Win The Race To Zero
Win The Race To Zero
Almost since its inception around 50 years ago, credit card processing has been viewed as a necessary evil. Time and time again business owners are lured by promises of saving money only to end up in the same or worse situation.
Insiders refer to this as “The race to zero” where each processor only slightly undercuts the previous processor rather than maximizing savings. What’s worse is they often hide additional costs in the fine print or hike up fees over time.
Education is the best remedy to keep businesses from overpaying on merchant services. Here are some
helpful tips:
Understanding your Effective Rate
The rate your processor often quotes you is not the “Effective Rate” but rather a per swipe rate. An attractive
rate is meaningless if there are additional costs and fees tacked on.
The effective rate is what you are paying with any and all additional costs factored in. It is easy to calculate yourself as follows:
- Take out a few processing statements and look for your TOTAL FEES.
- Next divide this number by your TOTAL SALES (before any fees removed)
That’s it! The number you calculated is your effective rate.
Example: $5,000 total fees / $100,000 total sales = 0.05 = 5% effective rate
What is a good effective rate?
Good effective rates vary from industry to industry based on SIC codes (Standard Industrial Classification).
Physically presenting a card for payment will have lower rates then typing in card numbers or paying online.
This is due to the elevated risk of chargebacks and cancellations.
A good rule of thumb for effective rates is 2.2% for card present and 3.2% for online and keyed entry.
Interchange vs Fees
The hard costs a processor has to pay to Visa, MasterCard, Discover and American Express is called
Interchange. There are around 400 different credit card types each with their own interchange rates. Think every card from a debit card to an Amex Black. This also includes all the bonus points, flier miles, cash back, etc.
A processor earns their living by adding fees on top of interchange.
Typically, you will see a percent and a per transaction fee. Example: 10 basis points and 10 cents per transaction. Note a basis point is one hundredth of one percent. In the example above the business pays
Interchange (hard cost) + 0.10% + $0.10.
Clear out the junk
Many processors tack on additional fees. Most of these are unneeded and simply go to line the processors pocket. If you are paying these, you absolutely have room to save money. Some items to look out for include:
- Monthly fee
- Yearly fee
- PCI fee
- PCI noncompliance
- Dual pricing fee
- Batch fee
- Monthly discount adjustment
- Review Trackers
- List Item
- Saferpayments
Dual Pricing aka Cash Discount
Passing the fees to customers has been gaining traction over the last few years. Business owners have grown
tired of paying the fees for their customers card benefits (flier miles, cash back, points, etc.). It is also an easy
way for a business to improve its bottom line. This is called Dual Pricing where two prices, cash and credit, are
posted like you often see at a gas station. It is legal in all 50 states but has some rules you need to adhere to.
1. Credit card prices must be posted
2. Either cash prices must also be posted or a notice of the discount for cash payers
– We recommend doing both!
3. The maximum allowed is 4% (3.5% is most commonly used)
4. Dual pricing works on ALL cards not just credit.
Surcharge is a dirty word
When done properly, Dual Pricing comes across as a benefit to the cash payer rather than a fee to the credit
card payer. Surcharge on the other hand often has the opposite effect. A surcharge is a fee added on to the
bill. Surcharge is legal in most states but also has rules you need to follow. Check your state rules before doing
surcharge though some common rules are:
1. Surcharge rate must be posted
2. Maximum allowed is 3%
3. You cannot surcharge debit cards
4. You cannot run a debit card as a credit card
Mind your store
Review your statements regularly. Check your effective rate and look for changes. Don’t just take your
processors word for it. Know the facts, shop around and…WIN THE RACE TO ZERO!
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