it to automatically batch out at certain times (or trigger batching out for certain transactions, like pre-auths).  If it seems feasible for your business, it might make sense to nix pre-authorizations altogether and simply charge credit cards at the invoice level.  In any case, strike while the iron’s hot and you’ll come out on top in this case.

Save some money by saving time

Lots of businesses, especially B2B wholesale companies, are extremely advanced in almost every sense, except when it comes to payment processing; they’ll use systems that are quite disconnected, take too much time to use properly, and, for all their inefficiency end up costing businesses more.  This is due in part to the processing industry, what with most payment processors’ tendencies to rope businesses into contracts, lie, be ambiguous in their language, and other nasty habits – most business owners are apprehensive about doing anything differently when they’ve found a processor that’s at least somewhat fair.  It’s not uncommon to see a manufacturing company use the most high-tech equipment to fabricate their products, yet use a standalone terminal (technology that dates to the 1970s) for credit cards in conjunction with their top-notch accounting programs!  It’s unfortunate.

So, is it really possible to get two good things in one package pertaining to payment processing?  Actually, yes.  Using a credit card processing plugin for your accounting system of choice can effectively reduce your processing fees automatically while making your workload a lot lighter.  Plugins like this work with programs from QuickBooks (as an alternative to Intuit merchant services) all the way to Sage 500 (as an alternative to Sage Payment Solutions).  Here’s what happens:

1. Rather than using a credit card terminal, you input your customers’ credit card data directly into your accounting system, which you would have had to do at the end of the day anyway.
2. The plugin automatically transmits extra information like a PO number, invoice number, ZIP code, freight amount, and other information you enter anyway to the credit card-issuing banks.
3. The banks see this extra information and qualify the transactions at higher security levels, since the extra information makes those transactions harder to duplicate or make fraudulent.
4. The higher security gives you a lower interchange cost (set cost) for the credit cards entered that way – especially for business-type cards and GSA cards.

And, that doesn’t even touch on the time savings.  But, imagine how much time you might save not having to run all around your office to complete one credit card order, then stay a half hour (or a whole hour) after work re-entering credit card data to mark your invoices as paid.  And balance your GL.  It’s a lot of work you don’t really have to do!

Birds of a feather flock together

Ever had the feeling you just didn’t belong?  It happens most often in social situations, I’m sure, but your processor can pull a fast one on you and take you on a bad spending trip – all because you operate in a “high risk” industry, or some other industry they don’t particularly like.  Of course, in an effort to earn your business, they may not always tell you this, but they’ll sure make you pay anyway.  So, what do you do when you’re being silently shunned?

First, take a good look at your processing statement and determine if your overall costs seem fair (and, they will vary considerably depending on the type of business you’re in).  If they don’t, you might consider seeking out a processor that caters to your exact business.  Often, credit card processors will cater to specific industries, like adult novelty shops or firearms dealers, by establishing relationships with other entities (offshore or local banks) that will allow them to process transactions that other processing networks might label high-risk.  Prices will be lower with a high-risk-specific processor, for example, than with a run-of-the-mill company because they don’t have to worry about their backing network kicking merchants away, and for that reason the processor doesn’t have to worry about recouping all sorts of administrative costs by charging you.  Everyone wins.

Yours,

Jeremy

PS - I'm sorry; you still can't get away with processing for free.  When I figure that one out, you'll be the first to know, though ;)

Understanding Advertised Processing Rates!

(Why total processing cost is (usually) not equal to the percentage you’re promised.)

Short answer: Because there’s much more that goes into your total price than a rate.  If you ask for a rate, you’ll get a rate, sure.  But that’s like asking a car dealership how much an engine costs and expecting to walk out with a whole car after paying.  Unfortunately, the rate can be deceptively small or completely made up.  How often do you see stuff like this?

It sounds fantastic, and it would be if it were possible 100% of the time without National Bank Card, salesmen that they are, losing money on processing costs.  The reality is it ain’t.

Long answer: Your total costs are comprised of much more than a single percentage—unless you’re using a flat rate pricing program, but we can get into that later.  Unfortunately for you, single percentages sell a lot better than a block of fine print, and, with those nifty contracts that MSPs dole out like candy, it’s pretty easy for them to get away with promising you something lovely and sweet and then delivering something slightly sour. 

Single advertised percentages can mean a few different things, but hardly ever the full price.  A single percentage can refer to:

• The interchange (base) cost to accept a credit card.  It’s not likely a processor would come out and tell you this, not only because interchange isn’t in everyone’s vocabulary (“You mean the freeway junction?”) so it’s easier to avoid talking about it, but because interchange costs fluctuate rapidly depending on what credit cards your customers use.  For a full breakdown, you can click here.  Let’s just say it doesn’t read like The Catcher in the Rye, though.  (Brief synopsis: Consumer credit cards and debit cards aren’t so expensive.  Business-type credit cards and government purchasing cards are.)

• The total cost to accept credit cards.  This is more likely what a processor wants to convey when advertising “Card Processing under 1%.”  However, as we can see by skimming over that Interchange Guide above, even interchange costs are rarely below 1%.  So, do we really expect National Bank Card (or any other processor, for that matter) to eat cost on your transactions?  Good heavens, no.  We’ll see some companies like Sage Payment Solutions advertising 1.85% on “qualified” transaction costs, too.  While 1.85% is a tad more realistic than <1%, it still doesn’t account for a big number of card types in that interchange guide—anything over 1.85%.  What happens if you don’t get that 1.85%?  SPS can just say your transactions didn’t qualify.  Better luck next time!  Here is the picture as it appeared December 1^st, 2014:

(FYI, the folks at QuickBooks Payments love to do this too.  Remember, though: hate the game, not the player.  Both Sage Payment Solutions and Intuit Merchant Services are using a pricing formula that's been tried and proven over years: the fewer numbers you show someone, the better off everyone is.)

