Top 10 Keys to Lower your Credit Card Processing Costs
1. Switch to Interchange Plus Pricing
2. Know your Business Type
3. Get set up under the correct Visa/MasterCard Program
4. Know your card mix and average transaction
5. Use Latest Processing Technology
6. Review your statements (at least every 6 months)
7. Accept All Card Types and transaction methods
8. Be in Contact with your account executive
9. Get multiple bids for card processing service
10. Buy value – not price
Credit card processing continues to become more complicated with new fees, technology and regulations. We realize that you can be overwhelmed with all the changes.
As a small business owner, you are inundated with offers from credit card processing companies that promise to save you money. Usually most offers start with a low rate. Each merchant services provider tries to trump another with that lower rate to win your business. If you have been in business for some time and switched processors, you might have realized that these low offers do not always pan out.
In fact from 2000 to 2010, the average credit card processing rates for retail have risen from about 2.00% to 2.66% not including extra fees like statement fees, batch fees and PCI fees. This rise is despite a huge drop in debit card rates and increase in debit card usage. Why the increase? Rewards cards are one of the main culprits. Banks are passing on the cost of those fancy rewards, airline miles, etc, to the merchants.
The second main reason is a lack of merchant processing education. Merchants are trained by the banks to respond to low rates. The problem is that there are 440 Visa/MasterCard/Discover rates and the banks are only showing you the lowest transaction rates.
The correct question to ask is not “what is your rate?” but “what is your effective rate?” The effective rate takes into account all the possible Visa/MasterCard/Discover categories for which a transaction may qualify. Knowing your effective rate will give you a more accurate estimate as to the true cost of your processing. You can figure out your effective rate by using a simple formula.
Effective Rate = Monthly Processing Charges/ Monthly Processing Volume.
For example: If you process $10,000 dollars a month in volume and your processor charges you $300, your effective rate is
$300/$10,000 = 3.00%
This guide outlines 10 key strategies to lower your card processing costs. Below is a detailed explanation of each key strategy. By following these steps, you will be an expert in credit card processing and you will do yourself a favor by lowering your processing cost to the maximum extent and saving substantial amounts of money.
1. Interchange Plus Pricing (IC Plus)
This type of pricing used to be reserved for Fortune 500 companies. Not any more. Now, even Mom and Pop shops can take advantage of IC plus pricing savings. Banks are hesitant and sometimes outright refuse to give IC plus Pricing to small businesses because the banks are unable to maximize their profits. They would rather sell you the much more lucrative Enhanced BillBack or 3-Tier pricing, which is much more lucrative.
The recent Durbin Amendment makes it imperative that you switch to Interchange plus pricing to ensure you realize the cost reduction savings. Merchants that are not on interchange plus pricing will see their savings go to the processor, which is not compelled by law to lower the rates. (Please see Durbin Amendment Savings at the end for more details.)
There are many independent credit card processing organizations (ISO) that will offer you IC Plus pricing. You should take them up on their offer. There are many reputable ISO’s in the market.
Why Interchange Plus Pricing?
As mentioned before, there are 440 different Visa/MasterCard/Discover Categories and you want each one of your sales transactions to qualify for the lowest possible rate category. IC Plus Pricing places each transaction in the appropriate category and charges the corresponding rate. No other pricing method does this. For example, the most common pricing method, 3-Tier, places each transaction according to the processors’ preferences. The processors prefer placing most transactions in the mid- and non-qualified tiers as opposed to a qualified tier. Yet, these same processors will sell you on the qualified rate tier. This is an example of bait and switch.
IC Plus pricing is pretty simple. There are three components that make up your rate.
Interchange + Visa/MasterCard/Discover Assessment Fee + Processor Rate
Interchange consists of 440 rate categories. For most businesses, only about 60 categories will apply. That is still a lot. The range of rates varies widely from 0.95% + $0.10 for debit cards to 3.25% + $0.10 for certain corporate cards.
Assessment fee is the rate Visa/MasterCard/Discover charge for each transaction. Currently this fee is 0.11% + $0.02 and does not vary by card or transaction types.
