How to reduce processing fees for credit card payments

Many manufacturers and distribution companies use a virtual terminal to process credit card payments from customers, a method of payment that’s on the rise as customers using the card often get perks like cash back or airline miles.

While companies continue to accept credit cards because that’s how their customers want to pay, there are fees associated with processing these payments that can be significant.

“They’re actually making less money per transaction because they are paying to the credit card and processing companies a percentage of what they’re charging the customer,” says Marc Schwalb, Strategic-Partner at Schooley Mitchell. “A good effective rate might be between 1.8 and 2.5 percent. But sometimes we see clients who are being charged closer to 4.5 percent. That’s a significant portion of a major purchase that manufacturers and distribution companies are giving up just to process a payment.”

Given these are often high-ticket purchases — sometimes more than $100,000 — it’s imperative that companies adjust. That could mean passing along the cost by raising prices, which isn’t an ideal solution, or they could no longer accept credit cards as a payment method, which also isn’t ideal.

A better approach, Schwalb says, is to significantly reduce the rate charged for processing by working with a cost reduction specialist or directly with the processing company to determine if it has the right pricing structure and that any additional fees are minimized or waived.

Smart Business spoke with Schwalb about how manufacturers and distribution companies can reduce the costs associated with processing credit card payments.

What pricing structure options are there?

There are many pricing structures, but most companies are using either a fixed, tiered or interchange plus pricing structure.

Fixed pricing means there’s one rate for every transaction. This works if that fixed rate is favorable. Processing companies set the fixed rate based on a company’s history, looking at the average cost per transaction and the credit cards most often used by the customers, so getting a favorable rate can be challenging.

A tiered rate structure is similar to a fixed structure, but it’s divided into categories based on the type of card used and the fee put in place by the card network. That can give the company processing the payments more downside protection than a fixed rate, but the terms are not likely to be favorable.

Interchange plus pricing uses both the interchange fees and the processing company’s fees to determine the cost of processing each payment. These rates can be negotiated, but doing so requires an understanding of the many factors that affect this pricing structure.

Two newer options have recently emerged: cash discount and surcharge programs. These essentially pass on processing costs to a company’s customers, which, depending on the business, may or may not be a suitable option.

How can a company reduce its processing expenses?

Improving pricing can be a complicated and often difficult task for those who aren’t familiar with the options or who lack the time to figure it out and have the conversation. Fortunately, there are consultants that can discuss options with companies and map out where money can be saved, either through the rate structure or in other areas of the processing process, such as the different fees — transaction or administration, for instance — that can be lowered or eliminated if negotiated.

It’s also important, even after negotiating rates, for companies to continue to monitor their processing charges. That’s because there can be instances of price creeping — where rates are raised over the course of time. Without someone on the lookout for price creeping, rates can reach a point at which they’re no longer favorable. There can also be pricing errors — an incorrect percentage or a misplaced decimal point — that can lead to significant billing errors that will remain uncorrected unless challenged.

There are so many factors that go into what constitutes credit card processing fees that it’s hard for businesses to be experts. It’s prudent to work with someone who is knowledgeable to review the situation and find a pricing structure that’s most beneficial to the business. ●

INSIGHTS Business Services is brought to you by Schooley Mitchell

Marc Schwalb



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