Credit card processing is necessary to take payment online from customers.  The process of selecting a provider and researching the options can be overwhelming, for example, LemonStand’s eCommerce platform supports over 95 payment processors in over 100 countries around the world.  

It’s important to know that not all credit card processors are equal; the variation between pricing models is huge. The approach to customer support can also be significantly different.  In general, as a business owner you should not select the first processor you speak to, as your credit card processor will become a long term strategic partner for your business and you want to be sure you’re partnering with the right one.  

A little bit of research work upfront will provide years of value in return (not to mention avoiding a big pile of headaches).  Today, I’m providing you with some tips for your search.  Following are 4 critical things you need to be aware of when searching for a payment processor in order to reduce costs–and frustration!

Beware pricing tricks

Pricing is one of the most complicated areas of the payment processing industry.  There are many ways a salesperson can make a rate sound very low, but in actuality, it’s very expensive.  It’s important to be aware that many business owners sign a merchant processing agreement and do not receive what they expected.  

If I had one single piece of advice, it would be:

Do not just go with the salesperson that gives you the lowest sounding rate.  You MUST understand the pricing models.  This is why it’s generally a good idea to go with the person that spends the most time with you, in a detailed way educating you about how the pricing works.  This most likely will be the most credible person that you will speak with.

I cannot emphasize enough how important it is not to “cut to the bottom line”.  If you take this approach–which is the lazy approach–you’re likely to be taken advantage of.  At a bare minimum you must understand the 3 pricing models of the industry:

  • Qualified / Non-qualified: is a pricing model in which a merchant gets a base rate (usually a fantastic rate–something like 1.49%) that they will rarely or never pay. What’s not explained is that the rate only applies to card-present (swiped) transactions, and only for basic cards (no rewards cards, air miles cards, etc).  This pricing model sounds fantastic, but it gives merchants essentially zero cost certainty and can make a quote sound way lower than it really is.  If you get any sort of quote with a qualified rate, it’s suggested to ask for one of the next two following pricing models explained below.  If they won’t support one of the other two pricing models then move onto a different payment processor.

 

  • Flat pricing: is an old fashioned, simple, honest pricing model.  It often sounds much higher than a qualified/non-qualified quotation, but it’s often a better value in practice.  With flat pricing, you simply pay the same flat rate on every transaction.  Card present or card not present?  Doesn’t matter.  Rewards card?  Doesn’t matter.  Transaction processed at midnight under a blue moon during the summer solstice on a leap year?  Doesn’t matter!  You pay the same true and honest rate every single time.  It’s also easier to reconcile your settlements because it’s easy to calculate your transaction costs.  It’s an under-appreciated pricing model and is best suited for small to mid-sized businesses.

 

  • Interchange plus pricing (also called cost plus) is the most affordable and transparent pricing model.  It’s somewhat similar to qualified / non-qualified pricing because the rate fluctuates depending on the card type used, but the major different is it’s tied to true interchange cost from Visa or MasterCard.  In a nutshell, the credit card processor will straight up tell you how much they are charging you above the true interchange cost as set by Visa and MasterCard.  This pricing model is about transparency.  Almost all of the largest merchants and household brands will be on interchange plus pricing.  It’s harder to reconcile than flat pricing because the rate fluctuates, but you are able to get a lower rate because when basic cards are used, the interchange costs are lower, and these cost savings are passed onto you.  It also gives you peace of mind because the rate you pay is tied back to the real, true, fixed interchange costs as set by Visa and MasterCard.  At the end of the month you can easily calculate exactly how much money your payment processor earned from your account because they have straight up disclosed their processing fees to you.  It’s honest, transparent, and a good value.  

 

Of the 3 pricing models above, the general recommendation is to request flat pricing if you process lower volumes or if you prefer easier reconciliation.  If you want the lowest rate possible, you should request interchange plus pricing.  In general, it is best avoid qualified / non-qualified pricing.  If you have received a quote and the processor won’t give you interchange plus or flat pricing (if they are trying to force you on a qualified pricing model) then be aware that this is simply a sales tactic.  There is absolutely no reason why they can’t quote interchange plus pricing.  If they refuse, seek out a different credit card processor.  

Check out this article from MerchantAccounts.ca for a more detailed article about the different pricing models in the credit card processing industry.  

Price Increases are NOT Inevitable and should not happen 

It’s surprising how many business owners are resigned to seeing a notification from their processor about an upcoming increase to their credit card processing rate.  Working in the industry, the reaction is astonishing to me because so many business owners just accept it as if it’s inevitable.  Quite simply, it may be a common practice, but it shouldn’t be and you should not accept it!  Having your rate increased after you have reached an agreement is in no way reasonable and as a business owner you should fight back.

