How to Find a Credit Card Processor: A Quick-Start Guide to Choosing the Best Merchant Services

By Francesca Nicasio

No matter what type of business you’re running, we’re willing to bet that getting paid is a top priority. After all, the more funds you have in the bank, the more money you have to serve your customers and grow your business.

Now, the process of getting paid used to be simple: people hand you some cash and you get to keep that money as revenue. But with consumers increasingly using credit cards as well as alternative payment methods (e.g., mobile wallets, “but now pay later,” etc.), money changing hands in business has become a complex process.

That’s where your payment processor comes in. This entity (sometimes called “credit card processor” or “merchant services provider”) facilitates the process whenever a customer pays using their credit card.

Why do you need a payment processor?

The short answer: it enables, you to accept card payments in your business.

Every modern business needs to have a trusty payment processor. With card payments making up 62.3% of consumer spending in the US, it’s clear that people like using their credit and debit cards to pay for purchases. And if you’re unable to adequately serve these customers, you can bet that they’ll take their business elsewhere.

Finding the right payment processor for your business

Now that we’ve established why you need a payment processor, let’s talk about the steps you should take when choosing a provider. There are a number of factors to consider when shopping around for a credit card processor. They include fees, technology integrations, and customer support, among other things.

We break down these factors below. Go through these points and keep them in mind when you’re comparing different providers.

Figure out each processor’s rates

One of the most important steps you should take when shopping around for a payment processor is to iron out your fees. Not all merchant service providers are created equal, and choosing the wrong processor could literally cost you hundreds (maybe even thousands) of dollars per month.

The 3 major fees in credit card processing

At this stage of the process, the first thing you should do is understand the major fees that come into play when a merchant accepts a credit or debit card payment. They include:

  • Interchange fees – These are the fees paid between the merchant’s bank and the customer’s bank to cover the costs of processing the card payment. This fee is deducted from the total amount process, so if a customer pays you $100 and the interchange fee is 2%, then the interchange fee is $2.00
  • Assessments – These are fees charged by card networks (Visa, MasterCard, Discover, American Express). This is how these credit card brands earn their cut.
  • Markup – The markup serves as profit for your payment processor. Different providers charge this fee in various ways. Some take a cut out of each transaction while others charge a flat rate.

TAKE NOTE: Out of these three types of fees, the interchange and assessment costs cannot be negotiated, as these are determined by credit card networks and banks. All merchants pay these fees and credit card processors do not control them.

Payment processor pricing models

Now that you know (some of) the fees involved in payment processing, it’s time to discuss how these fees are paid. Depending on your credit card processor, you’ll be charged using one of the following pricing models:

  • Tiered pricing
  • Blended pricing
  • Interchange-plus
  • Membership

Let’s look at each pricing model in more detail below.

Tiered pricing

Tiered pricing categorizes transactions into three groups: qualified, mid-qualified, and non-qualified. The processor will charge you lower fees for qualified transactions, while those that are considered “non-qualified” will come with higher rates.

The nature of a transaction will determine its tier.  Debit cards and non-rewards credit cards are usually considered qualified charges, while business credit cards and high rewards cards would fall under the non-qualified category.

Do note that these tiers are set at the discretion of the processor, so always double check these details with your provider.

Now, credit card processors that use tiered pricing are often criticized for their lack of transparency. That’s because these providers would bundle up their markups with credit card processing costs, so you have no idea how much is going to the banks and card networks and how much is going to the pocket of your merchant services provider.

There’s another reason why tiered pricing isn’t a good option for you. Processors that use this pricing model can sometimes implement misleading marketing practices.

Many credit card processors would only advertise their lowest possible rates (i.e., the “qualified” rate) to entice businesses. The merchant is then lured to their services thinking that they’ll be paying lower fees when in reality, most of their transactions would fall under the non-qualified tier and thus would incur higher charges.

Blended pricing

Sometimes referred to as “fixed pricing,” blended pricing works similarly to tiered pricing in that it bundles the processor’s markup with the credit card processing costs.

