Business Credit Cards

5 Steps for Startups to Lower Their Credit Card Processing Fees

As transactions continue to shift away from cash and checks and to credit and debit cards, any startup that wants to appeal to a broader audience has to accept credit cards and their processing fees.

Lower Your Credit Card Processing Fees

Increasingly, accepting credit card payments is a necessity for startup businesses. In fact, 77% of all US and Canadian transactions are now using some form of plastic (credit, debit or gift cards), and that figure is expected to grow another 4% by 2017 according to the US Federal Reserve.

If you’re not careful, however, you and your startup business may end up paying a full 1-2% more per transaction than you need to. And given that many startups operate on already thin margins, that may be the difference between profitability and ongoing losses.

To help ensure that your startup is getting the best pricing it can, use these five simple steps when shopping for credit card processing:

Pitch a Processor on Your Startup’s Growth

To accept credit cards at your business you’ll need an account with a credit card processor. Credit card processors provide you with the equipment and technology that enables you to accept and process a card. They make money by marking up each transaction over what they have to pay to Visa, Mastercard, etc. Consequently, the more transactions you have, the higher their overall potential profit. This means that the more transactions a business does, the better per transaction pricing it typically receives. That’s because the processor is willing to take a smaller profit on each individual transaction, because they know they’ll make it up in volume.

As a startup, you typically cannot offer immediate significant volume because you’re still growing your customer base. What you can do, however, is pitch the processor on your future volume. Explain to them that while you’re only doing a few thousand dollars a month in business today, that you expect to be doing 10x that in a year. Thus, they should give you aggressive pricing today, in order to lock in your business so that when you are doing much higher volume they’re able to keep you as a client.

Prioritize Swipe Transactions

Processors charge more to merchants who have a higher risk of chargebacks because they bear the risk for those chargebacks. For example, if you accept a credit card, and the customer disputes it, and you’ve since gone out of business, the Processor is responsible for paying the customer back.

Typically, a processor doesn’t know a ton about your startup individually, so they use some shorthand rules for assessing risk (and setting the correlating prices). The most important factor in assessing risk is what percentage of your cards do you physically swipe as opposed to accept over the phone, or online. Physically swiped cards have a much lower fraud rate, so if you can get more of your customers to pay you in person, you’ll end up with a significantly lower overall rate.

Provide Security Information and Take Signatures

In addition to swiping as many transactions as possible, you can also lower the risk of a chargeback or fraudulent charge from the Processor’s perspective by providing extra security information when you do accept a payment over the phone or online. For example, by obtaining the billing zip code and security code on the back of the card, you better assure the processor that the card being entered is the actual cardholder’s. And by having the customer sign their receipt you better protect yourself and the processor from chargebacks. This translates into a lower rate being charged on that transaction.

Converting Prices to an Overall Total Cost Before Comparing

One of the best ways for any business, including startups, to get better pricing is to comparison shop. But when you decide to shop around for better pricing, you’ll find that each processor uses slightly different pricing structures (e.g. Tiered, Interchange Plus, ERR, Flat, and Monthly Membership). This makes comparing pricing impossible to do without first converting all of the prices to a consistent overall number so that you can compare the pricing apples to apples. Once you do convert all prices to a consistent number, however, you’ll be able to see who is actually offering a better deal. The best way to do this, is to total up all of the fees, in whatever form they may be assessed for a give month, to obtain your Total Cost to Process.

Negotiate with Credit Card Processors

Credit card processors have fixed costs that they have to pay to Visa, Mastercard, etc per transaction. But beyond that, there isn’t much by way of costs except for their sales and marketing budget. Consequently, they typically have significant flexibility on pricing. (These fixed costs are commonly called the Interchange Price). So, you shouldn’t hesitate to push for pricing concessions that are particularly attractive for startups. For example, removing a monthly minimum fee (a fee which applies even if you’re not processing that month) is a good thing for small startups. And asking for either free equipment or no termination fee (you usually can’t get both) is another concession that you can typically obtain.

As transactions continue to shift away from cash and checks and to credit and debit cards, any startup that wants to appeal to a broad audience has to accept credit cards. By using the steps outlined above, however, you should be able to obtain an overall cost to process below 3% (less than 3 cents of every dollar go to credit card processing costs).

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