If you are in business to grow and prosper, credit card processing fees are a necessary cost of doing business. But, with each swipe of the card a fee is charged, which, individually, is not a profit breaker, but they can mount up over the course of month to where they become a significant business expense. Of course, the more in sales volume your business is doing, the higher your processing fees are. And that is not necessarily a bad thing unless you aren’t using the most efficient processing tools and services. For a fledgling business, every cent counts towards profitability, so it is important to take key steps to reduce your processing costs.
Understanding Your Processing Costs
The challenge facing many small and medium sized businesses is that card processing industry is a virtual mind field of complicated fee structures and convoluted relationships that can put them at the mercy of their merchant services provider. It’s as if they make if purposefully confusing so as to weaken your resolve to understand what is really happening, which is that you are likely paying more than is necessary for the level of service you receive. It would be well worth your while to gain an understanding of the fee structure and how all of the parties share in it to create your end cost.
The dirty little secret in the industry is that interchange fees, also referred to as the wholesale rate at which fees between the credit card processor bank and the issuing bank are determined, are not a secret at all. They are published for all to see, but the card processors won’t tell you that. These fees, which account for about three-quarters of the total cost of processing are fixed for all credit card processors, thus they cannot be negotiated. So, you can move on a focus on other aspects of the processing expense.
Assessments, which are charged by the card network providers, such as Visa and MasterCard, comprise about 3 to 5 percent of the processing expense. Again, they are not negotiable.
The card processor makes its money primarily on the markup over and above the interchange and assessment fees. This is where you may have some negotiating room depending on your sales volume and your willingness to push the issue. The markup of the more competitive processors will come in somewhere between 15 and 20 percent of the total processing costs. The markup becomes your true basis for comparing card processors. But, it’s also important to know how the processor charges their markup fee. Many times they will bundle their fee up with the interchange and assessment fee which can result in a higher overall fee expense to you.
Alternatively, you could ask for interchange plus pricing which is more transparent in that the interchange and assessment fee is charged directly to you and the processor’s markup is charged separately. This way you know the actual breakdown of the fee structure, and you are more likely to see a lower overall fee expense. It also provides a more accurate way to compare the fee pricing among different processors.
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