The number of cash only businesses has dwindled and that number looks to shrink even further in the coming years. For nearly all small business owners, credit card processing is a fact of life. This means working with a merchant services organization to provide essential options such as virtual terminals, eCommerce solutions, mobile payments, credit card processing, and much more.
So how do small business owners know if they are overpaying for credit card processing? With this question in mind, today will be looking at the basics of payment processing fees, how to select the right merchant services, how to compare fees and rates, and some simple ways to potentially reduce credit card processing fees.
Understanding the Basics of Credit Card Processing Fees
In order to understand a fair rate for merchant services, it helps to first understand what types of credit card processing fees are out there and which might impact your small business. In broad terms, payment processing fees fall into one of three categories:
Flat fees are generally charged by the merchant service organization on a monthly or other pre-determined schedule. These may replace certain transactional fees or be in addition to transactional fees.
Transactional fees are paid to the credit card company or bank per transaction. Typically, these are based on a percentage and can either be a flat percentage or tier-based. However, other pricing options do also exist.
Incidental fees might include one-off incidents such as chargeback, PCI non compliance fees, insufficient funds, etc..
In addition to understanding fees, rates, membership fees, etc, it is important to also buff up on general terminology. Consider doing your own research into these terms or consider speaking to an industry professional for more information.
Selecting the Right Merchant Account Pricing Model for Your Business
There are several different pricing models which merchant service providers may use for small businesses. Each one of these models has a unique set of advantages and disadvantages. Working with a merchant service provider to identify the best model for your business is a great step towards getting the best deal.
These four pricing models include the tiered pricing model, membership pricing model, flat-rate pricing model, and interchange plus pricing model. Each pricing model has its own method of charging businesses for flat fees, transactional fees, and incidental fees. However, some models will not actually show what fees are coming from which sources.
For example, interchange-plus pricing details all fees individually. Tiered pricing and flat-rate pricing may actually blend together credit card fees and merchant services fees into one lump amount. As a small business owner and/or operator, the choice is yours whether detail or simplicity is more important.
The Importance of Comparing Payment Processing Rates and Fees
So back to the important stuff: how can you be sure you aren’t overpaying for payment processing? That comes down to calculating the effective rate of your merchant account fees. This is accomplished by dividing total fees by sales volume (fees / sales). By then multiplying that figure by 100, you get your effective rate.
This effective rate can be used as a basis to make sure you are getting a fair deal. Compare this effective rate to previous statements and with other merchant service providers. Regardless of your pricing model or other factors, the effective rate should give you a great idea of what you are truly paying in membership costs, fees, and other charges.
One caveat is that incidental expenses and one-offs can skew these figures. If you had a major chargeback, overdraft, or other unique situation in the past, take care to calculate those figures separately as necessary.
Is it Possible to Reduce Credit Card Processing Fees?
In many cases, it is possible to take steps towards lowering your merchant services costs by reducing fees and even potentially reducing rates. While none of these replace working with a high quality merchant services provider, they may help reduce your overhead by lowering your effective rate.
Use best practices when accepting credit cards. This can include only accepting chip cards in person as hand-keyed, swiped, or other credit card transactions may actually carry a higher processing fee.
Avoid chargebacks and other incidental fees. (link chargebacks blog) incidental fees such as chargebacks can not only hurt your bottom line, but they can also lead to account suspensions or terminations. Again, use best practices when accepting and processing any card payments.
Do not accept credit cards for small purchases. Think of a coffee shop selling a $2 cup of coffee. Accepting credit cards can reduce a profit of $0.75 down to nearly nothing. Understand your pricing model and determine a fair threshold for accepting credit cards.
True Merchant Offers Payment Processing Solutions for Small Businesses
The payment processing professionals of True Merchant understand that overpaying for merchant services can not only be frustrating but also damaging to small businesses. That is why we are proud to offer transparent, fair pricing models which fit a wide range of business types and sizes. Feel free to call or fill out a brief form to learn about how True Merchant can help your small business grow.
Whether you are looking for credit card processing, online payment solutions, business funding, mobile payment solutions, or any other payment processing service, let True Merchant go to work for your business today!