• The markup on your transactions.  This is usually what a given processor is trying to convey with an ad like that of our friends at National Bank Card, much as they may not want you to realize that.  A markup of 1% on top of an interchange cost is no small chunk of change, especially as your processing volume rises.  (That’s why it’s more common for smaller companies to have higher markups and larger companies to have smaller ones.  Somewhere down the line, someone realized that 1% of $3 million per month was $30,000 and that their company was helping to finance someone’s country house and yacht every month.)  “Under 1%” is of course better than 1%, but how much better?  We can’t tell, of course.  As long as they keep you below a 1% markup, though, they’ve kept their promise.  Get ready for a nice 0.95%!

A note on flat rate pricing

The only situation where I would trust a processor reading me one number over the phone or on the internet would be after they've thoroughly analyzed the trends for credit card usage among my customers--that is, they'd have to tell me what kinds of card types are coming in and how they arrived at that single cost.  For example, if I'm in the B2B realm, accepting a good number of corporate cards every month, it wouldn't be out of the question for someone to quote me a flat rate of 3%.  It's a little high, yes, but it covers the real expenses of the credit cards I accept.  You'll never see those kinda of quotes advertised on "credit card processing" Googles, though, because everyone's already advertising <1%.

Back to business...

Those are your options when you see ads like the one I mentioned.  They’re everywhere, and you’ll get a rotation of them whenever you Google “credit card processing.”  And, going back to the short answer, the reason they’re so popular is they’re a lot easier to read and process than a mass of fine print  And, since this explanation wasn’t written in size 6 font, I hope it helped you a little more than a big ol’ text block would have.

Cheers,

Jeremy

Wanna Know What’s NOT Free? A FREE Terminal

Free terminal for you?  Or, free overhead for your processor?

Every now and then, I still hear stories of merchants who get duped into signing agreements for eternally long merchant services contracts, unresponsive service, and–my favorite–credit card terminal leases.  Terminal lease agreements are really something to behold because we’re talking about a very inexpensive piece of machinery here–$200, maybe $300 for a really nice, sleek-looking one.  Right away, you know that if you plan to stay in business longer than 1-2 years, paying $15 per month doesn’t make any sense.  And that’s just a small aspect of this terminal business. As humans, we make bad financial decisions when circumstances aren’t perfect, and some salespeople unfortunately make a killing off getting you to make a bad choice under pressure.  And, while we’re on the subject of bad choices…have you heard the expression “free terminal” before now?

The truth about free terminals…

It’s important to think about why a merchant services provider would offer free machinery to its prospective clients.  It’s not the same as something intangible, like a cloud-based software package or virtual gateway; while software developers put in the time and expenses into developing their product, there comes a time when the developing company will break even–or, simply offer their software product for free as a benefit.  With physical card readers, however, processors do not stand to benefit in the slightest by offering free terminals, especially not as a way of enticing merchants into signing up.  It’s for this reason that so, so, so much of the time, you’ll find that free terminals are accompanied by a thick merchant services contract.  Usually for 36 months.  And, it probably stipulates that if you decide to end your agreement before 36 months elapse, you pay for the value of about ten of those lousy terminals or the fees for your highest-volume month multiplied by the number of months left on your agreement, whichever is worse.  In fact, I’ve never heard of a company that didn’t offer free terminals without some sort of string attached to the offer.  Terminals are tangible items, so they always carry a cost.  Processors aren’t total goof-offs–they usually find a way to pass the charge onto you.  If you choose to fulfill your contract, you might not see the ugly side of the agreement–and, you may really get free machinery–but, brace yourself if you anticipate batting an eyelash at that contract.

The solution to ostensibly free terminals?  Try a guaranteed non-free one, or don’t try one at all.

I try to play devil’s advocate whenever I can, so I don’t want to tell you to avoid free terminal offers at all costs.  If you’ve found a deal that really is wonderful and a merchant services provider that is either that loyal to you or that scared to lose your business that he offers you free machinery–and, if machinery is the best way for you to accept your card payments–I say go for it.  Everything else aside, wholesome relationships are hard to find, especially in business.  Especially in credit card processing.

However, if you’re the least bit uncertain, get away from that free terminal before you put pen to paper.  Go online and search for the brand of terminal you like, fork over the $250, and get your terminal in the mail next week.  Never pay for a machine again.  Refuse to do business with anyone who makes you purchase or lease their own machinery instead of letting you use your own.

And, furthermore, if you’re feeling innovative, consider that using a physical terminal might not be the best processing solution for your business at all.  Online virtual terminals don’t take up space on your desk and are designed to provide reporting and searching tools to businesses who need that sort of functionality.  They generally don’t cost any more than a physical terminal to use, and, in some cases, they can give businesses a lower base cost on business-type credit cards.  Depending on your dollar volume of transactions per month, you could save a substantial amount of money by conducting business that way instead of through a machine.  You might consider choosing a merchant services provider that offers a solution that really fits your business.

Hopefully you learned something interesting from this (or you were at least entertained)!  Of course, it’s one thing to be told something by someone you don’t know and quite another to have experienced it firsthand, but, you know what I always say… If you don’t believe me, go out and try it and tell me how it goes.  Hopefully you don’t subject yourself to one of those free gags and I see you before 36 months, though 

Take care,

Jeremy