How to Negotiate a Credit Card Processing Deal

February 21, 2019

February 21, 2019

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Choosing a processing company can be one of the hardest steps in getting your business off the ground. This guide will lead you through all aspects of the contract and help you negotiate the best possible deal therefore saving your business money. Check it out now!

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To process credit card transactions, you’ll need to partner with a credit card processing company. Your business will interface with your credit card processing provider each and every day that you’re in business. So, when you’re deciding which provider will get your business, it’s not a decision that should be taken lightly.

The process often takes a bit of shopping around and negotiation with different companies. Negotiating the best possible deal from the outset will ensure you get the best possible price for this essential service, affecting your profit margins on every product you sell.

The answer to how to negotiate a credit card processing deal is part art and part science. Below, we give you a step-by-step process so that you can negotiate deals with confidence.

What is an Interchange-Plus Pricing System?

Though it sounds complicated, the concept of an interchange-plus pricing system can be broken down easily. It’s a pricing system that comes with two components: the “interchange” and the “plus.”

The interchange component is the percentage of every transaction that is charged to the credit card company and issuing bank. This percentage comes back as a fee that you, the customer, have to pay.

The plus is charged in addition to the interchange rate. This aspect represents the markup charged by your credit card processor so that they make a small profit on each transaction that gets processed.

Sometimes the interchange is structured as a percentage of each transaction, and other times it’s a flat per-transaction fee. Oftentimes, however, it’s both. This may sound complicated and expensive, but there are good reasons you should look for a credit card processing partner that offers interchange-plus pricing. Out of all the industry’s different pricing models, interchange-plus is the most transparent.

Get an Interchange-Plus Quote

Interchange plus pricing allows you, as the customer, to see the markup that the credit card company and bank make on their fees. This gives you more information than with other pricing models, which don’t tell you the markup these companies are earning each time you process a credit card transaction.

Tiered pricing structures, usually with three different rungs, are another common pricing model. Tiered pricing systems come with less complicated monthly statements. But interchange-plus pricing gives you a fuller insight into where your money is going.

The last main pricing model is a subscription-based system. You’ll still pay interchange rates, but in the form of a single membership fee as well as a flat charge for every transaction you process. While occasionally this can be a cost-effective option, interchange-plus pricing gives you better transparency into how each dollar is being spent.

Calculate the Effective Rate with Careful Fee Comparison

Your interchange-plus quote will give you a comprehensive list of fees, which you should examine carefully.

Fees can be divided into two basic categories: scheduled and incidental. Scheduled fees occur every month, or at some other agreed-upon interval. Incidental fees are those that only occur on a one-off basis. Take into account which fees are which, as the difference is critical for determining what your businesses’ profit margins will be month to month.

Common scheduled fees that are charged at regular intervals include:

  • Monthly subscription fees
  • Annual subscription fees
  • Payment gateway fees
  • Monthly surcharges
  • Equipment warranty fees
  • Equipment leasing fees
  • PCI compliance fees

Common incidental fees that occur only on an individual, one-off basis, include:

  • Application fees
  • Equipment deposits
  • Early termination fees
  • Chargeback fees
  • PCI non-action fees
  • Equipment and/or software setup fees
  • Address verification service fee

Determine Your Markup

Using the information you got from comparing fees, you can then figure out your effective markup rate based on how many transactions you process. For example, your monthly fee breakdown might look something like:

  • Interchange-plus fee: .25% + $0.15
  • Annual PCI compliance fee: $80
  • Monthly subscription fee: $20
  • Monthly gateway fee: $10

Using those fees, here is how to determine your effective markup rate:

  • Multiply markup rate by predicted monthly sales volume.
  • Divide monthly sales volume by your average transaction size to determine the average number of monthly transactions
  • Multiply your average number of transactions per month by your per transaction fee
  • Add up all scheduled fees. For fees collected annually, divide by 12 to get the per-month rate
  • Add the numbers from lines 1, 3, and 4 to get your total cost above wholesale
  • Divide total cost above wholesale by your total monthly credit card payment volume. The result is your effective markup rate

Compare Other Inclusions

Figuring out your effective markup rate is important, but it isn’t the only factor in deciding whether or not to work with a certain credit card processing company. Other inclusions can make all the difference, but if you have no need for them, it won’t be worth paying a higher overall price to have them.

Here’s an example: you have two companies, and one offers a .75% effective markup, with no other inclusions. The second company offers a .90% effective markup, but includes a credit card processing terminal and payment gateway. If you need both of those inclusions, the higher rate might be worth it. However, if you don’t need them, you might as well go with the company offering the lower rate with nothing extra included.

Once you determine who offers the best rates, use your assessments of what else they offer in order to figure out which company offers you the best value for your money based on the particular needs of your business.

Look For Cancellation Terms in Your Contract

Contracts are complicated, with many stipulations, written in lots of hard-to-understand language. Buried in your contract are going to be terms regarding cancellation and early termination of your service.

Unfortunately, like the rest of your contract, these can be difficult to understand because of the dense legal language they’re written in. However, it’s worth taking some time to truly read through the contract and try to understand everything it stipulates.

Sometimes this means paying for an hour with a contract lawyer who works in this industry and can help you understand the contract fully.

Some contracts will charge cancellation fees when you stop the service, or early termination fees if you try to cancel before one year. Always negotiate to get these fees waived. This will give you more freedom to change companies if you find one that offers a better value.

Credit card processing companies use another trick in their contracts you should be aware of: the auto-renewal clause. This causes your account to renew automatically when the current contract is up, effectively locking you in with the company.

The only way for you to escape and take your business elsewhere will be to pay the early termination fee. Auto-renewal clauses should always be a deal breaker for you. If the company refuses to remove them, tell them you are going with another company unless they are waived.

How to Negotiate With Pushy Salesmen

As you shop around for the right company, you’re going to have pressure put on you from each company’s sales reps. Do not agree to their offers right away, and always ask follow-up questions. To disarm them slightly, mention that you’re shopping with some different companies and ask questions based on your comparisons.

For example, if one company includes a credit card processing terminal with their offer, mention it, and ask if they have a similar offer. This puts sales reps on the defensive, making them feel like they have to make better offers to keep up with the competition.

Final Thoughts

With a bit of knowledge going into negotiations about how pricing works, what to look out for in contracts, and how to get the edge during negotiations, you can shop for a credit card processing partner with confidence. Make sure to take your time, and if you start getting burnt out, give yourself a break before going back to the negotiation table.

Sometimes finding the best value is easy and happens fast. Other times it takes more searching and negotiating. Remember that, as a general rule, it’s the sales rep’s job to try to get you to pay for a pricier plan, whether you need it or not, so consider all contracts carefully.

Once you’ve made your choice, signed a contract, and put the process is behind you, be sure to pat yourself on the back—you will have finished one of the major milestones toward getting your business up and running.

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