How to select a credit card processor for your business

By Jeremy Simon

While business owners may be happy to use the same bank for both their business credit card and for processing credit card transactions, there are factors to consider when picking a credit card processor.

Looking for a competitive credit card processor can save your business some serious cash.  For example, if you run a 120-seat restaurant with about $2 million in annual revenue, 80 percent of that on account, trimming only 1.5 points from your processing fees could save you $24,000 a year.

While it may be convenient to let your bank take care of processing credit cards, you may be able to save more using another provider.  But fees shouldn't be the only factor in selecting a credit card processor, since terms are often open to negotiation.  Other important considerations involve equipment, lag time and extras.

When it comes to fees, a base rate of 2 percent per bill is usually considered quite good.  However, it can be tough to compare processing prices since there is no single resource, while fee structures remain difficult to understand and contracts likely contain some confusing language.  To make things easier on yourself, ask to see a typical monthly statement itemizing every transaction and its associated fees.

Although third-party processors may offer lower rates than banks, they may charge "nonqualified" rates on certain transaction types, like phone orders where the credit card is not swiped -- so make any processors you are considering outline these rates first.   

Also, those in the industry note that processors are required to pay a fee to Visa and MasterCard, which frequently amounts to 1.65 percent for a normal credit card transaction.  Therefore, beware of any credit card processor that offers an incredibly low rate of 1 percent, as the company likely will make up for that loss by piling on added fees or even hiking rates partway through your contract.

Meanwhile, breaking your contract (which typically run from one to three years) could mean an early termination fee amounting to a few hundred dollars.

Equipment is another concern, with credit card processing machines (which are generally part of point-of-sale systems) each potentially costing between $300 and $800.  Additionally, you will require a method for connecting to the processor, using either a separate telephone line or over the Internet.

You also want to be aware of the lag time (anywhere from one to five days) that it takes for you to receive your customers' money.  While some credit card processors have more efficient fraud-checking systems, others attempt to squeeze interest from the reimbursement provided by the credit card companies before depositing the funds into a merchant's account. 

From your perspective, getting money faster is obviously preferable.  And although preferable, remember that faster service does not have to cost you more.

In terms of extras, processors may choose to bundle fees, rather than deducting them at the point of each transaction.  That can mean you pay the cumulative amount at month's end, which can simplify your bookkeeping and provide you with a bit more cash on hand.  You may also want to find out if your processor deals with gift certificate transactions, which can add another 25 cents to 50 cents per transaction.

Published: April 20, 2007

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