The processor fee is the rate and/or transaction fees your processor charges. This is the only negotiable part of the interchange fee available to the merchant. Please keep this in mind when negotiating with potential processors. This fee does not vary by card or transaction types.
To get the final rate, you simply add up all the components. For example, a
Visa Retail Transaction Rate would look like this:
1. 54% + $0.10 + 0.11% + $0.02 + 0.10% + $0.13 = 1.75% + $0.25
Always remember that swiped transactions have lower rates than keyed transactions. Swiped or keyed business card transactions have higher rates than swiped or keyed consumer card transactions. Debit card transactions have lower rates than credit card transactions.
Please remember in choosing your pricing method, you want to lower your effective rate. The rate range is more important than the lowest rate. The lowest rate only applies to one transaction type. The rate range applies to all the cards and, ultimately, determines your effective rate.
2. Know your Business Type
Visa/MasterCard use pricing indicators or business types to apply discounts to your rates. In the beginning, Visa/MasterCard used to charge one rate for every industry. Some industries refused to accept credit cards because they thought the rates were too high and cut into the profit margin. Supermarkets were one of the biggest holdouts. So, Visa/MasterCard began offering discount rates to specific industries, card types, and processing methods. This is why there are 440 different rate categories. These discounts paved the way for credit card acceptance at supermarkets, gas stations, and fast food restaurants.
Your business may qualify for one of Visa/MasterCard’s special programs.
For example, if your business has an average transaction of less than $15, you may qualify for the small ticket program. If you are paying 1.64% + $0.25 per transaction now, then under the small ticket program you could get your rates as low as 1.65% + $0.04. Now your processor will probably tack on another six cents to cover its costs. Still, you would save fifteen cents a transaction or 1.5% on a $10 transaction.
Visa/MasterCard has programs for most industries like restaurant, B2B, MOTO, quick serve restaurants, convenience store, hotel, gas stations, supermarkets, charities, insurance, utilities, government etc.
3. Get Set Up Properly
Once you know your business type, make sure that you are processing under that correct business type to take advantage of the savings. You will need to call your processor and ask. If you are not set up properly, you need to find out why and fix it. Your processor may not have intentionally set you up under the wrong business type, but it has reaped a financial reward from you. This is why you need to constantly be pro active in accepting bids for your merchant services. Do not become complacent with your current provider because, like it not, many have their best interests at heart.
4. Know Your Card Mix and Average Transaction
There are dozens of card types such as personal cards, rewards cards, corporate cards, debit cards, purchase cards. Each type of card has a direct impact on the rate that you pay. Having a break down of the card types effectively minimizes your processing charges.
You will also need to know the percentage of swiped transactions, keyed in transactions, and business card transactions. Let’s say your processor provides you with a super low swiped rate but you key in most of your transactions. Another situation is if you are set up with a low consumer card rate even though you take mostly business cards. Remember many processors will sell you a low rate to get your business but that rate may not apply to the majority of transactions. A higher rate may apply. For this reason, you need to know your mix of card transactions.
If you are not sure of your card mix, your processor should have a website so that you can review your transactions. Some processors’ websites provide in depth analyses of your transactions. Use this valuable information to your advantage.
Although IC Plus pricing offers the greatest savings for most businesses, there are some exceptions. For example if you accept 95% personal cards swiped through your credit card terminal, you would be better off with a low 3-Tier pricing. The reason is that you can predict that nearly all of your transactions will qualify at the lowest qualified rate and only a few transactions will qualify at the higher mid- and non-qualified rates.
If you take a majority of business cards, you might be better off with a special B2B pricing program. Most small business owners are not sure of their card mix. Usually, the card mix is all across the board. In this case, you are better off with IC Plus pricing.
Knowing your average transaction will save you money. You can find your average transaction on your statement or simply divide your monthly volume by the monthly number of transactions. This is important to know, because if your average transaction is below $15, you may qualify for the small ticket program. If you have a high average ticket, your business may benefit from pin debit savings.
