As a small business owner, there are plenty of ways to figure out how to save money in business expenses, but credit card processing fees is an often overlooked area since many small business owners don’t even want to think about credit card processing after typically receiving 10 calls a week by sales agents promising to save them money and who never do.
This article will shed some light into an industry that wants to keep small business owners in the dark. Here are ten ways you can find out if your small business is getting ripped off accepting credit card payments:
The problem with transparency is that the credit card processing rates that a small business owner is charged on their monthly merchant account statement can’t be deciphered as legitimate line items, let alone whether the fees charged for each of those items are fair and reasonable.
In addition to questionable fees, most small business owners are typically quoted a credit card processing rate when they sign up with their processor, but unfortunately most business owners don’t verify this rate on their merchant account statement because the monthly statements are too confusing and they simply give up and assume that they are paying the verbally quoted rate. In almost all cases the quoted rate is never the rate the small business is actually paying. Demand that your processor explains each line item and the fees for those items.
The vast majority of small businesses that accept credit card payments are locked into a long-term contract with their credit card processor. Most of the contracts are for a three-year period. In addition, the long-term nature of these contracts often carry large termination fees that can cost small businesses thousands of dollars if terminated early.
Termination fees are not required by processors, but are often added by a sales agent as an extra profit center. With all of the options available today for a small business owner to accept and process credit card payments no small business should be paying termination fees to stay in a processing relationship that is not working for the business for any reason.
These plans are one of the least transparent types of credit card processing arrangements that a small business can find themselves locked into. A tiered rate plan often confuses most business owners because each tier of a tiered pricing plan often has a stated transparent rate and they feel that they are getting a fair and transparent plan. Just because the rate is transparent, does not mean everything is transparent.
What is not transparent is the types of customer credit card transactions that will fall into each tier and the actual direct cost to process a specific credit card transaction type. As an example, often times debit cards can have a direct cost of 0.05% will be placed into a pricing tier that might charge a small business 1.69%. On the surface the 1.69% rate looks good, until the small business owner finds out that the processor and sales agent is making 1.64% (1.69% – 0.05%) of each transaction amount at their expense. This is only one example from literally hundreds of different possible credit card transaction types. Credit card processors and especially sales agents love tiered pricing plans because of the high fees and lack of transparency.
If the words “qualified”, “mid-qualified” or “non-qualified” appear anywhere on a merchant account statement you know that you are being ripped off big time.
For simplicity and the convenience of having one relationship a small business owner will often use their local bank as their credit card processor. This is a huge mistake. Only a few banks actually are equipped to process credit card payments, the vast majority are simply reselling credit card processing services for other processing companies. As all astute business owners know, the more layers of people involved, the costlier a service becomes. This is exactly why using a bank to process your small business credit card payments is a terrible idea. Banks are simply adding a hefty fee on top of the fees that the processor already charges as a nice profit center for the bank and its sales agents. Also, a lot of banks use a tiered pricing model that was discussed above.
Free equipment can sound enticing, especially for small businesses on a tight budget, but it will cost a small business significantly in the long-term. As everyone knows, nothing is “free”, you always pay for it somehow. In the case of credit card processing, a processor will mark-up the already high processing rates per transaction even higher to cover the cost of the “free equipment” that was provided to a small business.
To make matters even worse, most of the time the equipment is not even the property of the small business even though they were told it was “free equipment” provided to them. If a small business owner were to read the fine print of the processor and sales agent contracts they would find that this equipment is being loaned to the small business and if it is damaged, destroyed, lost or stolen during its use then the small business would need to pay to for the “free equipment” that is no longer usable as well as purchase new equipment to be able to continue accepting payments. If your business uses “free equipment” it’s time to start understanding the high processing fees you are being charged for the privilege of using this so-called “free equipment”.
It is often taken for granted that employees know how to properly accept a credit card payment from a customer. There are some very basic things a business owner can do to train each employee how to accept credit card payments that can keep processing rates low. An employee should never key-in a retail (walk-in) customers credit card number when the card is present and available for swiping or dipping (chip in card) into the payment terminal.
