Are you planning to accept credit cards for your business? You will need the services of a good merchant services provider to start you up. With so many credit card processing companies in the market, and without adequate knowledge of this trade, it is difficult to decide which merchant services provider is the best for your business.
A business that accepts credit card payments pays a small fee to the merchant services provider for each transaction. Though it is inevitable for businesses to pay for the convenience of credit card processing as it directly contributes to increased revenues, there are ways to save on credit card processing.
In this article, we attempt to address the most common questions merchants have about how to save on credit card processing costs, including:
- What is credit card processing?
- Why is credit card processing a critical element of businesses today?
- What are the types of credit card processors?
- How should you select a credit card processing company?
- What makes a business high risk?
- What is needed to qualify for a merchant account?
- How much does credit card processing cost?
- How to lower your credit card processing costs?
What is credit card processing?
A credit card transaction starts with a swipe at a credit card terminal or by the entry of the card details (card-less transaction) into a billing system. Before the amount moves from the card holder’s account into your business account, certain validations, checks and deductions are made. All these tasks are managed by the credit card processor.
Merchant card processing companies make sure credit card transactions are processed accurately and on time, for a fee. The fine points of credit card processing can get confusing, and businesses save themselves the bother by hiring a processor. In fact, internet businesses rely on credit card processing companies totally for their every day functioning.
Why is credit card processing a critical element of businesses today?
It is critical for growing businesses to offer customers the option to pay with credit cards. As more and more customers get comfortable with cashless transactions, businesses are pulling all the stops to make credit card transactions secure and painless. Online transactions (cardless) are quite common today with the surge in e-commerce websites.
Cashless transactions benefit your business. Funds are transferred into your merchant account on time with hardly any effort from your side. You also open your doors to a new segment of customers – a definite plus point for every business.
Credit card companies and banks encourage credit card usage by offering deals such as heavy discounts on products and services, gift vouchers, and prepaid services. Businesses can add their own incentives to existing offers to make credit card purchases irresistible to customers.
What are the types of credit card processors?
There are a variety of credit card processors to choose from. These are discussed below.
Independent Sales Organizations (ISO)
ISO services are like brokers. They link merchants with banks. ISOs have a contract with a bank to sell services to them. They hike the merchant service fees when negotiating with the merchant and close the deal. This is how they make profit. ISOs are popular as they take care of all the details for the merchant.
Enquire about merchant card services at your existing bank. Some banks offer merchant account services as part of a business account deal. Understand that most banks will outsource credit card processing to an external agency as they may not have the expertise to handle it in-house.
Credit card companies
The major credit card companies – Visa, MasterCard, American Express and Discover – have their own rules for servicing merchant accounts. While American Express sets up your merchant account directly, the other three brands expect you to have an account with an intermediary organization before setting you up for credit card processing. Large businesses that see monthly credit card sales in hundreds of millions usually take up this credit card processing option.
International merchant account companies
Businesses can opt to get their credit card processing done by offshore or international merchant account providers. As these merchant account companies are not regulated in the same way as those in the United States, they are risky. Typically, businesses that have poor credit history, are placed at odd locations, involve huge risks or have been refused credit card processing services by conventional agencies go for this option.
Registered credit card broker
These brokers are also independent sales organizations representing several ISO processors at one time. They have accounts with other credit card processing companies. Their services are personalized and they offer small businesses the same level of service provided to larger concerns. All organizations should be registered with Visa and MasterCard sponsored by ISOs. Small and mid-sized business can opt for this more expensive option if they want custom-made services.
How should you select a credit card processing company?
Keep the following points in mind in your selection of a credit card processing company. There are many important factors that are best checked out at the start of a business relationship.
1. Survey the market
Do a market analysis of various credit card processing companies. Compare services on the basis of:
- length of service
- rates charged
- terms and conditions applied to the merchant account
- previous record
- familiarity with your business type, size and sales volume
2. Understand the fee structure
Credit card processors charge a number of different fees. You should understand all the fees so there are no rude surprises when you get the bill from the company.
3. Know the time to receiving funds
Swiping a card takes seconds. It takes much longer for the funds to reach your merchant account. Transactions are processed in batches. The industry standard for transferring funds to the business account is 2 business days. This varies across credit card companies. American Express delivers funds in 2-30 days.
4. Read the fine print
Many businesses make the mistake of not asking enough questions about the terms and conditions set down in the contract. Make sure the credit card processor cannot take advantage of any clause to fleece you. It’s best to have your business lawyer review the contract before signing it.
5. Assess the customer service
You will be contacting the credit card processing company’s customer support service often, at least initially. In case of any problems during a credit card transaction, it should be possible to get immediate assistance or you will lose a sale. Always get some contact names and numbers so that you don’t waste time in customer call queues when help is required urgently. Know the working hours of customer service personnel. A 24×7 service is best.
The credit card processor should understand the importance of customer care and offer you some guarantees such as response time, query resolution, etc. Ask about the knowledge levels of its representatives.
6. Security of transactions
Reputed credit card processing companies work with you to mitigate credit card fraud. They make card less transactions safer by using Secure Socket Layer (SSL) protocol for transmitting credit card information on the internet. This is the minimum security required for online credit card processing transactions.
7. Get references
Ask the credit card processor for references. Call past customers and get reviews of the processors’ services, customer care, security provisions, error rates, lapses, etc. At a minimum, check the processor’s rating with the Better Business Bureau. If there are any complaints or recorded disputes, question the credit card processor. If their replies are not satisfactory, keep looking around.
