It's that time of year when business owners review their expenses - looking to eliminate costs and maximize profits. It's also the time of year when many retailers expect this holiday push to give them the boost they need to achieve their year-end goals. But what if your merchant services provider is charging you too much? Could this year-end boost be doing more to catapult their profits while eliminating yours? Hopefully not, but we know that reading your credit card processing statements can be a confusing task - which is why many business owners don't consider reviewing their merchant services partnership when searching for cost-cutting strategies. In this post we'll try to simplify the merchant services statement and put your business in a better position to review your current credit card processing expenses.
Five Steps to Reviewing Your Merchant Services Partner
Before we get started you should gather the last few months of credit card processing statements to use these five steps effectively.
Reviewing Your Merchant Services Provider
Step 1. Are You in a Contract? You Shouldn't Be.
Unfortunately many small business owners get bombarded by calls from merchant services (or credit card processing) companies daily. This industry is saturated with entry-level cold calling, door-to-door, type sales people who can prey on the confusing nature of the credit card processing statement and find a way to manipulate merchants into thinking they have a better deal and then get them to agree to a contract. You should not be in a contract. Most ethical, high-quality, consultative-based merchant services providers of the 21st century do not require contracts. If you are in a contract, give us a call. We can review the agreement and make some recommendations for you. If you are vetting merchant services companies, always ask if there is a contract involved and although you may have to sign a monthly service agreement, an annual, 2 year or any long-term contract is no longer standard in the industry and should be seen as a red flag.
Step 2. Are You Paying Equipment Fees? You Shouldn't Be.
Similar to Step 1, you may have inadvertently gotten involved with a merchant services vendor that is actually charging you for the equipment. Look through your statements and if you see any indication that you're paying for equipment, give us a call - you shouldn't be. Why should you, the business owner, get charged for the equipment to process the transaction? You're already paying a fee for the transaction - which is why the equipment should be free. Unfortunately we have come across some small business owners that are being charged to buy their equipment in installments which means not only do they have exorbitant monthly fees that drastically cut into their profits, when the equipment is paid for they own out-dated credit card processing equipment that could be obsolete at the pace the credit card payment technology is advancing. It is possible that by the time you figure out how much it is to "buy out your lease" or pay for your equipment, it won't make sense to switch into a no-contract, no-equipment-fees agreement, but we'll be happy to review your options and remind you when it's time to switch into a more profitable solution for your business.
Step 3. Figure Out Your Effective Rate
So now you've hopefully determined you're not in a contract and you're not paying equipment fees but what ARE you paying? You signed up with super-low rated but it seems that you're paying much more, so how do you calculate it? Here's the quickest and easiest way to figure out your effective rate. First, grab the last three months of statements and do this quick calculation:
Total Costs / Amount Processed = Effective Rate
For example, if you processed $100,000 in credit card transactions and your total costs for processing this amount was $3,200, your effective rate would be 3.2%. After you calculate your effective rate, if it's higher than 2.5% contact us. Although processing fees are unavoidable, the objective is to pay as little as possible in order to maximize your profits while still offering your customers the ability to pay for goods and services with credit cards.
Step 4. Determine Your Pricing Structure
In many cases business owners choose a merchant services provider with "the lowest rate" which is how we typically choose the best home loan, car loan, credit card and many other products that involve a "rate." However, in the case of credit card processing, the "rate" charged can be deceptive due to different pricing structures. Let's take a look at the three most common pricing structures:
- Flat Rate= The most popular service provider offering a flat rate is Square, a simplified, but typically more expensive, choice for many new businesses. The benefit of using Square is the flat rate of 2.75% per swipe and 3.5% + 0.15 for every manually-entered transaction, $99 for the Square Stand and $29 for the Square Reader. If your business uses Square, calculate your effective rate and contact us if it exceeds 2.5%.
- Tiered Pricing= Tiered pricing is the typical bait and switch scenario in the credit card processing industry. A business owner will usually be "sold" on the low "Qualified Rate" which can be as low as 1.5%. Unfortunately very few transactions meet the qualifications of the qualified rate and at the end of the month when the business owner averages all transactions that were charged a qualified rate, a mid-qualified rate and a non-qualified rate they can find that the effective rate is higher than 4%! Much higher than the average 2.5% paid by most of our valued clients. If you are on a Tiered Pricing structure, contact us for a free evaluation of your merchant services charges.
- Cost Plus / Interchange= We recommend the Interchange Plus, or Cost Plus, or Interchange as the preferred pricing structure. Interchange refers to the processing rates charged by the card brand i.e. Visa, MasterCard, Discover. The benefits of this pricing structure is the transparency and cost-effectiveness of paying a fixed margin plus the rates charged directly by the credit card brands.
Step 5. Look for Hidden Fees
While reviewing your statements keep an eye out for hidden fees, or items your business was charged for that are not for verifiable services. Some examples include:
- Annual Fees,
- PCI Compliance Fees,
- Regulatory Fees,
- Client Support Fees,
- High Mid-Qualifying and Non-Qualifying Fees,
- Membership or Supply Fee,
- Batch Header Fee,
- Daily Discount of Merchant Fee,
- Enhanced Bill-Back Merchant Statement, and
- as discussed in Step 2, Equipment Lease Fees.
If any of these fees are showing up on your monthly statements, or your agreement, contact us and we'll review your situation to reduce hidden fees, lower your costs and increase profits.