Photo: Flickr Andres Rueda
Quite simply, there is a cost to transacting payments on big payment networks (Visa, MC, American Express, etc.).
Over time, these costs have increased both in price and complexity, resulting in the addition of many middle men—there are around 1,000 credit card processors and resellers registered with Visa—and extra fees. Business owners are left trying to make sense out of industry jargon and fine print contracts when all they want to do is get paid.
As a result, many (if not most) are overpaying for credit card processing.
That’s exactly what happened to me when I was starting my last ecommerce business, TSS-Radio. I spent weeks poring over contracts, talking to salespeople and compiling a spreadsheet comparing the different options for credit card processing. Finally I had to move on to another part of the business and just chose one.
Big mistake. When I audited our statements a year later, I found we had overpaid by $40,000. That’s money we could really have used elsewhere in our fledgling business. Furthermore, I couldn’t even complain to the guy who originally sold me the service because he had since left for another credit card processor.
To ensure you are getting a fair shake on your payments, I recommend the following:
Spend at least a few hours educating yourself. Payments is the largest financial services expense for most businesses, so the payoff from that time investment is usually pretty high.
1. Get multiple bids/offers and ensure the bids are quotes on an apples-to-apples basis. Has every fee been outlined? Is it a tiered bid? A flat percentage bid? An interchange plus bid?
2. Carefully audit your first few statements from the chosen provider. Find all the fees on your statement (they might be spread out in several places) and divide them into your total processing volume to calculate your overall rate.
3. Never sign a contract with cancellation fees. You should be able to easily get out of a contract with a credit card processor if you’re unhappy.
4. For card present merchants, never rent or lease equipment. Watch out for “free terminal” offers. Processors more than make up for the cost of the terminal by charging higher rates that will cost you in the long run.
That’s it. Good luck. Payments are evolving very quickly after many years of little innovation. The new competitors and business models may bring much-needed competition to the existing market structure and lower costs and increase flexibility for business owners.
In the meantime, be careful. A bad credit card processing deal has the potential to suck serious profitability out of your business.
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