Payment Processing

Most entrepreneurs are not experts in payment processing. But, everyone knows that there is a fee attached to every credit and debit card you run at your business.  For some business owners, paying a processing fee may seem ridiculous.  Some business owners have said that they simply will only accept cash because then they can keep what they would have paid in fees for themselves.  Yes, it feels almost like processing fees are giving free money to a financial institution when all they do is sit back and watch the money flow.

But the truth is it likely will cost you more if you only accept cash.

To know what side of the equation you are on, it may be helpful to better understand the basics of payment processing.  Knowing the basics will help you better make sound business decisions regarding how you accept payments.  There are 7 key payment processing basics that you should keep in mind.

1. Payment Acceptance Always Has a Cost – Even Cash
   As the saying goes, nothing is free in this life.  This couldn’t be more true when accepting payments at your business.   Other than the cost or your time for either you or your employees to accept and close out a transaction, most business owners will think that cash is free, whereas the percent you pay to a payment processor can cost as much as 3% or 4%.  This bad thinking.  Worse yet because many consumers often don’t carry cash anymore, so you could have the cost of lost business if you don’t accept cards.  To truly understand the cost of accepting payments you have to include the total cost.  This includes the time it takes to count cash, put deposit entries into your accounting system, and taking the money to the bank for deposit.  With cards, these 3 steps can be automatic, not to mention incremental revenue due to card convenience.  One popular merchant in the San Francisco bay area stopped accepting cash because they calculated their true cost of cash was exceeding 5% of the transaction, when the total cost of handling the money was included.  It turns out cards can be less cost to the business than cash if you run the math.
2. Banking vs. Payment Processing
   Many merchants didn’t know that there is a difference between banking and a payment processing.  Often merchants go to their bank and ask how they can accept credit cards.  Of course a bank will help you, but you do need to keep in mind that their primary business is banking, and payment processing is one of many, many financial products they may sell.  As such, they may not give you the best service at the best price, that payment processing is not their sole focus.  It would be like going to your tax accountant and asking them for accounting services because they happen to know how to work with numbers; they may be able to help you, but accounting may not be their primary business expertise.
3. Selecting a Payment Processor
   There are many, many payment processors in the USA.  Every bank will offer a payment processing service for your business, but there are also companies that just focus on payment processing, and they can often offer you better services as lower cost.  So what is the range of services that a payment processor can offer?  Here is a short list that you can use to compare payment processors that you may be considering:
   1. Broad range of card brands with mobile payments
   2. Negotiated interchange pricing
   3. Option of standalone terminals and integrated services with your POS software
   4. 24/7 customer service help over the phone
   5. High availability (like your phone service you want it up all the time)
   6. Online reporting and the ability to enter your deposits into your accounting system
   7. Value ads like gift cards, loyalty, and visibility to your customer purchase data
   8. Next day deposits
4. Card Brand Fees
   Yes, there are fees associated with accepting payment cards, but they can vary depending on the card brands.  The three popular card brands in the USA are Visa, Master Card, and American Express.  There is also a Discover card brand but it is not as popular, though it should be noted that Discover does more business outside of the USA under other brand names than they do in the USA.  If you are a consumer business you should have Visa and Master Card.  If your business is includes business consumers then American Express is a must too.  Fees for each of these brands may not be the same, as typically American Express has a higher fee than Visa or Master Card.
5. Card Present/Non-present Fees
   You may not have known this but there is a price difference of up to ½% more in fees if you run a card payment without the card present.  This would be over-the-phone or web-based card transactions.  Keep this in mind as you think about how you are running your business.
6. Card Debit Fees
   Debit cards in the USA are not as frequently used as credit cards, as many consumers and business prefer to preserve their cash flow with their bank account, as well as get purchase protection services with their credit cards.  However, accepting a debit card means that you don’t have to pay the high fees as compared to credit cards.  There is still a fee, but it can be as low as under 1% because your processor doesn’t have to pay the card brand and interchange fees associated with credit cards.  If you intend to accept debit cards, you will need to set it up with your payment processor in a configuration that includes a PIN pad device, unless you have a standalone payment terminal.  Also, be careful when someone presents a debit card.  They often have a Visa or Master Card option on the debit card, and if you process the transaction through the Visa or Master Card network you will pay credit card fees instead of debit card fees; about a 2% difference.
7. Payment Processor Fees
   It is important to know some facts about payment processor fees when you are negotiating your fee rate.  Payment processors collect your processor fee, but they have to cover their costs to other financial institutions because they can’t do all the work needed to transfer money from one bank account to another.  As a result, often the margin for a payment processor is under ½% of the transaction.  This may be an oversimplification, but there are 2 things to know.  1) Payment processors have to pay what is called, Interchange fees, which is paid to the banks that move money.  

There is also a Card Brand fee which is paid to the card brand, such as Visa, to manage the line of credit account for the consumer.  

Combined, these two fees can be nearly 2% of the transaction, leaving the payment processor with the smaller portion of the fee collected to act as your broker on behalf of the banks, card brands, and in some cases, the software integration with your POS application.  2) Sometimes your payment processor will offer you a flat fee for all transactions, but you should know that they may be taking a larger margin on some of the brands as their cost to the brand will vary.  You can negotiate your fees with your payment processor either by brand or as a flat fee.  Of course, the larger the volume of business you do the more negotiating power you have.  The range of negotiation can be mid-2% with large volumes, and 3%+ for low volumes.