Understand Your Merchant Rates

Credit card merchant rates are the most confusing, aggravating expense that exists. Have you figured out the genius of the plan? There is a brilliant, foolproof method to the madness. The banking system has created a system of billing their customers that is so incredibly complicated and impossible to understand, that it is never challenged. After all, who is willing to spend the time and effort to initially comprehend the numerous charges, and then to monitor and check the accuracy each month? Almost no one. The problem with this approach is that the merchant costs are significant — and can be reduced — for your business on a monthly and even daily basis. You could be adding money to your wallet every month.

The itemizing of costs can be even more unclear if you are entering an agreement with a credit card merchant company that is allied with your management software company. Now there are even more costs to understand. Let’s start with the agreement: Many companies ask for a three, two or one-year contract. The rates are not fixed, however, so you commit yourself to low rates, and then every month they raise them on you — and you have signed a contract. Some management software companies use this confusion to charge customers for checking transactions, which is pure profit for them, and usually hidden in fine print.

Let’s start with monthly billing. Congress passed the Durbin amendment, which creates a billing rate for the major banks that issue credit cards in major metropolitan areas. This rate has a higher per transaction fee, but a lower percentage fee. If you are a business near a big city and your dues are $40 or more, this is good. If you are near a big city and your dues are $10 per month, your rates just went up. Debit cards are the lowest cost, however checking accounts are not only no cost, but they don’t expire, have a limit and aren’t impacted by address changes — hence they decline less often. Look at your average rate of payment versus credit card dollars received; it should be around 2.3 percent.

Now let’s look at retail merchant rates. “Card-present debit cards” are the lowest rate, which means you must physically swipe the card. Many companies are not allowing credit card charges of less than $10. Another way to reduce costs is to allow house charges and roll the total into one transaction, or to allow account payments of $25 to $100, and then deduct from that throughout the month. Allowing someone to charge using an account on file, is “card not present” and more expensive. Corporate credit cards that give people miles are not funded by the credit card company; they are funded by you, with significantly higher rates. American Express is also higher than Visa, Master Card or Discover.

Another way to save is to complete PCI compliance. First off, you need to team up with a management software company that is compliant themselves. This will protect you from the risk of your billing files being “hacked into” and your customers being very upset. The next step is to complete the application survey for PCI compliance. This will allow you to save $190 per year, every year.

One of the primary benefits of choosing a management software partner with excellent customer support and an easy-to-understand cost structure is being able to measure and monitor your costs. As the owner or manager of your company, you should be able to understand and measure all of your expenses. Whether you are interfacing directly with a merchant, or through your management software partner, it is imperative that you are able to receive a concise and easily understood explanation of all costs.

In this challenging economy, none of us can afford to be inattentive to rising costs. Take the time to understand and measure your merchant costs.

David Porter has been a sales consultant at Twin Oaks Software Development for many years. Previously he ran several businesses, including Suburban Athletic Club outside of Boston, which he co-owned and operated for 10 years. He can be reached at 860.829.6000 or dporter@tosd.com.