Friday COACHWORX Business Tip: Getting a grip on credit card processing costs

A typical 12-volt retailer earns between $500,000 and $1,000,000 in revenues each year and might post a margin of 20% if they are lucky. That’s a lot of economic activity, and a lot of fees paid to support it.

For small businesses, credit card processing is a necessary evil, as cards are used in around 50% of all transactions – and because of points programs, that number is increasing every year – and with it the fees and percentages charged for processing transactions add up to a huge amount of money.

For example, if you opt for a flat fee service like Freshbooks or Square, you’re probably paying just under 3% of your revenues on every transaction. If you handle $300K in credit card transactions a year that’s $9,000 in fees – not exactly chump change. If you’re closer to $500K then it goes up to $15,000.

But while credit card processing is a necessary evil, there are things you can do to reduce your costs.

1. Don’t lease your credit card processing equipment. Typically processors will either sell or lease your equipment, and a lot of retailers will choose to lease to reduce their up-front costs and to ensure they always have the latest equipment. However, most equipment isn’t updated that often, or that dramatically, and you’ll end up paying far more for the lease over time. As well, some companies may offer you the credit card processing equipment for free by signing up for their services, in which case it’s a good time to remember that nothing is free – you may not be paying for the processor directly, but you’ll definitely be paying another way.

2. Don’t just process everything through your bank because you could be adding middlemen and fees. It is easier for a lot of reasons, but honestly your bank probably isn’t the one doing the processing – they’re contracting the processing work out to other merchant banks that also expect to get paid. Compare all of your options and all of the fee structures before deciding.

If you do go through your bank after evaluating the alternatives it should be because you’ve negotiated a fair rate based on your actual volume of sales. In that case, don’t lock yourself into a long-term contract unless you’re completely satisfied.

You also need to know what exactly every fee is for. One example might relate to debit card processing fees, which are really only 0.05% – but you may be charged up to 1.7%. Be prepared to negotiate everything. There are some base fees that are universal and non-negotiable, but there’s some wiggle room for fees charged on top of that.

3. Talk to an accountant. Most regions will let you write off some of your fees and processing costs. It varies from region to region, so you’ll need a local professional to help you understand what your options are at tax time. It’s one of those costs that a lot of small business owners will miss.

4. Try to avoid tiered pricing. A few studies have shown that small retailers who opt for tiers can sometimes end up paying more – unless you’re a high-volume retailer that can actually benefit from bulk processing rates.

5. Mind your processing settings. Some older systems will “batch” process credit card transactions (different than approving them) after every single transaction, but most businesses can get by processing at the end of the day. Usually, the batch processing fee is quite low, but not always and they do add up over time.

This is one good reason to review every fee and charge on your credit card processing statement – or statements if you’re charged separately by your POS service and bank.

6. Avoid paying gateway fees. One of the drawbacks of virtual POS systems is that you might be charged a monthly fee and transaction fees to process credit cards over the Internet instead of using your terminal. Again, it pays to know what every line item is on your bill and whether you really need it.

7. Track your costs. Some fees and costs do rise over time without much explanation. For example, if you sign on for a promotional rate with a new processor that rate might expire at some point, or other costs might kick in. Chances are that it was in the small print that nobody ever reads. For example, you might have to commit to certain revenue requirements to be charged a certain rate, which could rise if you ever have a slow month.

8. Avoiding manually keying in cards as much as possible. It’s unavoidable sometimes and it is sometimes more convenient to get paid over the phone, but fees per transaction are generally higher for this kind of transaction. If you trust the client, wait until the pick up their vehicle to get paid. Again, the fees may seem small – like $10 on $1,000 – but they do add up over time.

Fees are so high sometimes that a lot of retailers are tempted to give discounts for paying cash but often those discounts are greater than you would pay for credit card rates – and fewer people are carrying cash around these days than ever before. Encouraging customers to pay by debit card is good, but for large purchases your customers are really going to want their points.

The reality is that credit cards are unavoidable, as well as all the costs and fees that go with processing those transactions. You can, however, take steps to ensure you’re only paying for the services you use and are signed up for the right plan for your business.

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