Too often we speak with small business owners who underestimate the importance of finding the best credit card processing agreement. Fractions of a percent might not seem like much on a contract you sign with a merchant service provider, but those pennies add up. Fast. For businesses that have a higher volume of business, they add up even faster. And those totals will significantly change your bottom line at the end of the year.
Credit card processors know exactly how fast these fees will add up. And they’re equally good at marketing their contracts in favorable terms. So beware of exactly what you’re signing up for and how much it will end up costing your business over each year. There are also some easy ways to lower your credit card processing fees. Use this money to grow your business instead of wasting it on extra fees and surcharges.
What Are the Factors That Determine Credit Card Fees?
Simply put, there are a bunch. For a more detailed look, check out our blog on how credit card processing works. But let’s summarize a few of the major contributors below:
Assessment Fees: These fees are set by the credit card company and vary slightly within each network. They are also typically slightly higher for credit transactions than debit. Assessment fees also include a fixed monthly network rate as a sort of subscription fee.
Interchange Fees: Your interchange rate is the vast majority of your total fee paid for each transaction. These vary the most and can be reduced (though never eliminated) by strict credit card policies. A few of the factors that determine interchange rates include card present/not present, high rewards cards, business or corporate cards, and keyed/swiped/inserted transactions. These rates vary between networks, but oversight committees are cracking down on outrageous rates across the world. The EU recently issued broad caps on interchange rates set by the major card networks.
Processor Fees: The merchant service provider, of course, must also receive compensation for their role in this process. This rate varies between companies and can be negotiable based on transaction volume and business security/fraud protection measures. More on that below.
- Check Out Bundled Credit Card Processing Plans
- Negotiate for Lower Merchant Service Rates
- Show Evidence That You’re at Low Risk of Credit Card Fraud
- Set Up an Address Verification Service
- Enforce Minimum Cred/Debit Transaction Amounts
- Make Sure You Set Up Your Processing Account and Terminals Correctly
- Settle Transactions Quickly
- Don’t Combine Your Processor with Your Point of Sale Provider or Bank
With some processors, merchants have options for different types of structured accounts. Not all credit card processing companies offer this, however. Go into negotiations with potential credit card processors armed with information on how the process works. They will be more likely to offer favorable rates.
Flat Rate: Here, each transaction comes with a flat fee assigned beforehand. The fees will vary for different types of transactions but will not vary over time. For instance, your contract might have slightly different rates between debit, credit, and keyed-in transactions, but these rates will stay the same for every transaction of that type. This type of account is simple to understand and great for businesses that don’t have many transactions. For higher-volume SMBs, look for alternative plans.
Interchange-Plus: Arguably the best account plan of the majority of business out there, interchange-plus boasts more transparency than other plans. The rate is broken down into the basic interchange rate based on the type of card being used and additional details on how the card was processed. The added details are there to show retailers exactly what they’re paying for, enabling them to change store policy to lower their rates. Interchange-plus pricing is trickier to decipher but does allow you to learn which factors will affect your rates.
Tiered: Lastly, tiered pricing does little to break down the fees. The various tiers combine interchange rates for each different type of card with the transaction type for one fee. The single fee makes it impossible to know exactly what factors contributed to the total fee. Moreover, this type of plan is difficult to negotiate and is the easiest way for processors to quietly raise rates in certain situations.
These plans make the process simple but none of them offer transparency that many retailers desire. There are many factors that go into your processing rates and it’s important to understand each piece if you want to lower your processing rates.
Remember that, just like you, credit card processing companies are also in the business of making money. Performing this service will never be free, of course. And it’s also an absolutely essential operation for 99% of businesses. But that doesn’t mean that you should overpay.
Keep in mind that while you want to minimize costs, you also want to add value to the merchant service provider. One way to leverage this is to highlight your transaction volume. A higher volume will typically equate to a lower rate. Show evidence of annual growth with projected sales in future years.
It’s important that every business take any precautionary measures to protect against retail fraud. That means staying up to date with trends and technology and making sure your business is equipped with the right POS software and technology. A portion of your processing fees is insurance of sorts, while the processor and issuing banks are taking the risks. So if you can show that your business is less at risk for fraudulent activity, processors will lower rates. Below are some fraud protection methods to highlight when negotiating your rates:
- Follow all PCI Compliance rules
- Require a CVV with every card-not-present (CNP) purchase
- Keep purchase histories for a long period of time and save receipts
- Require signatures for delivered orders
- Enter ZIP code for the billion address
- Avoid keyed transactions
- Make return policies clear
- Get EMV card readers and eliminate all swiped transactions
Not only will lowering your chances of being the victim of retail fraud make your life far less stressful, but it will also save you money on your credit card processing fees.