A key difference is that it uses one fixed rate for all your transactions instead of using tiers.This means that you pay the same rate no matter what type of card your customers are using.

Because of its simplicity, blended pricing makes your merchant statement easier to read.

This pricing model also fares better from a marketing perspective. Unlike tiered pricing processors, which usually promote their “lowest rates” without advertising their non-qualified costs, blended pricing uses one fixed rate so you’ll have a better idea of what you’re paying.

That said, this pricing model could still subject you to higher than necessary processing fees if you process a lot of credit cards or sell high-ticket items.

Interchange-plus pricing

Unlike the first two pricing models, interchange-plus pricing separates the processor’s markup from the fees of the banks and card networks.

As such, you’ll have a better idea of which fees are going to the banks and card networks and how much you’re paying your processor.

Interchange-plus pricing is broken down into two components:

Interchange – As discussed, this is the fee charged by the banks and card networks.

Plus – This represents the markup of the processor and is typically charged as a percentage off each transaction.

There are a number of factors that determine how much your “plus” costs. Your business type and credit-worthiness are just a few things that your processor may consider when setting your rates.

If you’re considering signing up with an interchange-plus processor, be sure to have a thorough conversation with them so you can understand how they’re determining your rates.

Membership pricing

Membership pricing is similar to interchange-plus in that it also separates the processor’s markup from the non-negotiable fees.

A key difference, though, is that membership processors don’t take a cut out of your transactions. Instead, they charge a flat membership fee in exchange for access to the “wholesale” credit card costs — i.e., the fees charged by the banks and card issuers.

It’s similar to Costco’s business model. Costco charges annual fees to its members, who can then purchase products at wholesale costs. Just like Costco, membership payment processors make money through membership dues and NOT by marking up the banks’ or card networks’ fees.

NOTE: While Costco’s retail model is great for consumers, their merchant services use a tiered model, which is more expensive for businesses. Find out more.

Find the best credit card processing rate

Now that you understand how credit card processors structure their pricing, let’s discuss how you can lower your rates.

Stay away from tiered pricing

Our first tip? Avoid tiered pricing. As we previously discussed, the lack of transparency in costs and marketing make tiered pricing unfavorable to merchants and you’ll likely end up paying higher-than-expected fees.

Do yourself a favor and set your sights on processors that use blended, interchange-plus, or membership pricing.

Between these three pricing models, the “right” option will depend on the size and nature of your business as well as your credit card transaction volume.

Smaller businesses that don’t process a lot of credit cards may benefit more from the simplicity of blended pricing, while those that process large card transactions will likely save more from interchange-plus or membership-based processors.

The only way to know for sure is to run the numbers. And that brings us to our next point…

Find your effective rate

Your effective rate is your total processing fees divided by sales volume. Now, if you’ve already signed up with a credit processor, you can find your effective rate in your merchant statement. [Read the step-by-step guide to deciphering your merchant statement here.].

If you don’t have a processor or if you’re evaluating a provider that you’re not using yet, you can estimate your effective rate by taking the steps below.

Gather or estimate the following information:

A. Your total amount of credit/debit card sales–use your last months total or the average monthly total you sell __________

B. Find the interchange plus deal they are offering to you (interchange + ?%) ____________

C. Add up all of the monthly fees you would be charged (i.e. monthly fee, equipment lease, statement fee, etc.) _________

D. Find the per transaction cost and multiply it by the number of transactions you usually do per month  _________

When you have all of those blanks filled in, calculate your effective rate by…

Step 1. You’ll need to take your info from B and figure out your dollar amount. To do this, multiply your total sales times the decimal value of your total interchange plus percentage.

The average interchange rate is 1.5%, so whatever the “plus” that they’re offering is added to the 1.5%. Don’t forget to make the percent a decimal when you multiply it by your sales.

For example:

your sales = $15,000;

interchange plus offer = 1.5%+0.36%  

15,000 x .0186 = $279

Step 2. Add up the dollar amount you just found in step one to the dollar amounts you filled in the blanks on C  and D.

