6 Tips on How to Get the Cheapest Credit Card Processing Rates for Your Business
Depending on your business, the amount you pay in credit card processing can add up to hundreds, if not thousands of dollars per month. That’s why it’s critical that you select a payments provider that offers the most cost-effective rates possible.
Doing that, however, is easier said than done. The world of payment processing can be complex and the players in the industry are adept at making you think you’re getting a good rate when you’re in fact, overpaying for credit card processing.
To prevent that from happening to you, we’ve put together some pointers to help ensure that you get the cheapest credit card processing rates for your business. Keep these tips in mind when you’re shopping around for a payment processor.
1. Be aware of the common payment terms and processes
To properly shop around for a payment provider, you first need to educate yourself on the common words and phrases used by payment professionals. What are interchange rates? What do providers mean when they say “assessments”? What’s the difference between the issuing bank and the merchant bank?
It’s also important to be aware of how the business of payments works. Who are the players involved in processing payments? What takes place behind the scenes when a customer swipes their card? Who takes a cut out of your revenue?
Having the answers to these questions will ensure that you make an informed decision when choosing a payments provider. And as we alluded to earlier, a number of players in the industry implement shady sales tactics to get you to get you on board with their company. By being aware of how payment processing works, you can avoid being getting hit by higher-than-necessary fees.
We’ve discussed the ins and outs of payment processing quite a bit on the blog, so rather than rehashing the details here, we recommend you read up on the following:
2. Know your business and your numbers
Still on the topic of educating yourself, it’s also important to be aware of your business’ key metrics. Credit card processing rates will vary, depending on the number of credit card transactions that you process. That factors that affect your rates include your credit card volume, average basket size, risk profile, and more, so have these figures handy before you shop around.
To be safe, make sure you have 3 months’ worth of data for the following metrics:
Credit card transaction volume – Be aware of how many credit card transactions you accept per month, as well as the total amount processed.
Average transaction size – Many processors take a percentage out of each transaction. Knowing the typical basket sizes in your business will give you an idea of how big their cut is.
Types of payment cards used by your customers – Credit card processing rates can vary depending on the card used. Debit cards usually see lower fees while corporate and rewards cards come with higher processing costs. If you have an idea of which types of cards are being used by your customers, you can make an educated guess on how high your rates would be.
Effective rate – The effective rate is the total fees charged divided by the total amount processed. This is the rate that you’re paying after you factor in the non-negotiable processing fees along with your provider’s markup. You can find your effective rate by taking a closer look at your merchant statement and running the numbers.
Chargeback to transaction ratio – To find your chargeback rate, divide your total chargebacks by the number of transactions within that same period. FYI, the industry-standard chargeback average is 1%, according to Chargeback.com. Anything higher than that could put you in the “high-risk” category, which means you’ll end up paying higher rates.
Why take the time to iron out these metrics? Simple: these numbers can directly affect how much you pay in credit card processing fees.
Let’s say you’re trying to decide between two credit card processors. Processor ABC charges 2.5% + 30 cents per transaction, while Processor XYZ chargers 1.30% and a monthly fee. The “best” rate for your business will depend on your transaction volume, transaction size, and types of cards processed, so it’s important that you know where you’re coming from in order to gauge which one is the best deal.
3. Shop on markups, not rates
As we mentioned previously, credit card processing rates consist of a number of components:
There are non-negotiable fees, which include interchange and assessments. These fees are paid to banks and credit card networks, and credit card processors have no control over them. What processors do control are their markups — i.e., the amount you pay them in addition to the fees that go to banks and card networks.
When you’re evaluating payment processors, it’s important to shop on markups, and not rates, says Ellen Cunningham, marketing manager at CardFellow.
“Rates are only one piece of the total cost, and they’re easily manipulated. Nothing makes a salesperson happier than when you call and ask ‘What are your rates?’ because they know they’ll be able to play games with your pricing,” she adds.
Cunningham continues, “The smaller the markup, the better. Instead of asking about rates, ask about markup over wholesale. A processor that can’t (or won’t) tell you should raise a red flag.”
Here’s an example: a processor that uses interchange plus pricing may charge something along the lines of interchange fee + markup, which is expressed in basis points (i.e., 1/100 of a percentage point. If the interchange rate is 1.50% and your processor’s markup is 50 basis points, you’ll be paying 2.00%.