5. Use Latest Technology
A few years back, there was the story of the merchant who had purchased one of the first credit card terminals, the VeriFone Zon Jr. XL, which was very expensive. He had heard so many stories about his fellow merchants getting swindled on terminals that he vowed never to buy another terminal again.
One day a merchant services rep walked into his store and analyzed his statement. He noticed that his rates were extremely high. When he saw the Zon Jr. terminal, he realized that the obsolete equipment was the cause for the surcharges. The sales rep tried to convince the merchant that to save money he needed new equipment. The sales rep explained that the Zon only read the one track of information embedded on the back of magnetic strip of credit cards. Visa/MasterCard required that both tracks be read. The merchant would not budge.
Another five years passed and the Zon finally gave out. The merchant coughed up the money to purchase a new machine. The next month, he noticed that his processing charges per transaction were nearly two percent less than the month before. The sales rep was right. The merchant saved a few hundred dollars on keeping his old equipment, but lost thousands of dollars in unnecessary fees because he was incorrectly processing transactions. The moral of the story is that to ensure you maximize your savings you need to use the latest equipment and technology.
Another factor to consider is PCI Compliance. PCI Compliance is the credit card processing industry’s program to eliminate fraud by compelling merchants to follow their security regulations. Some older terminals are no longer PCI compliant and merchants who continue to use those terminals will face heavy fines if their terminals are compromised.
6. Review Your Statements
Most merchants seldom, if ever, review their statements on a monthly basis which is not a good idea. Do not expect your accountant to review and pick up irregularities from your statement as many CPA’s are unfamiliar with statements.
When you look at the statement, look for any changes in rates and fees and any other irregularities.
April and October are the two months out of the year when you must review your statements. These months are when Visa/MasterCard Association meets to set rates for the year and when your rates are most likely raised. If they are raised, talk to your dedicated account executive or your processor’s retention department and kindly ask them to lower your rates. If they are resistant, then switch processors because it is obvious that they value those few extra pennies over your business.
7. Accept All Card Types and Transaction Methods
There is an old adage in business – if you want more sales, make it as easy as possible for your customers to pay. That means accepting all the cards – Visa, MasterCard, Discover, American Express, JCB and debit cards.
Some merchants refuse to accept American Express because the rate is too high. The question you need to ask yourself is if you mind paying the higher transaction costs to gain a sale or mind losing the sale to save on the higher transaction cost. If the former is more important to you, accept American Express.
A few years ago, pin debit used to be the best way to cut your processing costs. That is not always the case anymore. Visa/MasterCard have cut the interchange rates for signature debit transactions. The debit networks have raised their transaction fees. But for merchants with high average transactions, pin debit is still a great tool to save money because the debit transaction costs are so much less.
If you are a retail business, ask your processor if they offer check guarantee. If you truly want to lower your transaction costs many check guarantee companies like Telecheck and Certegy offer rates below 1%. Then put up a sign that you welcome checks because some people still write checks.
8. Be In Contact With Your Account Executive
Do you have a dedicated account executive? Do you know who your account executive is? If not, then you need to get a new processor with an account executive assigned to your business. There are so many changes occurring in credit card processing industry that you need to be pro active in your response. You need a go to guy to help you. That’s your dedicated account executive.
A good merchant services account executive can help you analyze your statement; ensure that you are set up under the correct business type; help you decide the best pricing method; advise you on the latest technology; help you win charge backs; and, resolve other issues.
9. Get Multiple Bids for Card Processing Service
When was the last time you had your statement analyzed? More importantly, when was the last time you even looked at your statement. If your business is like most businesses, 50 percent or more of your revenue is generated through credit card payments. It pays to know what you are paying and ensuring that you are not paying too much.
The best way to the best deal on credit card processing is to get multiple bids. When banks compete, “you win” is not just a slogan but good advice. Getting multiple bids may appear on the surface to be time consuming.
