How to Lower Credit Card Processing Costs and Obtain Better Terms, Part 1: The Basics

Editor’s Note: Contributor Phil Hinke is a veteran of the credit card processing industry. He now consults with merchants to help lower their processing costs, believing the credit card industry is often unfair to them. His latest article, below, is “Part 1” of a four-part series on strategies for lowering processing costs and the related contractual terms and conditions with merchant account providers.

I have been writing articles for Practical Ecommerce for roughly 18 months. I have written these articles to educate ecommerce merchants on the complexity of the credit card processing industry, on the misleading tactics used by some in the industry, and on the important changes taking place in the industry.

Most importantly, I have written these articles to help merchants obtain fair processing costs, favorable terms and conditions, as well as recognize more reputable merchant account providers and salespeople. Keep in mind, the merchant account provider used by your bank — most banks are not the actual provider — or endorsed by your industry may not necessarily be what I consider to be reputable. It may simply be the provider paying the bank or industry group the most money or that did the best job of selling its services.

In this series of articles I will walk through key steps, mental attitude, and actions required in your negotiations with any merchant account provider. These items are critical whether you are renegotiating with your current provider or selecting a new one.

Note that I have written this series of articles specifically for ecommerce merchants. Merchants that also have physical locations can use these articles as a guide for obtaining best results at their physical businesses. However, there is information critical to brick-and-mortar business negotiations that will not be covered in these articles.

First, The Basics

You can find more details on this basic information in many of my prior articles. However, here is a brief outline, as a foundation for your negotiations.

  1. Beyond Visa and MasterCard. Understand that Visa and MasterCard have little to do with day-to-day processing. Think of them as you would Ford or GM. Ford and GM build and market their cars. However, you have to go to an auto dealership if you want to buy a car. Some auto dealerships are more reputable than others. Some salespeople are more caring than others.

    To obtain credit card processing you have to go to a merchant account provider. Some are more reputable than others and some salespeople are more knowledgeable and caring than others.

  2. Discover and American Express are different. Discover and American Express work a little differently than Visa and MasterCard. However, the vast majority of merchants use their Visa and MasterCard merchant account providers and salespersons to obtain Discover and American Express processing. The rates and fees you negotiate with your provider for Visa and MasterCard should apply for Discover as well. You should not have to pay any extra fees to accept Discover. American Express sets its rates and fees.
  3. All merchant account providers pay the same interchange rates. All providers pay the same wholesale cost — i.e., interchange rates and pass-through fees. If a salesperson tells you he or she gets better pricing through Visa or MasterCard because of size or whatever reason, it just isn’t so. I’ll go into detail on interchange rates and pass-through fees later in this series of articles. Note that the recent Visa and MasterCard legal settlement, should it go through, might impact individual interchange rates. I addressed this last month, in “Visa, MasterCard Settlement Not an Automatic Win for Merchants.”
  4. Follow the money. The money ecommerce merchants pay for card processing generally goes to four players.
    • Issuing banks. The bank that issued the credit card used by your customer generally receives the majority of the processing cost that you pay. This is not necessarily the case with debit cards since the Durbin Amendment interchange reduction went into effect in October 2011. What the issuing bank receives is called “interchange.” There are hundreds of interchange rates. The lowest is for regulated debit cards — those from large banks — with a maximum interchange of 0.05% + $0.22 per transaction. Commercial cards and transactions that were not processed properly have the highest interchange rates. These rates generally range from 2.2% to 3.25% + $0.10 per transaction.
    • Card Associations: Visa, MasterCard, Discover, American Express. Merchants generally lash out at these companies for the cost of processing. However, Visa, MasterCard, Discover, and American Express generally receive only about 5 to 10 percent of the total amount a merchant pays for credit card processing. They receive this through dues and assessments, access fees, and other miscellaneous fees. I’ll describe these fees in more detail later in this series. Combined, these fees are called “pass-through” fees.
    • Gateway company. If a separate gateway company — such as Authorize.Net — is used, there can be both a monthly and per-transaction fee depending on the number of the transactions. However, many providers charge a per-transaction fee for their own proprietary gateways.
    • Merchant account provider. The merchant account provider is the company selling the processing services. This is where many merchants overpay, even when it comes to gateway fees. In fact, some merchants actually pay a higher percentage of the total processing cost to their merchant account providers than they do to the issuing banks, card companies, and gateway companies combined. Moreover, many merchants have contracts with merchant account providers that contain unfavorable — or punitive — terms and conditions.

The focus of this series of articles will be on negotiating with the merchant account providers to obtain the best processing value, which includes not only costs, but also terms and conditions, funding cycle, provider expertise, quality of service, and other factors.

Gathering Contract Termination Details

Before you go further with any negotiations, you need to know the following four items about your current contract.

  1. The date your current merchant agreement expires.
  2. How far in advance you must notify your provider that you are cancelling your service. Most providers require notification 30 to 90 days prior to the expiration date.
  3. The acceptable method for cancelling the agreement. Many providers require a written and signed cancellation notice.
  4. Your penalty for early termination. Most providers charge $0 to $400 for early termination. However, some have liquidated damages clauses that can cost thousands. The highest early termination penalty I am aware of was more than a half million dollars. Every merchant should understand the early termination clause before signing any merchant agreement.

Call customer service if you do not know the above information. However, asking for this information is a red flag to your provider that you may be leaving. It may offer to do its own rate review, lower your rate, or promise to match any other proposal. You are not ready to accept any of these offers at that point. But should your provider offer any of these, it may indicate that you are currently overpaying.

In “Part 2: Attitude,” the next installment to this series, I will address preparations for negotiations.


Phil Hinke
Phil Hinke
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