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| Do you take plastic? |
But many small business owners make the mistake of signing up with the first merchant account provider they find, which can result in excessive fees and processing charges, cancellation penalties, and all sorts of other headaches.
It just so happens my friend Chris Lenz does this for a living. So I asked him a few pointed questions about setting up or changing a merchant account for credit card processing. While the answers may vary according to your situation and your business model, don't sign up with a merchant provider without asking these questions and getting answers you are comfortable with.
1. How much should the average small business owner plan on paying in credit card processing fees? And how is this determined? Is it based on your personal credit score, your annual sales volume, or some other factors?
This is probably the first question that a new small business owner asks, and also one that is the most difficult to answer. First, there are multiple types of fees that fall under the “processing” umbrella. Some businesses will require terminals, or POS (point of sale) systems, that can be either purchased or rented, others will operate via the web and have associated fees, and different processors may have monthly or annual fees for various other reasons.
Then there are the true “processing fees” for accepting the credit or debit card as payment. These fees will vary based on a multitude of factors including business type, how you accept payment (in person vs. over the phone or internet), and to a degree sales volume. These fees are in large part determined by the rules established by the associations themselves (Visa, MasterCard, etc).
As a general rule, if you are paying more than 2.5% per transaction in true processing fees, or more than 1% per month in monthly charges in addition to your processing fees, you should get an analysis done and see if it makes sense to switch to a new processor or a new plan with your existing processor.
2. Are there generally start-up costs or monthly fees associated with having a merchant account?
Most, but not all, companies do have some sort of upfront fees for starting service. These vary widely and are often negotiable. This is also true with monthly fees. As we move further into the world of paperless offices many companies now charge a fee for a paper statement, but will often email statements for free.
Some types of accounts, most notably e-commerce, will require a monthly fee because of the technical necessities of how they work.
3. How do merchant accounts compare to services like PayPal and Google Checkout? At what sales volume does it start to make financial sense to upgrade from one of these to a full-blown merchant account, and how much money can a small business owner save on fees?
PayPal and Google Checkout are great services for merchants that have a relatively low sales volume and do e-commerce or use a virtual terminal. However they do have drawbacks. The main one that I have found is that they try to have a “one-size-fits-all” rate structure for all merchants, which can end up costing you more in transaction fees. As a guy who is 6’5” tall, I can tell you that one-size-fits-all rarely works!
If your business is solely or primarily e-commerce than these options should be offered, but only as part of your overall payment package. In my opinion, you should still use a processor for your credit card transactions, and offer these a secondary payment options for people that want to use them.
As far as the amount you can save on fees, this obviously depends on your sales volume. For example: If you process $100,000 per year and you're paying 3.5% in fees, you could save $1,500 per year with a merchant account that only charges around 2%. Obviously, every situation is different, but it pays to do the math!
4. Are there any risks associated with having a merchant account? Can it ruin your credit or hurt your business in some way if something goes wrong? Are there any regulations or safeguards small business owners should follow or have in place when handling their customers' credit card numbers and personal information?
The main risk for business owners has to do with identity theft. According to the rules of the game as set forth by the associations, if a customer’s information is stolen it is ultimately the responsibility of the business owner. There are typically fines involved; on average, each compromised account costs a small business owner just over $200.
The industry has established rules, known as PCI Compliance, that must be followed. These rules pertain to your equipment and how you may handle credit card information on a procedural level. For example, do you store credit card information? If so, do you have a policy on where it is stored and who has access to it?
5. Are there different rules or fees associated with credit versus debit cards? What about between Visa, Mastercard, Amex, and Discover? Are there different processes or fees associated with in-person versus online versus telephone transactions?
Yes, yes, and it depends! There are numerous rules and fees based on business type, how you take the information, average ticket, and many other factors.
6. Is it better to have a machine to "swipe" cards, or to use a web-based terminal to process credit cards?
Although it is typically both less expensive and less risky to take cards face-to-face (swiped cards), there are some business types and some occasions where this is not feasible. In those circumstances your processor will need a thorough understanding of your business in order to offer the best advice. This is where a lot of small businesses go wrong. They sign up with a processor and end up with a payment system and/or a rate structure that doesn't fit their business model.
7. For small businesses who conduct business through their website, are there any special considerations to keep in mind when setting up an online shopping cart?
When setting up a website with a shopping cart it is necessary to use a gateway to communicate with your processor. Although most processors require that you work through a third party gateway, this can be cumbersome, especially if you have an issue down the road. Also, not all shopping carts work with all gateways. For this reason I recommend selecting a merchant service provider early on to ensure that all your systems work together. Since I am a big fan of one-stop shopping, I recommend using your processor’s gateway service if they offer one.
The nuts and bolts of how it all works on the back end between your shopping cart, your gateway, your processor, and your bank can obviously get complicated. That's why it is so important to have a customized plan from a processor who knows and understands your business model.
8. I'm a fairly smart guy, but even I can't decipher my merchant account statement. For someone who already has a merchant account, what are some things they should look at on their monthly statements to determine if they're getting ripped of or just to decide if it's worth the hassle to change to a new plan or a new company?
I spend all day reading statements, and sometimes even I have trouble! Many processing companies do not want you to understand what you are looking at, because the more you know the stronger you are going to be at negotiating with them, or understanding when you are truly offered a better program. If you see your rates go up with no explanation, or if you have not had another company review your statement and offer a competitive bid in several years then it is probably time for a review.
Most importantly, changing processors should not be a hassle! If you work with a reputable company then your existing representative should be happy to sit down and review your statement to answer any questions. And, if a new salesman is trying to win your business and won’t take the time to answer your questions then you need to run!
9. Speaking of changing to a new company, how difficult is that to do, and what are some things small business owners can do to make it a smoother process?
The number one mistake I see over and over again is business owners not knowing if they are still under contract with their existing company. Although most reputable processors are very transparent with their terms and conditions, some still try to use the fine print to hide this detail.
If you do sign a new contract while under contract with a previous processor, you will almost always incur additional fees. Most importantly, if a salesman tells you that there is “no term” or “no termination fee” ask to see something in writing. Too many times less than reputable salesman say whatever they think is necessary just to close a deal.
10. Any parting thoughts or words of wisdom for the small business owners who will read this?
The one thing every business owner needs to know, and I’m sure everyone reading this now understands, is that there are few easy answers when it comes to merchant services. Every business is different, and every solution needs to be customized. As much as we all want quick and easy answers this is one area of your business where you need to take your time.
If you speak to a salesman whose only question is “what’s your rate?” or who doesn’t ask as many questions about your business as you ask about his, then they are not really looking out for your best interests.
When looking for a new company ask yourself, did this person take the time to really understand my business? Were my questions answered in a manner I understood? Most importantly, am I comfortable with the person sitting in front of me? If you can’t answer “yes” to all these questions then keep looking!
Chris Lenz is a charter member of The Nifty 150 and works as a sales rep for one of the country's leading credit card processors. He will quite happily sit down with you over a beer and review your existing merchant statement as well as your business model and help you save money on processing fees. Give him a call at 727-417-9386 or fill out this this form to get in touch. Tell him you found him through The Nifty 150 and he will even supply the beer! (Right, Chris?)
Chris Lenz is a charter member of The Nifty 150 and works as a sales rep for one of the country's leading credit card processors. He will quite happily sit down with you over a beer and review your existing merchant statement as well as your business model and help you save money on processing fees. Give him a call at 727-417-9386 or fill out this this form to get in touch. Tell him you found him through The Nifty 150 and he will even supply the beer! (Right, Chris?)
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