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How To Choose The Right Credit Card Processor & Add $$ To Your Profit Margin

How To Choose The Correct Credit Card Processor

Whether you are a restaurant, auto repair service, veterinarian, motel owner or knit sweaters and sell them at craft shows, you have to accept credit/debit cards to be a viable business today.

There are over 23 million small businesses in the US and on average about 60% of all gross revenue in generated by sales paid by plastic.

Accepting cards is one of the only expenses that is a direct hit on profit margins. Yet this cost of doing business that brings in 60% of your gross revenue is the least understood aspect of the day today operations in any business across the country.

Here I hope to educate you and clarify some of the nuances of the Electronic Card Processing industry that will help you make better, informed decisions about your card processing provider.

The Basics:

Visa, Master Card, Discover, and American Express are not and will never be processors of cards. They are card associations that back cards issued by financial institutions.

For you to accept cards, you MUST contract with a registered card processing company. Registered means that the processing company has registered and pays a fee to VISA, MasterCard, Discover, American Express to process their cards.

There are different types of processing companies. For simplification we will call them levels.

Level 1- Primary Processors

There are only about 6 major primary processors in the world. They are all registered with the major card associations and either directly or indirectly (explanation later) process all card transactions throughout the world.

As a business owner, this is where you want to be. The Primary Processors are First Data, Chase Paymentech, RBS Lynk, Heartland, Global Payment Systems, and Bank of America.

A Primary Processor is where you will generally find your lowest processing costs.

Level 2- Financial Intuitions

Many financial institutions (FI’s) provide “Merchant Services”, ie; card processing service.

Generally they create an Independent Sales Organization (ISO) or division of the F.I. to manage the revenue stream for the institution. In doing so, they will contract with a Primary Processor to do the actual work. They must also register with all the major card associations.

Most of the smaller more localized F.I.’s will contract with a Level 3 ISO to perform this service, and by doing so do not register with the card associations.

Both the F.I. and the ISO (if structured that way) will add a little to the fees to create a revenue stream for themselves.

Level 3- Independent Sales Organizations (ISO) Financial Institution Related or other.

As discussed in level 2, some ISO’s are ISO’s of a Financial Institution. But there are many independent companies that are ISO’s not affiliated with an Institution. When you do a general google search, these are most likely the processors that will pop up. These ISO’s must also register with the card associations and contract with a Primary Processor to do the actual work. Again the ISO will add a small part to the fee structure for themselves.

Level 4- Agents or Merchant Services Representatives

All three levels above operate with an Agent Sales Force – so your Agent is affiliated with one of the three levels above.

Agents may be a local business man, like you; a Road Warrior passing through towns and states that are usually high pressure “act now” type people; or Telemarketers, again high pressure trying to get you to send them your statement.

These are the people that most likely try to contact you daily. And once again the Agent adds a little more to the fees for their income.

Levels 2 and 3 Processors and the agents are all adding a small amounts to the primary fee which becomes a revenue source at each level – so if your Agent is a Level 4, you are paying 4 entities within your fee structure.

This is how Primary Processors “indirectly” are processing all transactions throughout the world.

When it comes to choosing a processor, the best scenario and the most cost effective option is to work with a local Agent linked directly to a Primary Processor.

If your processor is someone you randomly Googled, or who you gave in to on the phone, or who passed through town and talked you into switching — you are most likely with a level 2 or 3 processor and likely paying a higher fee structure with no local representation.

It’s Not About The Rate

The most frequently asked question when I am speaking to a business owner is, “what’s your rate?”

First of all, there is never just one rate. There is always – yes I said always – many different rates and fees you can be charged in any given timeframe. There is no one-rate-fits-all in Electronic Payments.

Another thing there is always – yes I said it again – ALWAYS a fee on every transaction.

Processors that tell you, there is no charge on debit cards … well, lets just say they are less than truthful. I will get into more depth on rate structure in my next post.

So getting back to, “What’s your rate?” – nobody ever asks me:

  • How much is your Annual Account fee?
  • How much is your monthly Statement fee?
  • How much is your monthly Service fee?
  • How much is your Gateway fee?
  • How much is your PCI Compliance fee?
  • How much is your Authorization fee?
  • How much is your monthly Minimum fee?
  • How much is your Batch fee?

Well, you get the idea. These are just a few of the multitude of stated and/or hidden fees that can come into play.

I could give you the lowest rate you will ever get, but if I double or triple one or a combination of several of the above, I’ll be making up the $$ there.

So again, its not about the rate!

How To Negotiate The Best Fee

A better way to negotiate with an Agent is to first know your “Net Effective Rate” (NER). This is your overall cost to accept cards.

To calculate your NER, just divide your total fees paid in one particular month by the total card sales volume for that month.

This percentage is the real and actual hit to your profit margins to accept cards. Take that percentage and convert it to dollars by multiply the percentage by your average ticket or sale.

So – why not just work off this percentage rate and dollar amount rather than the “transaction rate” which is just a portion of the total?

You should.  This calculation encompasses the whole picture, will keep the agent honest, and your negotiations more meaningful.

For example, if you find your Net Effective Rate is 3.25%, your approach with the agent should be, “if you can reduce my Net Effective Rate by 1% then we can proceed”.

Do you see what you just did? You changed the conversation into actually adding 1% back to your profit margins rather than discussing transaction rates.

If you know that 1% equals $X, the NER becomes a  much more tangible and real result for your negotiation efforts.

Refusing to discuss transaction rates will totally throw the agent off his/her game and most likely they will disengage because they don’t want to talk in these terms, as they can’t hide fees.

Definitely one way to get them off the phone and get them to stop calling you!

Local Agents

In summary, always work with a local agent who is affiliated with a Primary Processor, and who will work with you face to face. Always know your Net Effective Rate, and use this to negotiate with card processing companies.

If you need clarification or have any basic questions about credit card processing I can be reached at any time at 715-889-2409 or email rick@ignitepaymentstechnologies.com. I am here to help!


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