The Hidden Costs of Credit Card Processing
By Joe Palko on Sun (1/27/08) in E-Commerce Operations | 0 Comments
If you’re an e-commerce merchant, a credit card processor—usually but not always a bank—is handling your credit card business. There is also a gateway acting as an information conduit to your processor. It is critical for modern businesses to work with credit card processors and the gateways which transmit our transactions back and forth at hyper-speed. But remember, banks are businesses too. So are gateways. That means they’re in competition with other companies offering similar services. Use that basic business tenet to your advantage and the savings you negotiate around your credit card fees can add up to real money over time.
Let’s Make a Deal If you’re just starting out, don’t simply take the first offer you get. Shop around. If you’re in business and you want to stay with your current processor, fine. But get a competitive bid from another company and see if your people can match it. Prepare to be pleasantly surprised!
Know the Territory
Learn the kinds of margins your bank has to manage. Find out what the “Interchange Fees†are. Interchange is the “cost†structure in which all fees are based. Interchange fees are rates charged by Visa and Mastercard; and they are published for you to see. By comparing what your bank charges you to the published fees, a merchant can see how much money the processor is making on your account. This gives you more room to negotiate. Unfortunately, the processor makes substantially less money than the actual card “issuing†banks, but that doesn’t mean that there isn’t room for you to save money. Keep in mind that the Interchange rates set by Visa and Mastercard are non-negotiable, only the “markup†between the published rates and what you are actually charged are.
Examine Your Fees
Remember, these are banks, so think “free checking.†There are many areas where the seemingly monolithic lender can be flexible if you know where to look.
Statement fees and supplies charges— avoid them when possible. These fees are virtually pure profit for the credit card processor. Supplies charges include things like signage, door stickers, register tapes and the like. And you need them, why? Unless you have a bricks-and-mortar store, they don’t even apply for e-business. Get them waived. The statement fee is what the bank charges you—for sending you your own bill! Sadly, it does cost them something, but pay attention! It usually costs vastly less than the fee they want to charge you.
Setup fees—Fight them. If the bank wants your business badly enough they’ll waive them.
Early cancellation fees— these generally exist in the processing bank’s contract. Fight to get these waived.
Chargeback fees— These are very negotiable. A chargeback is when a consumer says they didn’t authorize the charge to their card. The chargeback fee is the administrative “cost†for the investigation and research that the processing bank must do. Negotiate this fee. Standard chargeback fees are around $35 per incident, but you can negotiate a much better rate.
Per-transaction fees—Any little bit helps. This is the fee on each sale you ring through to your processor. Study the interchange rates. Any reduction here is multiplied times your number of sales. Any increment can be a genuine savings.
The Payment Gateway
A payment gateway is the software application for e-commerce merchants and mail order/telephone merchants that authorizes and settles the payment transaction data. In traditional retail, it is the network that transmits and encrypts the data between the merchant and the processing banks. Yahoo! provides this service as part of its e-commerce package at no extra charge. Many other platforms do not include this and so again, you have an opportunity for real savings if you negotiate. Most gateways have transaction costs involved. Negotiate these rates, or use a system like “Yahoo! Small Business Merchant Solutions†where the gateway is included at no extra charge.
Summing Up
The bad news is that the processor is only an intermediary and, unlike most banks, work at a very small profit margin. Still, any cut in your fees, especially something high-volume like a per-transaction fee, can mean a real savings over thousands of transactions. The key to remember is, you have leverage because they have competition. Watch the numbers and shop around.
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