 

However, for the sake of fairness and for better context, there are rare occurrences where a rate increase may be warranted.  For example, if you make a significant change to your business and are selling a significantly higher risk product or service.  Or, if you’ve had serious problems with chargebacks or fraud, that could be another reason for pricing to be revisited.  But understand, these are extraordinary exceptions to the norm.  To put it in perspective, in 17 years at merchantaccounts.ca we have never done a price increase to a merchant. So if you receive an unexpected notification of a rate increase on your processing statement then fight back!  Repricing of merchants is often an unfair business tactic.  Fortunately for Canadian merchants at least, it is addressed in the Canadian code of conduct, which is a set of rules that credit card processors must abide by.  In the past, so many credit card processors were unfairly repricing merchants that the code of conduct now protects every single Canadian merchant from this business practice.

 

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Under the code of conduct, if you receive notice from your credit card processor that your rate is being increased, you can cancel your credit card processing agreement WITHOUT PENALTY at any time within 90 days of having received your notification of the rate increase.  

 

There is no point in negotiating good rates for your company only to have the processor renege on what was agreed to.  If your rate is raised, it’s time to shop around.  You can exit penalty free and can almost certainly find a payment processor that will value your business and treat you better.

Don’t ship suspect orders!  It will help your costs in the long run

This is a lesson that, sadly, many business owners don’t take to heart until they’ve been burned at least once.  It can happen so innocuously.  You launch, business is going well, and you’re seeing steady growth each month.  Then one day an order comes in and it looks a little bit funny;  the phone number has an odd area code, but otherwise it looks good, so you just ship it. Big mistake! Minute details like this could spell fraud and could end up costing you a lot, not just in chargebacks, which are refunds of the payment to the card holder, but also in extra chargeback fees and overall hassle too. 

Most people are good people, but there are fraudsters out there that will prey on unsuspecting merchants.  You must protect yourself!  We could get into an entire discussion on how to spot and stop fraud, from card side checks such as address verification or CVV (the 3 digit security code on the back of the card), to other 3rd party tools or protocols that you can put in place.  However, for the sake of making it easy for new merchants, we can say this:  if your gut feeling tells you that something isn’t right, if your radar is going off, if your spider-sense is tingling… don’t ship!!!   Call the customer and make sure it’s a good and valid order before you fulfill anything.  Doing a manual validation is as simple as the following:

 

“Hello, my name is John and I’m calling from XYZ Inc.  We just got your order for ___<item>____.  I’m responsible for screening our orders.  For our security, as well as your own as a customer, I’m calling to validate that it’s a good order.  Can you please confirm your billing address on file?”

And then you just listen.  Did the person sound like they were overseas using VOIP?  Did they speak clearly?  Were they surprised to hear from you?  Did they know their own billing address off by heart?  None of this is foolproof, but there are many strong clues and indicators that you pick up on very quickly as a merchant.  If it doesn’t feel good, don’t ship it.  It’s that simple.

If you aren’t going to ship an order, simply apologize to the customer and tell them that their card is going to be fully refunded, apologize again and let them know that due to your shipping policies you cannot ship the order.  If they are very legitimately interested they might offer to send a photo ID or some other proof to validate the order.  How far you want to go, and whether you want to ship is up to you.  Nobody else is going to protect your bottom line, so use your gut, and trust your judgement.  

Leverage your processing history to reduce your processing costs.

You won’t be a startup forever.  Eventually, you will have built up a track record of successful credit card processing.  When this happens, you can re-approach your current processor to discuss rates and pricing.  If you have built a rock solid track record with very little fraud and chargebacks  – then it’s time to leverage that track record and request a lower rate over time.

You can ask for a rate review after 6 months, or better yet, one year of processing.  You have to understand that this is very situational.  For example, if your business already has a very good rate then it’s likely it won’t change.  However, if your business has grown and has proven itself by having little to no chargebacks or fraudulent orders, then it’s time to ask for a better rate! The processor may or may not be willing to renegotiate this, but it’s fair to say that a good payment processor values long term clients and will reward you with lower rates as your business matures.  

Understand that the answer may be no (especially the first time you raise the request) – but once you’ve built your processing history, and if you feel that you have a good argument, then don’t be shy about asking for a rate reduction.  If you have a good payment processor they will probably reward your loyalty and success to date with a lower rate.

Summary

It’s easy to become intimidated or overwhelmed when finding a payment processor for your business.  It’s best to start by taking the time to understand the pricing models, build out a list of features that you want to support, and be confident about what to accept and not accept when negotiating with your potential providers.  If you follow these steps you’ll be better off than the vast majority of merchants out there.

Yes, it’s work, but a little bit of legwork upfront will be rewarding in the long run.  If you have any other questions about payment processing for future blog posts let us know.