License to Charge

Learn how credit cards can take your business out of the past and into the future.

Cash: It’s So Twentieth Century


While it looks like we might not have those flying cars that we were supposed to be driving to work in by 2010, it’s quite clear that the kids of today will likely consider paper money a curious oddity by the time they reach middle age. The multi-billion dollar Internet commerce industries run almost exclusively on credit and debit cards, and it’s not uncommon to see customers at convenience stores make the smallest of purchases with their cards. The future is here. With our quick lesson in credit card processing, you’ll be ready for the future yourself, and the good news is that you won’t even need a rocket.

Work with the Right Processor


There is no doubt that today’s payment processing industry is a highly competitive market. All processing companies have their own way of presenting fees and transaction charges, so it’s often difficult to make an apples-to-apples comparison among credit card companies. Above all, it’s important to make sure that any processor you work with has a good reputation and is capable of handling your needs. When you do choose a processor, be sure to request a hard copy of the contract before giving them any personal information. Double-check that all fees listed in the contract are the same as those that were verbally quoted. If there’s ever a dispute, issues will be decided on the basis of the printed contract, no matter what the salesperson may have told you.

Finding a good rate is all about tailoring a program to fit your business’ needs and then negotiating the best possible deal. Of course, getting the best possible rate shouldn’t be the only consideration when choosing the right processor; service and speed are often an even more important factor. For instance, many small businesses let their bank handle their credit card processing. While this may seem convenient, it often comes at the price of inferior service. Instead, you should look for larger organizations that have the staff available to offer support when you need it.

Imagine this scenario: it’s after 6:00 p.m. and there’s a line of customers out your door, and suddenly your credit card terminal malfunctions. You probably don’t have the time to run to the drive-through window at your bank and hope that there’s someone around who knows how to fix your terminal. Try calling your contact a couple of times to see if your call gets answered immediately or if you get a voice mail system. Finding a trusted and dependable processor will help you avoid such headaches.

Credit Card Rates and Fees


When you accept a Visa or MasterCard, you pay what is called a discount rate to process the transaction. Your monthly statement will also contain a variety of fees depending on how your transactions are run and what kind of pricing program your processing company has. Again, be sure to look at the printed contract to learn what all of the monthly fixed fees will be.
The actual discount rate you pay is a percentage of the dollar amount of the pointof- sale transaction. The discount rate varies, but it’s always based on the business type, the
method of how the transaction is taken (e.g., swiped, keyed, Internet) and other qualifying factors. This fee is split between three players handling the transaction: the card issuer, the card association, and your payment processor.

Credit card rates are typically broken into two categories. The lowest rates are typically applied to card present transactions (in which the card is physically swiped through a credit card terminal). All transactions in which a credit card is not physically swiped—including Internet transactions, phone transactions, or credit card numbers keyed through a terminal—fall into the card not present category. This type of transaction is often referred to as MOTO (mail order/telephone order).

Payment processors can be as diverse in pricing as hair salons, and a haircut can cost anywhere from $10 to $400. The trick is finding a happy medium. Because of this, it’s important to ask the right questions when deciding on a processor. Find out what the different discount rates and fees for different types of charges are (Internet, in-person, telephone, mail, etc.) and ask what the fixed fees related to the account will be, such as yearly, set-up, application, monthly minimum, statement, support, cancellation, discount, per-transaction, gateway and card reject fees.
These fees can typically add up to $25 to $75 per month even if you do not take a single credit card. This is what I refer to as the “Health Club Effect”: if you pay a monthly gym membership and take a month off, you are still expected to pay your monthly dues because the gym remained open in case you decided to visit. Once quoted a rate, the best way to determine what you’re actually going to pay is find out exactly what your average customer spends and use that amount to calculate which rate will result in your lowest cost. Estimate your total sales for a given month and multiply that number by the quoted rate, and then add your monthly fixed fees to estimate your total expense. For example, an average small business makes $5,000 a month from credit card sales, so $5,000 X 2%=$100 plus $25 quoted in fixed fees would be $125 dollars a month. Another processor may quote 1.5% for the $5,000 in credit card sales, but may charge $75 in fixed fees, so $5,000 X 1.5%=$75 plus $75 in fixed fees = $150. The first off er had a higher rate, but was a better value overall.

Buy or Lease Dilemma


When it’s time to purchase a credit card terminal, many business owners face the dilemma of choosing between buying or leasing. Even though making a small monthly lease payment may not be a burden, merchants often end up paying two to three times the upfront cost of purchasing the same equipment over the course of the lease term. With that said, purchasing credit card equipment outright isn’t necessarily the best solution. For some business owners, the money spent upfront for a terminal may be better allocated to different areas of the business. For a new business just getting off the ground, leasing is often the preferred option. The actual lease pricing is heavily dependent on your personal credit. You should also be aware that you can deduct the interest portion of any lease as a business expense on your taxes. For many customers, the decision to enter a business often hinges on seeing the bright credit and debit card stickers placed on the store’s window. Once seldom-used conveniences, these little plastic rectangles are slowly becoming the definitive payment method of the future. We were once reminded not to leave our homes without our cards; today, we might just as well be reminded to bring our cash.

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