Keying a credit card number instead of simply swiping or dipping the card will automatically add an extra 40%-60% in processing fees to a transaction. The more information known about the customer the lower the processing rate. Credit card processing terminals and POS systems can be programmed to ask for inputs for Address Verification Service (AVS) information and/or the three-digit Card Verification Value (CVV) number on the back of the customers’ credit card.
By training employees to enter the AVS information, which can be as simple as a ZIP code and the CVV number on the back of the customers’ credit card this will help ensure that a small business is paying the lowest processing rates available for the transaction.
At the end of each day a small business will run a process with its credit card processing equipment or software known as batching or settlement. This simply adds up all the transactions for the day and transmits the customer credit card numbers, transaction amounts and other pertinent data to the processor to close out the transactions for the day for payment to the small business. Under most circumstances one daily batch is sufficient for most small businesses.
However, terminals, POS systems and software can be programmed to batch out after each transaction. Each time a batch transaction is completed a processor will charge a flat dollar amount per batch with rates typically in the range of $0.01 – $0.25 per batch. One batch a day is no big deal, but if your business processes 400 transactions a day and the equipment or software is programmed to batch after each transaction then fees can quickly escalate beyond reasonable. This is one of those fees that will often go unnoticed by small business owners, but can easily be avoided with a little time and research of their current credit card processing processes and equipment settings.
Leasing credit card equipment, especially what is referred to as a counter-top terminal is even worse than a processor providing “free equipment” that was discussed above. Processors and especially sales agents love leasing credit card processing equipment to a small business. There are high mark-ups and high profits in leasing equipment. As an example, a lot of retail based businesses use basic counter-top terminals that can be purchased outright for around $200 depending upon where they are purchased. Sales agents don’t tell business owners this and will lock a small business into a three-year lease of anywhere between $25-$40 per month for a counter-top terminal that costs $200 if it were purchased outright.
Leasing this equipment at $25-$40 per month for 36 months would cost a small business between $900-$1,440 for a $200 terminal. If the equipment is damaged, destroyed, lost or stolen the small business is still responsible to finish making the remaining lease payments while at the same time having to purchase or lease a new terminal to continue accepting credit card payments. Also, sales agents are famous for adding on a fee for “terminal insurance” that will continue to inflate the cost of the equipment. Terminal insurance is a complete waste of money given the monthly fees charged and the deductible assessed in the event the insurance is used.
Many professional services businesses such as lawyers, CPA’s, medical offices and dental offices process customer and patient credit card payments using an online software application known as a virtual terminal. A virtual terminal is nothing more than the same software features found on a physical terminal, but in the form of a website application where customer and patient information can be entered. Once a physical terminal is purchased for about $200 there is no extra equipment or software related costs, but in the case of a virtual terminal there are extra ongoing fees per month and per transaction for the gateway connecting the website application (virtual terminal) to your processor. These extra gateway fees could amount to an extra $10-$25 per month plus an extra $0.05-$0.25 per transaction.
These fees are completely avoidable if a professional services business were to purchase a counter-top terminal for a one-time amount of about $200. This would eliminate the ongoing monthly gateway and per transaction fees associated with using a virtual terminal. If your business provides a professional services and you don’t have a physical counter-top terminal there is a high probability your business is being overcharged.
If a small business has been with a credit processor for more than one year it’s time to pull out those merchant statements and compare statements for any “automatic” fee increases. It is very common practice for credit card processors to arbitrarily increase a small businesses processing rates at any time especially on an annual basis, which can quickly drain profits from your business.
Some of the fee increase is legitimate and others are simply a way for greedy credit card processors to make more profits at the backs of small business owners. Almost every credit card processing agreement’s terms and conditions allow for the processor to change a business’s rates at any time with a simple 30 days’ advance notice. The notice is usually printed and buried on a merchant monthly statement, thereby often going unnoticed by small business owners. In addition to arbitrary fee increases, sale agents have been known on many occasions to simply make up new line items and begin charging those to small businesses using the same 30 days’ advance notice.
If your monthly processing fees seem like they are rising every month, that’s because most likely they are rising. Small business owners need to spend a little time learning more about credit card processing and not just ignore the dreaded monthly merchant account statement and feel helpless. Empower yourself to cut the fat and excess out of your credit card processing fees and get the transparency you deserve.
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