Most small businesses are overpaying for credit card processing. After the Mafia was eliminated from Italy this has become the next legitimate way of extorting money from businesses. Visa and Master Card are making billions of dollars in profit every year just for acting as a middle man to process the credit cards.
Is there anything businesses can do to lower this cost rather than just give this “extortion” money to credit card processing companies? Although there is no way you can eliminate this cost; there are few steps you can take to bring it down. Here are 5 steps you can explore:
- Read and understand you statement. If there is one simple thing small business owners can do reduce the fees; it is to read and understand how you are being charged. I know the statement is very confusing with many different categories and charges; you should spend time to understand what those categories mean. You can call your processing company and ask them to explain all the categories; and while you are at it; ask them if they can suggest some ways to reducing the cost. For our previous business we were able to bring the cost down by almost $100 per month after consulting with credit card processor. That is $1,200 extra profit per year that can go in your pocket.
- Compare fees against benchmarks. If you are paying more than 2% of credit card sales for the processing charges you should call your processing company and ask for concession. If you are paying more than 3%; it’s time to change the processing company right away. I don’t care what they say; but giving away 3% of sales to them is simply outrageous.
- Shop around. There are several avenues you can explore to see if you can get a better rate elsewhere. If you are part of a large franchise like Subway or McDonald’s they may have corporate level agreements that you can tap into. Otherwise, you can look into using Costco or Sam’s Club processors for your business. Usually, they can shave few dollars from your monthly bill. Another possibility is to look into large processing companies themselves rather than going through middle man. Usually, these “middle man” companies end up working with large processing companies anyway, so you can eliminate the extra fees charged by the middle man.
- Promote low cost transactions with customers. As I mentioned earlier, the credit card companies have several categories of charges with varying rates. You will pay lower rate for pin based debit card transactions; while the fees are substantially higher for phone based transactions where you don’t physically see the credit card. You should favor the lower cost transactions with your customers. Again, call your processing companies to find out which types of transactions will result in lower cost.
- Watch out for lock up period. Usually, when you sign up for the credit card they will ask for 2-3 year agreement with the penalty if you cancel earlier. While there is no avoiding it; you should ask for something in return if you do sign up for this period. You can ask for lower rates or free processing terminal in return. For our business we were able to get couple of processing terminals for free when we first signed up.
Have you come across any other ways of reducing the credit card processing fees that you would like to share with others?
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Never sign a contract with a termination fee. There are plenty of processors who do not have these.
The other option is to hire an expert not associated with any processors who can reduce your credit card processing fees. An expert can really understand the complexities and get you one of the lowest rates in the market. At our firm, the fee we charge is on a contingency basis, so if there is no savings, there is no fee. Many owners think they are getting a good rate when the reality is they are overpaying for credit card processing fees year after year.
Good points, Ron. Thanks for pointing them out.