The small portion of each credit card sale that your business pays toward processing costs can add up to thousands each year. Although credit card fees are a cost of doing business, they aren’t set in stone.
Payment processor markups and unclear pricing models can inflate your credit card processing costs, especially if you’re using a flat-rate plan. If you understand how the fees are structured and what you can negotiate, you can lower expenses.
See how you may be overpaying for credit card processing, how to get more transparent costs and negotiate for lower fees.
[Read: Business Credit Cards]
Why Businesses Overpay for Credit Card Processing Fees
With each credit card transaction, businesses pay a portion of the sale to cover processing costs. Businesses typically pay processing fees between 1.5% and 3.5%, which vary depending on the card type and how the transaction is processed.
Part of the processing fee goes to the card networks and banks, but payment processor markups are another part — and those are often negotiable.
“Many business owners assume their processing costs are limited to the basic percentage plus per-transaction fee, but the reality is far more complex,” says Eric Cohen, CEO of merchant services advocacy firm Merchant Advocate. “Hidden or avoidable fees often include markups on interchange rates, PCI compliance charges, statement or administrative fees, and virtual card or enhanced data premiums.” Cohen says businesses can usually find questionable fees by looking closely at merchant statements and requesting a line-by-line breakdown of all fees. PCI — which stands for payment card industry — compliance, statement or service fees are typically from the processor.
Businesses using flat-rate pricing, such as 2.9% plus 30 cents per sale, may not see all of the fees a processor charges. With flat-rate pricing, processors charge the same rate for all transactions, regardless of whether some transactions qualify for lower network costs.
“Many processors are quietly adding markup inside what appears to be a standard pass-through cost,” says Shane Hurley, CEO of RedFynn Technologies, a merchant-services firm. “It’s difficult for merchants to see because it doesn’t appear as a line-item fee; instead, it’s embedded in the rate itself.”
The bottom line: Your business may be overpaying if your total processing costs typically exceed 2.5% for retail or around 3% for e-commerce.
[How to Choose a Bank as a Small Business Owner]
Use Transparency to Lower Costs
Many small businesses accept the processing rate they’re given, but you can lower costs by switching to a more favorable pricing model.
Switching from flat-rate pricing to a more transparent interchange-plus pricing model for credit card processing is an easy fix, says Bar Geron, co-founder and CEO of business-to-business payment fintech Balance.
“With a flat rate, processors bet their costs will be lower than what they charge you and pocket the difference,” says Geron. “You lose all visibility into what you’re actually paying and end up paying more, especially in the B2B space where transactions are larger and more complex.”
Interchange-plus pricing is more transparent, offering clarity in what the card networks charge and what your payment processor adds. It can result in a lower effective processing rate and give you room to negotiate, as you can clearly see the fees from your payment processor.
[LINK: Best Business Checking Accounts]
Negotiate Payment Processing Costs
Even if your business isn’t a giant retailer, you can negotiate better processing fees. Start by understanding what goes into your payment processing costs and use that knowledge to negotiate lower markups.
Payment networks, including Visa, Mastercard and American Express, publish their base interchange fees, and you can negotiate the processor’s markup beyond those costs. Review your statements to determine your effective rate, compare it with what the networks charge, then negotiate on the difference.
— Ask for interchange-plus pricing to separate network fees from processor markups.
— Obtain a fee breakdown and request that your payment processor explain any charges you don’t understand.
— Get quotes to compare payment processor fees and shop around at least once a year.
— Avoid signing long-term contracts or terminal leases so it’s easier to walk away from unreasonable payment processing fees.
Although it helps to have huge transaction volume, even small merchants can negotiate payment processing fees. Ask for transparency, get competing quotes and question fees that seem excessive or don’t make sense.
“Small businesses can identify overcharges by thoroughly auditing their merchant statements and requesting a full line-by-line breakdown of all fees,” says Cohen. “They should calculate their effective processing rate by comparing total volume to total fees and benchmark that against industry standards.”
More from U.S. News
Business Credit Cards vs. Personal: 5 Major Differences
Ready for Your First Business Credit Card? Here’s How to Get One
Can You Get a Business Credit Card if You’re Not a Business Owner?
We’re Not Gonna Take It: You Don’t Have to Accept That Processing Fee a Credit Card Company Wants to Charge Your Business originally appeared on usnews.com
