Small Business Can Save By Shopping for the Right Merchant Service Provider
Written by Louis Georgakakis, in Category Payment Processing
When choosing a merchant services provider, small business owners should consider a number of important factors, which include the service rates, transaction fees, and the length of the contract - as well as several other vital items that will make all the difference in the world.
The problem with small business owners is that they typically go with the first merchant service they find, and end up paying too much. They fail to shop around for the top companies offering the best rates and services. The difference in rates means a potential loss of thousands of dollars per year.
The reason SB fail to shop around? In a recent survey, small business owners report that merchant services are too complicated, and it is easier just to go with the first company they find and get it over with. We believe this "reason" is a costly mistake.
If there is a possibility that you can shave thousands of dollars off of the cost to process credit cards payments, then, by all means, shop around. Take your time and do the research. The information below is regarded as the "basics of credit card processing". Finding the right merchant service provider, someone you can trust will save you time and money.
How Merchant Services Works
There are four key components involved in each credit card transaction, including the:
Merchant: The business that is receiving payment.
Customer: The person making a purchase.
Acquiring Bank: The bank that is was chosen by the merchant to provide credit card processing services.
Issuing Bank: The bank that issued the credit card to the customer .
The issuing bank lends enough money to complete the transaction with the merchant to the customer, who is then responsible for paying the debt off in 30 days, or adding it to their balance and paying interest on the unpaid amount.
When the card is processed, the merchant pays an interchange fee to the issuing bank. This amount is determined by what type of card is being used, whether the actual card was presented, what types of merchants accept the card and even the type of business.
The rate above is calculated by adding a percentage of the transaction amount to a flat transaction fee. According to the Federal Reserve System, an interchange fee cannot exceed a flat fee of 21 cents plus 0.05 percent of the transaction amount and a 1 cent fraud prevention adjustment . At the same time, the acquiring bank is charging a fee referred to as the discount rate. Paid by the merchant, this fee is related to accepting credit cards and is usually between 1 and 3 percent of the transaction amount .
Due to these charges, the merchant does not receive the full amount charged by the customer. The amount the merchant pays for the transactions adds up over the course of the year. Obviously, the lower the rate, the more revenue the merchant keeps.
One of the primary reasons an interchange fee is applied to each transaction is in anticipation of a chargeback. This occurs when the customer disputes the charge and the bank rules in their favor. Any money paid to the merchant will be returned and additional fees may be assessed . The interchange fee simply ensures the issuing bank is compensated something in this situation.
In addition to looking at the fees being charged by the provider, it is also important to determine whether or not the card has to be physically present for a transaction to be completed. Some providers do require this because transactions completed over the phone and internet can be risky and result in chargebacks.
Any small business that will be accepting orders over the phone or internet would want to avoid fraud and chargebacks. Unfortunately, this potential cost is a part of doing business. Additional Considerations
When choosing a provider, it is our recommendation to small business owners always to take the time to read and understand the terms of the contract, including the length and termination stipulations and fees. Be on the lookout out for rate fluctuations and whether or not the merchant is required to process a certain amount of money each month - another potential cost.
Rate increases, without warning or notification, is common. So, if you see this kind of language in the contract, find a better service.