I own, invest in and run several e-commerce businesses. As such, credit card fees are a big deal for me. After taking a few serious financial lumps over the years, I learned some helpful tricks when it comes to shopping for credit card processing firms. None of these lessons learned would have occurred had I not made some memorable mistakes.
When I started my first business, TSS-Radio, in 2005, many credit card processing salespeople called on us preemptively. We eventually signed with a guy who seemed honest and offered a good “flat” rate. We grew quickly, only to find that our credit card processor cut us off for doing too much business. Shortly thereafter, they turned us back on but started to hold back five percent of our sales as a “reserve.” I was forced to accept this behavior, as I had little time to shop and negotiate a deal with a new processor. When things slowed down, I began to analyze my statement. It turns out the “flat” rate wasn’t a flat rate at all, and I was charged US$40,000 in “downgrade” and “non-qualified” fees that year. I was angry and tried to cancel, but they held on to my reserve for another six months and charged a cancel fee that hadn’t previously been disclosed.
Wanting to resolve the issue, I put my economics hat on and tried to negotiate a better deal with another firm. I gathered six bids, compared them diligently in a spreadsheet, negotiated the terms, played the companies against each other and signed up with a new provider. The first month the statement looked great. Thinking everything was good to go, I didn’t look at the statements carefully again until six months later— a huge mistake. It turned out that at the start of the second month, I was charged nearly twice the rate I was quoted. I was forced to find another provider.
The third time I shopped for a credit card processing firm, I finally got a decent deal. It was at this point that I started FeeFighters.com, which is like Priceline or LendingTree for credit card processing. I was angry about how I was treated by the credit card processing firms, so I wanted to start a business that prevented others from experiencing what I went through. Looking back, I learned a lot of about credit card processing, and I hope others can learn from my mistakes. Here are some tips that will help you do a better job than I did:
- No cancel fee. Most processors will waive their cancel fee, so take advantage of that. Not being able to quit at a moment’s notice reduces your provider’s incentive to do a good job.
- Take advantage of Interchange Plus. The wholesale rate that your processor pays Visa or Mastercard (which they, in turn, pass to banks that issue credit and debit cards) is called Interchange. “Interchange Plus” pricing is where the processor passes along that cost, plus a small, fully disclosed markup. Large companies only accept Interchange Plus pricing, and you should, too, since it makes it harder for the processor to sneak in extra fees. Basically, this is like going to Blue Book to look up dealer prices before shopping for a car.
- Seek variety. Get multiple bids, and make sure that the bidders know they are competing for your business.
- Own your own equipment. Don’t lease or get subsidized equipment from your processor; they build those fees into their pricing to reduce your future flexibility and increase their future pricing power. Credit card processing equipment and software is cheap to buy; own it, so you can be in control.
- Have a backup plan. If you depend on credit cards for the majority of your business, it could be worthwhile to have a backup processor in case something goes wrong.
- Audit your bills. Find the total fees on your statement and divide your total Visa, Mastercard and Discover sales volume into those fees. Once you do this, monitor that amount month to month as a quick and dirty way of auditing your processing bill.
All too often, business owners overpay for their processing by one percent or more, so ensuring you are getting a good deal is a great way to significantly increase your bottom line.