Editor's Note: This is "Part 4" in a four-part series on how to lower your debit and credit card costs and obtain more favorable terms and conditions. "Part 1: The Basics," "Part 2: Attitude," and “Part 3: Preparation” we published previously.
Before starting any negotiations, make sure you gather the needed information, as explained in Parts 1 and 3. Also, read my previous three-part series “Credit Card Processing: Interchange Plus Pricing Not Necessarily Fair” to help understand misleading tactics and pricing you are identify through the process below.
Also note that the following process does not apply to PayPal. I’ll discuss companies like PayPal — along with important industry changes — in next month’s article.
Be a Stickler
Be a stickler on verbiage. Test for correctness. Be assertive. Get it in writing. To be sure, you want interchange plus pricing for your business. However, as I explained in my "Interchange Plus" articles, above, many merchants who think they are on interchange plus pricing are being grossly overcharged while others are simply not receiving true interchange plus pricing.
All communications should state that your interchange plus pricing be based on “published interchange rates and actual pass-through fees charged by the card companies.” Do not allow the provider to state pricing to be based on “cost plus pricing,” or any other verbiage. The key here is that Visa and MasterCard publish the interchange rates and “cost” means different things to different providers.
Once you receive any pricing quote — say 0.10 percent + $0.10 over published interchange rates and actual pass-through fees charged by the card companies — ask the provider to verify what the interchange rates and pass-through fees would be for the key interchange and pass-through figures stated in "Part 3" to this series. This is to ensure bidders are not marking up the rates and fees.
Tell the provider that future rate and fee changes are only to be based on changes in published interchange rates and actual pass-through fees charged by the card companies. Tell them you will leave them if they add any future rates and fees other than these. Many merchants negotiate only to find additional fees being added over time. Note that every merchant agreement I’ve seen actually has caveats for increasing rates and fees beyond the card company changes. Nonetheless, state the expectations you have for the processing relationship.
Knowing Acceptable Rates and Fees
You need to know where you should be priced. I wish I could say, “Here is where you should be priced based on x, y, and z criteria.” For example, the 0.10 percent + $0.10 example above would be a good rate for some merchants and a horrible rate for others.
Stay away from any company that says otherwise. There are many websites where you can enter your volume and average ticket “for the guaranteed lowest rate.” If you have been reading my articles here over the last two years, you know why that doesn’t work especially for ecommerce merchants.
Determining Correct Pricing
How do you determine the correct pricing for your business? What you should not do is what many merchants often do. They obtain a savings proposal from a soliciting salesperson. Then, they ask their current processor to match it. That approach is both cruel and foolish. It is cruel because you are being disingenuous to the salesperson, who is probably paid on commission only, has a family to feed, and bills to pay. It’s foolish because the proposal may not be good one and your current provider may not match it.
You can speak to fellow merchants to understand their pricing. However, credit card pricing is complex and two merchants priced at 0.10 percent + $0.10 can have grossly different costs.
You can have an independent company conduct a merchant processing statement audit, or have your CPA conduct the audit, or a combination of both. There are good, independent companies available that will conduct an audit for free. However, be aware that there are also companies that may suggest they are independent but are actually selling card processing or are paid by a card provider. Before you hand over your statements to any company, be assertive and make sure you know its affiliations and how it makes money. Again, you can rely on your CPA for advice.
Finally, if you are currently on interchange plus pricing, you can estimate how much you think your provider earns by calculating its gross revenue, as shown in the next section.
Whichever method you choose, you need to know where you should be priced before you start negotiating.
Negotiating with Your Current Provider
Should you want to try to stay with your current provider, the audit or calculation information you obtain should tell you where any cost issues are. You simply need to compile this information, plus any of the other requirements covered in this series of articles, and communicate it to your provider. If you are currently on a tiered pricing plan and your provider will not change to interchange plus pricing, solicit bids. I explain this in the next section. If the provider will not fully meet the new interchange plus rates and fees, then calculate its gross revenue to determine if you want to remain a client of that company.
A good thing about interchange plus pricing is that the provider essentially tells you its gross revenue. Say your pricing should be 0.10 percent + $0.10 over published interchange rates and actual pass-through fees charged by the card companies. Your current provider says it will go down to 0.50 percent + $0.10. You can easily determine how much more your current provider wants. For example, say you are processing $1,000,000 and have 10,000 transactions per year. Also assume you have $300 per year in peripheral fees, such as PCI fees, statement fees, and annual fees. Your current provider is saying that it deserves, each year:
- (0.50% x $1,000,000) + ($0.10 x 10,000) + $300 = $6,300.
You are saying they deserve:
- (0.10% x $1,000,000) + ($0.10 x 10,000) + $300 = $2,300.
Is your provider worth the extra $4,000? If not, let it know. If it doesn’t come down to a reasonable cost, solicit other bids.
Again, the above rates and fees are examples only. Also, the gateway per-item fees may be included in the revenue calculations depending on how they are being charged. Lastly, understand that most providers actually pay a third party — i.e., acquirer/processor — a portion of all transaction and other fees.
Soliciting Blind Bids
First, make sure you understand the contractual information mentioned in "Part 1" so you are not charged a large early termination fee if you leave your current provider.
Second, choose a minimum of four providers to be in the bid process. There are websites that list providers.
Don’t supply your merchant statement, but instead provide the necessary information for the bid, as explained in "Part 3." Make sure you address all your contractual and funding requirements in your bid as stated in this series of articles.
Understand that there are hundreds of merchant account providers. There are far fewer actual processors. These include companies like First Data, Elavon, Global, Tsys, and Heartland. Each merchant account provider should state the primary acquirer/processor it is recommending for your company. There should be a minimum of three different acquirers/processors in the bid process.
Ask for a sample statement from each bidder, I prefer very detailed explanations for transparency.
After you receive each bid you can determine the gross revenue as shown above. At this point, you may now wish to send your current statement to each bidder. You should set up conference calls or meetings with each. Have each company explain any issues it sees in your current statement, how its service is superior, and any other issues you need covered. Listen to what each company has to say and grade its expertise and service level. I am not a proponent of “lowest cost wins.”
Cost is extremely important, but so are all the other aspects. You want the best value, not the lowest cost.
You’ll find that the methodology covered in this series of articles will enable you to gather the facts to make an intelligent decision on credit card processing. I haven't found any "saints" in the merchant account industry. However, some of the less acceptable providers and salespeople will weed themselves out of the process because they will not want to expose the information or provide the pricing plan you require.