How to Lower Credit Card Processing Costs and Obtain Better Terms, Part 3: Preparation

This is “Part 3” 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” and “Part 2: Attitude” we published previously.

Note that this series is specific to ecommerce merchants. It can be used as a general guide by brick-and-mortar businesses. But there is information critical to those businesses that is not covered in this series.

You should be prepared before you negotiate with your current provider — or another provider — about your credit card processing services. Those providers will definitely be ready to sell you on their processing services, rates, and fees. To be prepared, understand the following information.

Know Your Contractual and Service Needs

Before starting any negotiations, understand your key contractual and service needs.

  • Contract length. I prefer a month-to-month contract with no early termination fees. A two-to-three year contract may be acceptable as long as there is no early termination fee. At a minimum, never sign a contract that has (a) more than a $300 early termination fee, and (b) a liquated damages clause for early termination. As a rule, the longer the contract length and higher the termination fee, the more concerned you should be about the provider.

  • Monthly discounting. Most providers debit the merchant’s account at the end of the month for their processing fees. That is called “Monthly discounting.” Most merchants prefer monthly discounting for easier reconciliation. However, some providers will automatically subtract their fees each day unless you specify monthly discounting. Moreover, some providers charge an additional fee for monthly discounting. If you desire monthly discounting, it should not cost extra.

  • Funding cycle. Know your funding cycle and settlement-time needs — especially if you want next day funding. Most providers offer funding in two business days. That means sales settled today are in your checking account in two business days. Some providers soliciting your business may offer next-day funding but not clearly state the daily settlement time to obtain it. Providers have different settlement times that can range from noon to midnight. Know the provider’s settlement time requirements or you may end up paying for next-day funding and receive two-day funding.

  • Refund policy. Many merchants think they have a great rate but don’t understand the importance of how refunds are handled in the contract. These merchants may be paying hundreds or even thousands of dollars each year for unnecessary processing fees on refunded sales. Understand that when a merchant credits a customer, most of the Visa and MasterCard interchange fee is refunded to the provider. Interchange can easily be up to 90 percent of the actual processing fee. Some providers properly return the refunded interchange to the merchant and only charge a transaction fee to route the refund. Some keep the interchange and charge a transaction fee. And some not only keep the interchange but also charge the merchant an additional processing fee and transaction fee on the refund. In the first scenario — i.e. return the refunded interchange to the merchant and only charge a transaction fee to route the refund — the merchant would only pay two transaction fees, say 20 cents. Require this scenario so that any returned interchange is passed back to you.

  • Gateway, provider, and shopping cart compatibility. Open gateways such as Authorize.Net work with the vast majority of providers and shopping carts. However, if you are currently using your provider’s proprietary gateway you may be limited to processing with it only. Both open and proprietary gateways have their advantages. However, know your gateway limitations. I also recommend merchants always renegotiate their processing before switching to a proprietary gateway as merchants may lose some bargaining power after they switch.

Know Key Rates and Fees

There are many rates and fees — and hundreds of interchange rates — in the card processing industry. I don’t expect merchants to understand all them. However, here are a few key rates and fees to use when negotiating. In my experience, if the processor is honest on these rates and fees, there is a very good chance it is being honest with all the others.

Key interchange rates:

  • Regulated debit interchange rate: 0.05% + $0.22 (maximum);
  • Visa Rewards 2 credit card: 1.95% + $0.10;
  • MasterCard Corporate data rate 1 – business: 2.65% + $0.10.

Key pass-through fees:

  • Visa dues and assessments: 0.11%;
  • Visa int’l service fee: 0.40%;
  • Visa APF – debit card: $0.0155 per-item;
  • Visa APF – credit card: $0.0195 per-item.

Another key pass-through fee is the new Visa “Fixed Acquirer Network Fee,” or “FANF,” which is based on sales volume. The fee will vary based on the amount of credit card sales. I addressed it in detail, at “Credit Card Providers Increasing Rates and Fees,” my May 2012 article.

Don’t Give Your Merchant Statement to a Provider

Below is information I sent to several providers in a quote request to bid on my client’s processing business. This is all the information I sent — and all they needed — for this small merchant.

Sample description to a credit card provider.

  • “My client dissolved the previous partnership in February and reformed as an LLC.”
  • “Ecommerce merchant.”
  • “Product is swimwear and other related water activity products.”
  • “Under the newly-formed LLC, business has doubled in the last few months and is growing at 5 to 10 percent per month. The current monthly volume for V/MC/D is $9,000. However, that will grow to $25,000 per month over the next year.”
  • “Average ticket is $65.”
  • “Gateway: Currently uses Skipjack gateway but will be changing to Authorize.Net.”
  • “Percentage retrievals/chargebacks less than 1 percent.”
  • “Percentage returns less than 3 percent.”
  • “American Express: Not currently with existing provider, but would change.”

In short, salespeople and providers do not need to see your statement. It’s none of their business who you are currently processing with, what rate plan you on, or what you are currently paying. Their business is to provide and fair and honest quote for your processing. To do so, they need to understand your processing risk, which is determined by knowing your years in business, industry, products, chargebacks, and returns. They need to know your business volume and average sale amount, and they need to know your payment gateway. You need to provide this information — not your merchant statement.


  1. Be prepared.
  2. Know your contractual and service needs.
  3. Know your key rates and fees.
  4. Provide salespeople key information, not your statement.

Next installment: “Part 4: Negotiations.”

Phil Hinke
Phil Hinke
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