What to Know About Credit Card Processing: 5 Tips for Getting the Lowest Pricing
Editor’s note: This is a guest post provided by Ben Dwyer founder and CEO of CardFellow.com, a service that allows small business owners to compare credit card processors for free and save 40% on average from credit card processing fees. Ben has written several articles on credit card processing including Credit Card Processing Exposed, that are essential for every small business owners merchant account tool kit. Ben has the ability to make a seemingly complicated process very easy to and understand. Visit his blog for more informative articles.
Credit card processors are quick to promise savings, but few actually explain how costs will be reduced, or by how much. If you know you’re overpaying for credit card processing, but can’t get a straight answer to determine why, this article is for you. The following five tips will show you how to cut through the smoke and mirrors to lower your business’s credit card processing costs.
1.) Never ask a processor, “What’s your rate?”
The first and biggest mistake that almost everyone makes when shopping for credit card processing is asking several processors the fateful question,
“What’s your rate?”
The rate a processor charges impacts cost far less than the pricing model it uses to assess fees. The first question you should be asking a credit card processor is,
“What pricing model does your company use?”
Credit card processors use two general types of pricing to assess fees. The first is called interchange pass-through pricing, and the second is called bundled pricing. Interchange pass-through pricing is by far the more transparent and least expensive of the two, and it eliminates a processor’s ability to charge hidden fees. Only after you know all of your potential processors are using interchange pass through pricing should you begin inquiring about rates.
2.) “Wholesale” credit card processing rates are available online.
You can and should know what a processor pays the bank before you ask for its rates. Every single credit card processor pays the same exact rate to process various types of transactions. For example, the cost for any processor to transact a swiped Visa reward credit card is 1.65% of the sale amount plus a $0.10 transaction fee.
Credit card processing’s wholesale rates are called interchange fees. Interchange fees determine how much processors pay the banks that issue credit cards (called issuing banks), and interchange fees are consistent among all processors. You can view the wholesale pricelists (interchange fee schedules) for the credit card processing industry right now by following these two links:
3.) Look at the big picture.
People tend to focus on rates when comparing credit card processors while other important components of cost are overlooked. The most accurate way to compare processors is not by the rate each one charges for individual transactions, but instead, by the effective rate that accounts for all costs.
The effective rate shows how much in volume a business pays back in gross charges. For example, if a business pays $250 in fees to process $10,000, the business’s effective rate is 2.50% (250 / 10,000 * 100 = 2.5). Calculating the effective rate for each prospective credit card processor is a simple matter of adding up all of the fees that would be incurred during an average month of sales. So as long as you use the same sales figures for each processor, you will end up with an all-inclusive picture of costs for comparison.
4.) Leave your options open.
Processors often attempt to lock businesses into multi-year contracts with hefty cancellation charges, but you don’t have to agree to a processor’s terms. Use the fierce competition in the processing industry to your advantage and refuse to pay a cancellation fee. You will be surprised how quickly processors agree to your demands. However, never mistake a verbal agreement as final, and always read the written agreement carefully before signing to ensure the cancellation fee has in fact been dropped.
5.) Always buy, never lease.
In most cases, credit card processors make more money by leasing equipment than by processing transactions. New credit card machines can be purchased from honest processors for only a few hundred dollars. Compare this to leasing a machine at $48 a month over five years and the cost difference is astronomical. A credit card processor that even attempts to lease a credit card machine clearly puts profits ahead of integrity.
Do you ask the vital questions mentioned above when selecting a credit card processor? Share your payment processing experience in the comments section below.
Ben Dwyer is founder and CEO of CardFellow.com. CardFellow is a free online marketplace where businesses receive instant quotes from pre-screened credit card processing services along with expert guidance and support.
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