10. Buy Value – Not Price
There is a famous saying that goes “price is a one time thing, cost is ongoing.” Many merchants are lured into bad processing agreements by artificially low rates and/or “free terminals.” These offers are constantly advertised on the Internet. “Rates as low as…” and “free terminal with every account” are just some of the offers. Don’t be fooled. If you have reached this point in the guide, then you have educated yourself pretty well.
You know that rate means nothing. Effective rate is everything. (Effective rate is all your processing costs divided by your volume.) Rate is what got you to sign. Effective rate is what you actually pay.
Go with a company that offers the latest technology. Do not pay extra fees or PCI compliance penalties because of obsolete equipment. Look for added value like loyalty programs, gift cards, check guarantee, online account access, POS systems. Other services and products like these can give you a competitive advantage. If you do not take advantage of them, your competitors certainly will.
Go with a company with a dedicated account executive. Ask the processor what happens if your account executive leaves? Can you be assigned a new one? A good account executive can save you much time and money which is worth a little extra fee for that service.
Go with a reputable company that tailors its processing to your business needs. Many merchants think they can solve this problem by going to their banks. Banks do not have the same control over merchant services like other products they sell. Most banks outsource their merchant services to big processors like First Data, Elavon, and Paymentech. As mentioned before, the banks want to profit off of you by making a profit from your business. Do not expect to get a good deal from your local bank. But do expect to get a sympathetic ear when something goes wrong. Do not expect your banker to be able to do something about it.
Second, your processor should be able to accommodate your needs. If you need next day funding, have large transactions, take advanced payments, or want to accept health savings cards or fleet cards, your processor should be able to work with you to create a plan that will meet your needs. If not, find a processor who can help you with these objectives.
Be wary of free terminal offers. As the sayings go, you get what you pay for and there are no free offers. Credit card terminals are not free to the processor and the processor will make sure it gets a return on the “free” terminal it gave to you. Find out what that cost is. The cost could be an obsolete terminal, a long-term commitment, or excessive penalties for non-return of equipment.
Keep searching. If you are not completely satisfied with your current processor, then change processors. The competition for merchant service accounts is fierce. You are in the driver’s seat. The best advice when choosing a credit card processing company is picking a company which you believe has the most integrity and honesty. This will keep you in a good position over the long run.
The Durbin Amendment Savings
Small businesses have received the biggest reduction in their credit card processing charges in the history of the electronic payment industry, but if they are set up correctly.
The Dodd – Frank Wall Street Reform and Consumer Protection Act of 2010 included an amendment, the Durbin Amendment, which greatly impacts your credit card processing or more specifically your debit card processing charges. This Durbin Amendment affects both signature and pin based debt interchange rates by drastically lowering them as of October 1, 2011.
Prior to October 1, 2011, the debit card processing rates (debit interchange rates) were set by Visa/MasterCard at 0.95% + $0.20 for Visa and 1.05% + $0.15 for MasterCard. The Federal Government led by Senator Richard Durbin intervened and under the Dodd Frank Wall Street Reform and Consumer Protection Act reduced the debit interchange rates to 0.05% + $0.22.
Merchants that process debit cards whether signature debit or pin debit will see huge savings on their merchant account processing statements in the future. Debit, both pin and signature, comprise nearly 50 to 70 percent off all card transactions. Merchants could see their credit card processing charges cut in half. That equals real savings.
Unfortunately, many merchants, who do accept a high percentage of debit cards, may not see any savings, because their current credit card processing plan does not allow for the Durbin Amendment reduction. Instead their debit interchange savings will be going to their processors.
This is especially true for merchants who are on 3-Tier and Enhanced BillBack pricing. Processors are not compelled by law to reduce the rates. They are only reducing one component of your rate, Interchange, but not the other two components, Visa/MasterCard assessment and the processor’s percentage.
There is away around this dilemma to ensure that your company realizes the debit interchange savings. This requires the merchant to switch to interchange plus pricing. This will guarantee that you will receive the reduction.
The reason is that under IC plus pricing, the processor is compelled to set the interchange rate at the current bank rate and then add his percentage on top.