On the other hand, a membership-based payment processor such as Payment Depot gives merchants access to the interchanges rates without an added markup. Instead, Payment Depot charges a monthly fee to give merchants access to wholesale rates.
So, if the interchange rate is 1.50%, then you’ll be paying just that amount, plus a flat monthly rate.
4. Know the right pricing structure for your business
We’ve discussed payment processing pricing structures numerous times, and for good reason: having the right pricing model can mean the difference between paying a couple of hundred versus thousands of dollars in credit card fees.
Not all pricing models are created equal and the “right” one depends on your business. Here’s a quick recap of the different pricing structures used by credit card processors:
Interchange-plus – With interchange-plus pricing, the credit card processor adds a markup on top of the interchange or “wholesale” credit card processing rates. Unlike other pricing models, interchange-plus is pretty transparent because you know how much you’re paying in interchange fees and how much is going to your processor.
Tiered pricing – The processor bundles up the interchange and assessment fees with their markup, and they will then charge you based on three tiers: qualified, mid-qualified, and non-qualified. And because the provider combines all fees into 3 buckets, this pricing lacks transparency around how much you’re paying.
Blended or flat rate pricing – This is the simplest pricing model to understand because the processor charges you a single rate for all your transactions (versus separating them into different tiers or separating the interchange fees from their markup.)
Membership – Providers that use a membership model charge you an annual membership fee for access to wholesale credit card processing rates. These processors don’t take a cut out of your sales, nor do they markup interchange and assessment fees.
It’s important to understand how different pricing structures work, because not all pricing models will be a good fit for your business.
As Cunningham puts it, “flat rate pricing (offered by companies like Square, PayPal, and Stripe) is low cost for certain types of business, but not others. For example, Square will typically be cheapest if your average transaction is under $10 or if you only accept a few thousand/month in cards. Otherwise, it’s an expensive solution. Don’t be fooled by simplicity. Simple does not automatically equal lowest cost.”
Her advice? “Read up on the credit card processing pricing models available so you know what you’re looking for.”
5. Lower your fraud risk
A good way to lower your rates is to reduce your risk for fraud. As Jacob Lunduski the lead credit industry analyst at Credit Card Insider notes, “Generally the higher fraud risk a merchant poses, the higher their credit card processing fees will be.”
According to him, you can lower your fraud risk by swiping credit cards versus keying in the card information. Processors charge lower fees for the former because it comes with less risk compared to manually entering the credit card details.
Lunduski also recommends entering the billing ZIP code and security code whenever possible, and to use and address verification services to verify the cardholder’s billing address with the card issue.
Taking these steps, he says, can help fight fraud and keep your fees low in the process.
6. Avoid negotiating with your existing provider
While you may be tempted to re-negotiate your rates with your current provider, Cunningham says that this isn’t such a good idea.
“In most cases, the best advice for negotiating with an existing provider is don’t negotiate with an existing provider. A processor that’s overcharging you now will overcharge you in the future. Why give them another chance to keep the high rates going?” she says.
“This is particularly true if your processor uses tiered pricing, the kind with non-qualified rates. If so, switch and switch soon.”
Cunningham adds that some processors might make you think that they’ve lowered your rates, when in fact they’re only manipulating their pricing model.
“Processors are happy to lower your rates… temporarily. Then they slowly raise pricing over time. Or, if you’re on tiered pricing, they’ll just start considering more of your transactions non-qualified and charge the higher non-qualified rate. Your rates went down, but your actual processing costs didn’t.”
That’s why instead of re-negotiating with your current payments providers, she recommends finding “a processor that offers a lifetime rate lock so you can avoid rate creep over time and skip the hassles of monitoring rates.”
Don’t wait to lower your rates
If you’re overpaying in credit card fees, it’s best to take action immediately. Every penny that you’re unnecessarily paying means lower profits that you can reinvest in your business. Being stuck in a lousy credit card processing contract can have dire results for your company both in the short and long-term.
Our advice? Run the numbers. Know your payment metrics and then educate yourself on how the industry works. Once you know which pricing model works best for you, start having conversations with different vendors and ask the right questions.
And if you need help figuring out if a quote really is a better choice, get in touch with us so we can analyze your statement or proposal for free, and determine if you can save even more.