What makes a business high risk?
This question is discussed here because a high risk business pays higher than average for credit card processing services. Some factors that make a business a high credit risk include:
- poor credit history
- type of business
- high volume of chargebacks (indicative of customer dissatisfaction)
- potential of credit card fraud (high in businesses such as adult websites)
- money-back guarantees
Good credit card processing companies specializing in internet transactions help high risk businesses reduce credit card fraud and repeated chargebacks to some extent. Credit card fraud is the biggest risk in credit card transactions. Credit cards are stolen and used to make large purchases, often leading to heavy losses for the credit card processing service and the business.
High risk businesses are charged higher processing fees. They may also need to build a reserve with the credit card processor to serve as a buffer. A high risk business has to bear this cost to avail credit card processing services.
What is needed to qualify for a merchant account?
All merchant account and credit card processing services will perform a thorough background check before accepting your application. This is mandated by law after 9-11 to prevent money laundering. The processor will:
- check your credit history
- verify your business is not prone to large volume of chargebacks (because of credit card fraud or a mistake by your ISO)
- ask for credit references from your suppliers (to vouch for your name)
- reference from previous credit card processor (if any)
- past statements to check credit history and chargebacks
If your business falls into the high credit risk category, you are not disqualified from approval. You will have to pay more than non-risky businesses but a good credit card processing company will help you reduce your risk by addressing specific problems with your credit. Do not be misled by companies that promise a 99% acceptance rate. Instead, look for companies that have a history of helping out businesses in your situation.
How much does credit card processing cost?
The cost of credit card processing is an important factor in selecting a merchant account service. You should consider the costs of equipment and the applicable processing fees.
Cost of equipment
The credit card terminal used to swipe cards is the biggest upfront investment. However, you can choose to lease a machine for as low as $20 a month if you are only planning to try out credit card processing. The cost of a new terminal varies with the sophistication and features included. Basic machines cost from $200 to $750; wireless models can go up to $1000. Depending on whether incorporating credit card processing is a short or long term plan, you can lease or purchase equipment. Many merchant account service companies include terminals in their business package.
Online businesses may not need terminals. They will have to purchase a virtual terminal program and payment gateway to process cardless credit card transactions on their computer.
If you accept credit card orders over the phone or mail, you need to enter credit card data manually. These options are risky as there is the possibility of the funds, verified at the time of sale, not being available at the time the charge is processed.
Merchant Card Processing fees
Al credit card processing services charge a discount fee. This is the percentage charged for each transaction processed by the company. Charges levied by the credit card processor will depend on:
- your credit history
- transaction amount
- type of transaction – cardless or card present
The discount fee for transactions in which the card is present typically ranges from 1.5-2 percent. Card-less transactions incur a fee of 2.2-3 percent. Monthly minimum fees of around $20 are also common.
There are other charges, most of which are determined by the credit card companies such as Visa and MasterCard. A credit card processor may charge an application fee (non-refundable) that can range from $200 to $500. Some companies charge setup fees, activation fees, customer service fees, programming fees, pass-through fees and more. Make sure all the fees are specified in the contract.
You should shop around for the best deals for processing credit cards. Be wary of providers that include a large upfront fee in the agreement. Many reputed credit card processors will not charge activation or setup fees. Their services will be reliable and the prices fair. Working with a trustworthy processor is more important than paying cheap transaction fees.
How to lower credit card processing costs?
1. Ensure transactions are processed within 24 hours
Credit card sales transactions should be batched out every day, within 24 hours of the sale. An older transaction will incur higher credit card processing fee. Avoid this eventuality
2. Reduce the monthly minimum charge
The contract with the credit card processor specifies a monthly minimum charge. In the event that your monthly sales fall short of this number, you pay the difference. If this happens too often, ask the credit card processing company to lower the monthly minimum value. Most credit card processing companies will negotiate seeing your past sale records. If they don’t, there are other agencies that will be more than willing to help you out.
3. Print the business contact on customer receipts
Businesses usually have customers sign a receipt for a credit card transaction. This is a proof of sale that customers keep in case of chargeback or any other issue. Ensure the credit card receipt shows your business address and contact number, and not the credit card processors contact information. In case of any query, the customer should call you. If they call the credit card processing company, you will be charged for information retrieval.
4. Negotiate merchant processing fees
Nobody is doing any favors by extending credit to customers. Each time a customer uses a credit card, the card company makes money. By accepting credit cards, you are in fact generating more business for the merchant processing company. Negoitate lower merchant procesing fees in exchange for the business you generate for them.
5. Avoid card less transactions at the store
If your business location has a card swipe machine, avoid card less transactions. The rate of credit card transaction fees increases with the risk involved. Manually keying in credit card information also results in higher risk. Swiping cards through the processing slots incurs the cheapest credit card processing fee. If the magnetic strip of a credit card is damaged, ask the customer for an alternative credit card. Usually, customers will carry more than one card. If not, you have no choice but keep this practice to a minimum.
6. Review monthly statements carefully
If you have had a long relationship with the credit card processing company, there is likelihood that they may have hiked rates at some time. You can only know this by reviewing monthly statements minutely. Ask questions about downgraded transactions and unexplained fees. If there are too many of these, consider switching to another credit card processor.