If you have started a new business, then you have been through the “merchant provider bombardment”. From listening to them, you would think there are huge variations in different providers. However, with a couple of exceptions, they are mostly the same. In this article, we’ll go over what those couple exceptions are, how to do the math to make sure you are picking the right provider, and a couple of questions to ask each of them.
First, so we are all on the same page, a merchant provider is a service that a business uses to accept debit and credit card payments. Most of the time, they provide the hardware for you to physically swipe the credit card. Some providers, such as Square or Revel provide a full point of sale system for you to use. The hardware (i.e. terminal) is not usually simply given to you. In most cases, you pay a monthly fee to use the terminal or you have the option to purchase it outright.
There are basically two models in the merchant service world. The first is an interchange-plus model which is very similar to another called a tiered model. In these models, you are charged basically two different fees –
- Per swipe fee – This charge is exactly what it sounds like. Every time you swipe a card, you are charged a fee. This is typically between $0.10 and $0.25 per swipe. We’ll discuss this a little more, but if you have a low average transaction, this fee can eat up a huge percentage of your revenue.
- Interchange Fee – This is often listed as a percentage of the total transaction. For instance, the fee might be 1.69% so if you had a $10.00 transaction, your total fee would be $0.169. In a tiered model, this rate will adjust based on the type of card used. For instance, a Visa reward card would be charged differently than an American Express card.
At this point, it’s important to introduce the actors in this play. Of course, you have the customer and your business, which need little introduction. The other main roles are the credit card processor (most likely the person you have talked with) and the issuing credit card bank. These two entities are where the fees are going. There are a few other parties in the transaction, but these are the main 4 you are concerned with. The reason different processors offer different rates is that they are given some leeway to set their rates on top of what the issuing credit card bank has set.
The second model is what I will call a flat rate model. While in the model above, the interchange fee often differs based on the card the customer uses, services such as Square or Stripe essentially have one standard rate they use.
I am going to quickly contradict what I just said. A processor such as Square actually has three rates. The rate you are charged is based on how you choose to accept the card. For instance, if you take a card over the phone, the rate is slightly higher (this is due to a higher risk of fraud). In this model, it is much easier to compute your estimated merchant card expense. In the case of Square, if you are only accepting in-store credit cards, your rate is a flat 2.75%.
So, what is the best option for you? It really depends on a lot of factors. For one of my businesses, Monkey Bizness, which is a child indoor entertainment center, we use Square. That is because our average ticket size is below $10, so the per-swipe fees were actually a much larger percentage of our transactions than Square’s flat rate. However, I have a client whose average ticket price is over $100. In that instance, the interchange-plus model is the right one for them.
In order to find the right model for your business, you need to know the environment in which you will be processing credit cards. Ask yourself these questions:
- The first basic question is how much dollars in credit card transactions will you have in an average month? You also need to be able to estimate your average “ticket price”. That is, what is your average price on each credit card transaction. In many instances, this is simply dividing total credit card transaction amounts by total transactions.
- How will I be processing credit cards? Will it be by using the actual physical card of the customer? Will it mainly be through your website? Or, will customers be calling in? If possible, you should break down how much you estimate processing in each of these instances.
Armed with this data, you can now estimate your merchant processing fees between different providers.
There are some additional questions you should be asking any prospective merchant processor. These include:
- What type of customer support do you offer? Is it 24/7 support? Is it live support? You will be amazed that credit card issues happen at all times during the day, and you often need it resolved ASAP.
- How long have you been in business? Merchant processing is a very easy business to start and many people are drawn to it by the allure of making money off the backs of other people. You want to use a provider who has been around for a while and has a solid reputation.
- Are their systems PCI-Compliant? PCI compliance applies to any business that accepts, transmits or stores cardholder data. Merchant acquirers are responsible for following the standards set forth by the Payment Card Industry, as well as enforcing merchant compliance. There are some tricks, such as who is storing the credit card information, that you can use to make sure that you are not burdened with too much in regards to PCI laws.
- Can I process transitions offline? Guess what…your internet will go down at some point during the year? If you are processing multiple transactions each hour, you will most likely want the ability to process transactions offline.
- How quickly do you get your money? Some providers get you your money the next day, others may take a couple of days.
- What happens if I leave to a different provider? Are their cancellation or early termination fees? Do you have a contract that is a certain length?
- Are there any other fees? You’d be surprised at how many businesses I review their merchant service bills and discover they are being charged $30-$100/month for something they had no idea about.
Finding a merchant service provider that is correct for your business will be an extra 1% of revenue back in your pocket. For many, that could be enough to take your family on a Disney vacation each year. Use your financial provider to help you go through this process and calculate what your actual cost will be.
As always, if you have any questions or would like to discuss your business goals more, reach out to us on our Contact us page.