Being Smart about Accepting Credit Cards

Article by:
Sean Harper
EO Chicago

I own, invest in and run several e-commerce businesses. As such, credit card fees are a big deal for me. That said, after taking a few serious financial lumps, I learned some tricks when it comes to shopping for credit card processing

When I started my first business in 2005, many credit card processing salespeople called on us preemptively. We signed up with a guy who seemed honest and had a good “flat” rate. We grew quickly, and our credit card processor cut us off that December 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 had to agree, since I didn’t have enough time to reshop and renegotiate a deal with a new processor.

When I started my first business in 2005, many credit card processing salespeople called on us preemptively. We signed up with a guy who seemed honest and had a good “flat” rate. We grew quickly, and our credit card processor cut us off that December 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 had to agree, since I didn’t have enough time to reshop and renegotiate a deal with a new processor.

A year later, I got a chance to breathe and analyzed my statement. It turns out the “flat” rate actually 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.

I put my economics-major hat on and tried to negotiate a better deal. I gathered six bids, compared them diligently in a spreadsheet, negotiated the terms, played them off against each other and signed up with a new provider. The first month the statement looked great. I didn’t look at the statements carefully again for another six months. It turns out that, beginning in the second month, I was charged nearly twice the rate I was quoted. The third time I shopped for credit card processing, I finally got a decent deal

Here are a few things I learned when it comes to properly shopping for credit card processors:

    No cancel fee. Most processors will waive their cancel fee.  Not being able to quit at a moment’s notice reduces your provider’s incentive to do a good job.

  • Interchange Plus. The wholesale rate that your processor pays Visa and 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, full -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 Kelly’s Blue Book to look up dealer prices before shopping for a car.

  • Get multiple bids and make sure that the bidders know they are competing for your business.

  • Don’t lease or get subsidized equipment from your processor; they build those fees into their pricing in order 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 are in control. 

  • 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. 

  • Find the total fees on your statement and divide your total Visa, Mastercard and Discover sales volume into those fees; monitor that amount month to month as a quick and dirty way of auditing your processing bill.

Business owners quite often overpay for their processing by one percent or more, so ensuring we are getting a good deal is a great way to significantly increase our bottom line.

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