Step 3. Divide the dollar amount you just found in step 2 by your total monthly credit/debit card sales. This will give you your estimated effective rate for the interchange plus deal you are looking into!

Once you can work out your effective rate from your statement or proposal, you’ll be able to negotiate with your processor, find a better provider, and make a more informed decision.

Choose a processor that works well with your workflows and technology

 

Aside from costs, you should also evaluate your provider’s support and compatibility with your technologies and processes. For obvious reasons, you want a payment processor that can work with your business setup and requirements.

Here are a few things to bring up:

Equipment – Take stock of your current equipment — i.e., POS system, card readers, etc. Ideally, your provider should work with what you already have, but if this isn’t possible, it could still be worth looking into the payment processor’s preferred equipment if they can offer you a good deal.

Sales channels – You also have to consider the channels on which you sell. Do you sell both online and offline? Do you do “card not present transactions”? Are you always on the go when you conduct sales? Whatever the case, be sure that your payment processor can support your requirements.

For example, if you sell at trade shows or if you have a food truck, then you’ll need a processor that supports mobile payments. On the other hand, if you sell both online and offline then be sure to find a provider that lets you transact smoothly on both channels.

Payment types – Depending on your customer base, you may want to accept payments beyond traditional credit cards. Mobile payments, layaway, and “buy now pay later” are just a few examples of alternative payment methods that consumers are opting for. If your customers are requesting these types of payments, then choose a payment processor that support them.

Evaluate their customer service

Don’t make the mistake of overlooking the importance of customer support when shopping around for a credit card processor. While low rates and technology compatibility are essential, customer service can be just as important.

The last thing you want is to have a hard time getting ahold of someone when you run into setup or payment troubles.

So, look into a provider’s customer support offerings. Ideally, you’ll want a payments partner that offers both email and phone support. Be sure to talk to your provider about their offerings before signing up. Ask them about their customer service hours as well as the level of support that they provide.

Also, consider asking for references from other merchants who can talk about their experiences with the provider.

Find out what other merchants and experts think

Speaking of which, it’s a good idea to do further research into a credit card processor by reading up on merchant reviews. We recommend the following resources:

Merchant Maverick – Merchant Maverick is a comparison site that “reviews and rates credit card processors, POS software companies, shopping carts, mobile payments services, and small business software.”

One thing we like about Merchant Maverick is they offer unbiased reviews. While they do include affiliate links in their content, the site’s authors make it a point to present both the pros and cons of the solutions they review.

Trust Pilot – Trust Pilot is a review platform that lets consumers leave reviews about the companies and products that they’re using. If you’re in the process of comparing different providers, just enter the company name into Trust Pilot’s search field to find out what people are saying about it.

PCMag – PCMag has a nice side-by-side comparison of credit card processing services. Like with Merchant Maverick, PCMag’s reviews may contain affiliate links, but the different solutions are still reviewed independently.

Reddit Small Business – Reddit has an active small business community and has several threads on payment processing. Run a quick search to see what’s out there, or better yet, submit a thread to the community with your specific questions and concerns.

Yelp – You may think that Yelp is mostly for foodies talking about their latest restaurant adventures, but the site contains a surprising number of payment processor reviews. If you already have a shortlist of credit card processing companies, run a search on Yelp or just Google something along the lines of “Yelp [insert payment processor here]” to see the reviews.

Your own network – Last but not least, be sure to consult your own network of entrepreneurs. Chat with other merchants and ask them about their credit card processor. Are they happy with their services? How much are they paying in fees? What does their equipment or setup look like? The answers to these questions will be very enlightening to your search.

Take your time when evaluating processors

As you can see, finding the best credit card processor will take research, calculations, and critical thinking. It can be a lot of work, but the payoff — if you make the right decision — is worth it.

Also, remember that you can get help finding the right credit card processor. At Payment Depot, for example, we can review your merchant statement or proposal for free to see if you’re getting the best rate.

Feel free to get in touch. Our payment experts are happy to look at your documents to see if you can save.