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Credit Card Processing and Merchant Accounts

Updated on June 19, 2013


Many small business owners have received phone calls from credit card processing companies in the past year, telling them that a recent law change allows small business owners to get lower rates on credit card processing fees. Therefore, telling them to switch over to their company.

The law they refer to is the "Durbin Amendment." It encompasses many aspects of credit card processing, but the bottom line is to lower the rates for business owners, so they can pass over the savings to the consumers. You can read more about the Durbin Amendment by visiting the link below this introduction.

I am a small business owner, so one of my main concerns is to lower my costs, including the cost of the credit card processing fees. And from a recent switch from a credit card processing company to another, I learned a lot about confusing rates and how they can increase my costs. So in this hub, I will explain the details of the fees associated with credit card processing and merchant accounts.


1. Interchange vs. Flat Rate


If you have interchange pricing system with your credit card processing company, it will make your credit card processing statement very complicated and hard to follow. With an interchange pricing system, you are paying two parties: the credit card companies (VISA, MASTERCARD, DISCOVER, etc) and your merchant processing company (the people who you deal with). In your statement, you will see interchange fees (what you pay to card companies) and card fees (what you pay to the processing company).

When a processing company approaches your business, and tells you a very low rate, such as 0.2% - 0.5%, they are talking about an interchange system, where you pay 0.2% - 0.5% plus the interchange.

Flat Rate

Flat rate system will be simple, you pay a flat rate for different types of cards instead of fluctuating interchange rates. This will make your credit card processing statement a breeze to read, and you know for sure how much you will be charged each time you swipe a customer's card.


2. Breaking Down a Credit Card Processing Statement

  1. Processing Rates
    The percentage of transaction that you will pay as the processing fee. This fee differs for different types of credit and debit cards. The four major types of cards are:
    • Non-Qualified Credit Cards: Corporate cards, foreign credit cards, reward cards, and credit cards that aren't swiped (card numbers entered manually). Non-qualified credit cards have the highest rates.
    • Qualified Credit Cards: Credit cards that aren't the types described above. The card has to be swiped to be a qualified transaction.
    • Online Debit Cards: Swiped debit cards with pin number entered. This transaction type has the lowest rate, usually 0% + per swipe fee.
    • Offline Debit Cards: Debit cards swiped as a credit card. Fees differ from a company to company. Some companies will treat these transaction the same as the online debit, where some will treat these the same as the qualified credit cards.
  2. Per Swipe Fee
    The fee you pay for each time you swipe a card, or enter card numbers for a transaction. Swipe fees differ for credit cards and debit cards, debit card swipe fees being higher than the credit cards since the debit rate is usually 0%.
  3. Statement Fee
    A flat fee you pay for each statement you get. Usually around $5.
  4. Batch Header Fee (Batch Fee)
    A fee that you pay each time you have a batch summary. Around 30 cent per batch.
  5. PCI Compliance Fee
    A fee that you pay either monthly or yearly to keep your processing equipment up to security standards. About $10 per month. Some companies don't charge this fee.


3. Things to Remember When Changing Card Processing Company

You will have credit card companies trying to win your business from time to time. Either when you contract has ended with your current processor, or someone is trying to buyout the current contract, there are things to remember so you get the best rates.

  1. Length of the Contract
    They will always put you in a contract, and bind you to that contract with a cancellation fee. Check how long the contract is, and what happens when the contract ends. Usually you are no longer in contract and pay month-to-month when the contract ends, but sometimes they extend the contract for another year if you don't contact within 30 days prior to the contract ending date to cancel the contract.
  2. Equipment Lease
    Unless you have your own processing equipment, you will have to lease the equipment. Check to see if you are leasing the equipment from the credit card processing company, or if you are leasing through a third party leasing company. If latter is the case, you will end up with signing two contracts, one with the processing company and one with the leasing company. The two may have different contract length, and cancellation fees and policy. If that is the case, they can make things complicated when you need to cancel the contract(s).

    It is also a good idea to check what happens at the end of the equipment lease. Some companies let you keep the equipment at the end of the lease, and some will ask you to return them. Sometimes they even make you to add the equipment to your insurance policy to get have it covered for any damages.
  3. Cancellation Fees
    Always know what your cancellation fees are before you sign the contract. Can be anywhere from $350 to $500 for a 3-4 year contract, and sometimes the cancellation fee get reduced if you are 1-2 year(s) into the contract. Also check if there is a separate cancellation fee for the lease of the equipment. Sometimes third party leasing companies make you pay for the whole term even if you cancel. If that is the case, you may have to pay over $1,000 to cancel the contract if you aren't near the end of the contract. The lower your cancellation fees are, the easier for other companies to buyout the contract and offer you better rates if your companies isn't offering the best.
  4. Any Sign-Up Bonuses?
    Many companies will offer you signup bonus if you sign a contract with them. The bonus will be higher if they don't have to buyout your current contract and pay for the cancellation fee. In one case, a company paid for over $1,500 in cancellation fees and still sent a $100 signup bonus check for a small business. So there is always a room to ask for a signup bonus, especially if they aren't paying off any of your cancellation fees.
  5. Always Ask for a Rate Quote
    Unless you have personal relationship with the company that you don't want to break, it is always a good idea to ask for rate quote when another company approaches you. All you need to do is send them a couple of your credit card processing statements, and they will offer you a deal. The worst that can happen is that they cannot beat your current rate. In all other cases, you will end up with better rate with another company and possibly also a signup bonus check, or you can take the better offer to your current company and ask them to lower your rates.
  6. Read, Reread, and Read Again
    Before you sign a contract, read, read, and read. If the sales person tell you something, ask him where that is on the contract. Tell them to write everything they said on the contract so they cannot screw you later. If anything, yes anything, is unclear, ask. I had a sales man visited me over 10 times and corrected the contract over 5 times before I signed the contract.


Sometimes there are other companies who can offer you the same service you get for the lower price. So if you have time and energy, don't turn down an opportunity whenever one approaches you. But the bottom line is, the processing companies are out to make money. If an offer sounds too good, be alert and read your contract carefully. They may be saving you money with one obvious fee, but charge you more with other fees to make up for the savings they gave you. After a few switches, hopefully you can find a reliable company you can stick with.

If there is something about credit card processing statement that is unclear to you that wasn't covered in this hub, please feel free to leave me a comment.


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