AVS is a system that further reduces your risk of credit card fraud and chargebacks. This process simply verifies the cardholder’s billing address with the issuing bank tied to the card. The address entered must match the address that the shopper’s bank has on file or the transaction will automatically be canceled.
While this method is normally used for CNP transactions over an eCommerce channel, brick and mortar retailers sometimes also require it for in-store purchases. Most often, customers are only required to enter the billing ZIP code. The process is fast and simple, but adds yet another layer of important protections against fraud, thereby adding another reason for credit card processors to lower their rates. In fact, VISA has started to incentivize the use of AVS by lowering interchange rates for their merchants that use it.
You see this across many retail stores for a reason. Especially businesses that sell a high volume of low-cost goods. Here’s why.
Typically, your credit card processing fees come as a percent of each total sale. And typically, retailers who sell low-cost items are making only a slight profit on each sale. Markups are almost always lower on cheaper products. Therefore, even a slight decrease in profit can mean a sale went from making a profit to resulting in a loss. If your business thrives off of small purchases, consider not accepting credit cards for any transaction under a certain amount (usually $5-10). And for the transactions in which you do accept credit cards, follow the other steps in this blog to minimize your total percent going to processing fees. You’ll see the difference at the end of the year.
Some retail SMBs are now making up for lost profits through their processing fees with credit card surcharges or convenience fees. Laws have loosened, allowing the burden or the processing costs to be passed on to the consumer. This can, however, mean a reduction in business, so it’s usually a less than ideal solution.
First, talk to your point of sale software and hardware provider about how they operate with regards to sales processing. Many POS companies also operate as a merchant services provider. In these cases, it’s important to figure out exactly what they charge for and how they break down their rates. Beware of contracts in these cases. Often times, they won’t lock you into a contract for their POS system but will bind you to their processing system. This leaves you stranded even if you’re unhappy with the retail software, and early termination comes with costly penalties.
Others (like KORONA) integrate with a variety of payment processors. In this case, check to see that your POS company can integrate with a processor of your choice and go from there. This leaves you with more freedom in your business operations. It also allows you to better negotiate a cheaper rate. When different companies are fighting for your business, you’re more likely to get a friendly offer.
Once you settle on a POS provider and credit card processor, set up each terminal with all necessary hardware. Most importantly, this includes modern payment terminals. Get credit card machines that accept EMV cards and mobile payments. Additionally, look for machines that are customizable. For instance, in order to protect against fraud, you want to be able to disable manually card entry or card swipes. Again, these raise your processing rates and leave your business on the hook for any fraudulent purchase.
Merchants must settle or batch transactions after a certain time period. Batching your transactions means that you’re consolidating a group of transactions that occurred over a certain time period and submitting them to the bank to be processed. The money will then be withdrawn from the issuing bank and transferred to the receiving bank.
In order to complete this, you must manually tell your POS system and payment terminal to complete the task, or set it up to be done manually. Manual batching is better since it can be timed to do each night and leaves less room for human error. Make sure that your point of sale can be set to complete batching automatically. Not only does it mean that you’ll receive cash for your sales more quickly, but more frequent settling of credit cards will lower your processing rates.
Many POS solutions also come with a processing agreement. While it’s convenient to have these two major business operations merged into one service and price, it will almost certainly keep your processing rates higher than they need to be.
Points of sale solutions that come with a processing agreement leave businesses with no choice for processing agreements. The rates are fixed and the lack of choice means that there is less room for negotiation. Moreover, they often keep businesses bound to long-term contracts through their processing services. The POS software may not come with any binding contract, but if the processing does, SMBs are still stuck in an unfavorable position.
Banks, too, cannot provide the lowest processing rates. Usually, banks will outsource the processing to third-parties. Adding another cog in the wheel will undoubtedly mean higher prices. Keep it simple by working directly with your merchant service provider.
Use these tips and see your credit card processing fees go down. Check back over year-over-year analytics and you’ll see a huge difference. To find out more, check out our other blogs on payment processing or give us a call. We’ll walk you through the process of getting a retail POS set up and how we integrate with the most affordable and secure payment processors in the industry. Click below to find out more.