When you’re strapped for cash in the startup phase of your business, you look for cost-cutting opportunities wherever you can. Credit card processing fees are a great place to start! Check out these 5 tips for lowering your rates.
Note: Industry terms ahead! This article assumes basic knowledge of credit card processing fees and how credit card processing works. If you need more background information, please read these blogs before proceeding!
1. Choose the Right Merchant Services Provider for Your Startup
If you are reading this, it is likely that you have already chosen a merchant services provider for your startup. Hang in there, we have some helpful information for you further down the article!
For those of you who have not yet made a decision, it is important for you to know that the best way to save money on credit card processing fees is to choose the right merchant services provider for your startup from the get-go! Different merchant service providers offer different pricing models that work better for different sales volumes, which we will talk about in a moment. They also have different ethical standards and customer service philosophies that could either mean your startup’s success or get you in a bind later on if you choose poorly.
In general, choose the merchant service provider who offers the most transparent pricing model and the most committed customer service. At Cornerstone, we believe that local merchant service providers have a unique value proposition that aligns with most startup founders. Local providers promote transparency and customer service because they have a brick-and-mortar location in your business community and can’t hide behind miles of telephone lines.
2. Compare Industry Pricing Models
The pricing model that your merchant service provider uses will affect your credit card processing fees more than anything else. In the credit card processing industry, there are 4 most common pricing models used. Some are transparent, while some allow for providers to hide considerable markup fees that they take for themselves over and above industry prices. In addition, different models work better for different sales volumes. Here is a quick synopsis:
- Interchange-Plus – The most transparent model in the industry, the interchange-plus pricing model does not allow for undisclosed fees, but instead keeps provider markup fees separate from industry fees where you can see them. Also, the provider markup fee is a percentage of transaction that does not change based on the type of transaction performed. This pricing model works well for most startups.
- Subscription – Also a transparent model that keeps provider markup fees separate, subscription pricing charges a flat monthly rate in addition to a per-transaction fee and is best for high sales volumes.
- Tiered – An extremely unethical and non-transparent model, tiered pricing allows providers to hide markup fees in their rates, categorizing startups into “qualified,” “mid-qualified,” and “non-qualified” rate groups at their discretion. These categories are often based on the types of transactions performed.
- Flat-Rate – Also a non-transparent model, flat-rate pricing can still be beneficial for some low sales volume startups. It does not include a monthly fee but instead maintains a consistent percentage and per-transaction fees.
At Cornerstone, we recommend the interchange-plus pricing model. This model is the most transparent and typically results in the lowest credit card processing fees for our startup clients. If you would like to talk with one of our credit card processing experts about pricing models, we would be happy to answer your questions!
3. Negotiate Your Processing Fees
Whether you are just signing-on with a merchant service provider or your startup has been with the same provider for a few years, it is never a bad idea to negotiate your processing fees! A lot of people think that prices are fixed, but you never know until you ask. When negotiating rates with your merchant service provider, be sure to leverage your transaction volume. The more you sell, the more valuable you are to a provider and the more likely they are to give you a break. At Cornerstone, we are making serious bets that we can beat your current rates.
4. Set a Minimum Purchase for Credit Card Users
Contrary to many an angry customer’s opinion, it is not illegal to set a minimum purchase for credit card users. In fact, this is recommended for startups using an interchange-plus pricing model! Although your markup fee will not increase for credit card transactions with this model, the interchange fee set by your customer’s bank will be larger, making a minimum purchase relevant. It is legal to set a minimum purchase up to $10.
A quick note on surcharges: Although it is legal to set a minimum purchase, it is not legal to require a fee from customers who use credit cards in most states. This is only allowed in California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, Texas, and Puerto Rico. Even in those states, the rules and regulations are significantly complex, for instance, you cannot require a fee for most debit purchases. We generally recommend that startups do not consider surcharges. That said, you are allowed to give a discount to customers who pay cash.
5. Lower Your Risk of Fraud
The higher risk you are, the more likely your merchant service provider is to charge you high markup fees. Lower your risk by always swiping/inserting cards and never entering them manually, which allows for fraud. Use a chip reader if you are able as it is currently the most secure way to accept payments on the market. Finally, provide security information where you can, such as the customer’s zip code or the security code on their card.
Hopefully at this point you have some ideas for ways to lower credit card processing fees for your startup. If after reading this you are interested in a local, transparent merchant service provider who ascribes to the interchange-plus pricing model, look up Cornerstone! We strive to provide the best customer service at the best value for our clients.