How To: A DIY Guide On Reducing Your Processing Fees

DIY Guide on Reducing Your Processing Fees

They are often regarded as a necessary evil in the world of commerce, whether physical or digital. To reduce your fees, you must understand the fees. Once you identify what the fees are, you can, in turn, negotiate the fees. Let's get to it.

Why Do We Have Processing Fees? 

Here's how it works: Each time a credit card is used, the transaction information is handled by three entities. The credit card network (like Visa or MasterCard), the issuing bank (the institution that gave the customer the card), and the payment processor (which facilitates communication between the other parties).

Each of these entities play a crucial role in maintaining a secure, efficient, and global marketplace. Their services form the backbone of our ability to conveniently and confidently purchase goods and services. Therefore, they all charge for their services, and these charges come together to form the total credit card transaction fee that the merchant must pay for every transaction. This fee is generally divided into three parts: the interchange fee, the assessment fee, and the payment processor's markup.

It's important to note that while these fees might seem like an inconvenience, they're essential for facilitating trade and protecting both buyers and sellers from fraud. When a customer makes a purchase using a card, your business is charged a fee by the credit card company. This is to cover the expense of transferring the money from the customer's account to your business account. A little slice of the pie also goes towards ensuring security and compliance during these transactions.

What Are Associated Fees?

Let's take a closer look at the fees associated with credit card transactions. Typically, the transaction process involves three main types of fees ‐ the interchange fee, the assessment fee, and the payment processor’s markup.

• Interchange Fees are charges paid by merchants to the cardholder's bank. This charge is a small percentage of the total transaction amount. The specific rate varies depending on many factors, such as the type of card used or the industry in which the merchant operates.

• Assessment Fees are charges that credit card companies impose. This charge is also a small fraction of the total transaction. Each credit card company has its assessment fee structure and terms.

• Payment Processor’s Markup are fees charged by the entity that aids in processing the transaction. The payment processor ensures secure and efficient processing of credit card payments. The markup varies greatly between processors, and it's often where merchants have the most room for negotiation.

Therefore, to effectively manage and potentially lower your processing fees, understanding these three components is crucial! After pinpointing your fees, you're fully capable of determining your effective rate. This becomes a paramount factor when you're engaged in negotiations. This rate is the true cost of your processing fees, giving you a complete view of what you're paying your processor. It's calculated using a simple formula:

Total Processing Fees ÷ Total Volume = Effective Rate

For instance, if you're paying $300 in total processing fees for $10,000 worth of transactions, your effective rate would be 3%.

Identifying Unnecessary Charges

Your processing statement isn't always as straightforward as it seems. While you may be equipped with your effective rate, you'll encounter something the industry calls 'junk fees', those little additional charges that sneak their way into your statement. Understanding them is key to reducing your overall processing costs.

Junk fees show up under a series of different names on your statement; they might be labeled as 'network fees', 'administrative charges', 'terminal fees', or even 'monthly minimum fees'. Their purpose is to inflate the overall cost of your transactions. While they may seem insignificant, even a small increase in the rate can lead to a noticeable impact on your bottom line.

Kicking off your hunt for junk fees, first you'll need to analyze your processing statements. Don’t skim; take your time and look at each line item. If you're uncomfortable with this examination, reach out to your processor and ask them for a rate analysis. But if you want to negotiate your own rate, you need to have the evidence to argue your rate is unfair and should be reduced.

Start with understanding the industry-standard fees. Some charges like Interchange fees, assessment fees, and payment gateway fees are somewhat standard across most industries. Recognize them and set them aside for a while. Once these are identified, focus on the rest of the fees as part of your charges. Give particular attention to things like 'non-qualified rates,' 'batch headers,' 'PCI compliance fees,' and so forth. These are the easiest to dispute.If you spot unfamiliar fees or those not justified with appropriate context, mark them right away. Keep in mind, any fee should be both well-explained and directly contributing to your processing service. If it’s not, it's a junk fee.

Identifying junk fees requires patience and a keen eye for detail. It's all about knowing what fees are standard, understanding your statement fully, and questioning anything that doesn't add up. In doing so, you'll place yourself in a healthy position to reduce your overall processing fees – and potentially save money in the process.

What Do I Say To My Processor If I've Identified Junk Fees?

Embarking on a conversation with your processor about superfluous charges on your statement might seem daunting. But you, as a savvy and conscientious business owner, shouldn't hold back. It's your business - protect it.

Here's a simple yet effective approach.

First, formulate your concerns in a concise and coherent manner. You should be able to precisely point out what you believe to be excessive or unwarranted charges. Prepare by reviewing your statements in detail, and make sure you understand the nature of the fees you're questioning. If you need help, give us a call for a complimentary analysis. No strings attached. You'll be amazed at what can be uncovered.

Next, initiate a conversation with your processor. You might start with something like "I've been reviewing my statements and there are some fees that seem unnecessary to me". You can also leverage the fact you've been in contact with a competitor. That alone adds tremendous pressure to the provider and puts them on notice that you are informed. If your processor is applying unnecessary markups, they'll immediately get defensive and start the "your contract says" context. Don't be intimidated. Continue on with your questioning. It's essential to be clear, respectful, and professional throughout this discussion—this will increase your chances of receiving a positive response.

Make your case by explaining the reasons for your questions. Are the added costs out of line with industry standards? Are you paying for services you do not need or utilize? Your processor should be able to justify each fee or provide a solution to reduce it.

Remember, negotiating processing fees is not an uncommon practice, and you're not alone in this. Many entrepreneurs and small business owners successfully advocate for lower fees by having a clear understanding of their statements and being informed about their rights.

Often, just having a frank discussion with your current processing provider can lead to lower fees and avoid a conversion altogether. Either way, you win, especially when communicating effectively to your provider that you're considering a transition to a processor that operates with more transparency and wants to save you money. Although it may seem like a daring move, such a step often elicits a favorable response.

In most circumstances, companies typically wish to maintain their clientele and book of business rather than lose them to rivals. If they get wind of the potential loss of your business, otherwise known as a conversion, they could introduce more competitive rates in a bid to retain you. If your provider values your business, they may even move towards a pricing structure that is more transparent to ensure you are fully informed about the costs associated with each transaction.

However, remember that this action should not be an empty threat. Do your own research and be ready to switch to a competitor if necessary. You may find that other processors offer better rates, better equipment, better service, or a more straightforward pricing structure, on day one. We like to ask a simple question: "Are you willing to refund me the fees you've unnecessarily assessed?" The answer is always an unequivocal "No". That should indicate if your merchant has your best interest at hand.

Whether you switch providers or not, initiating such a conversation can give you a clearer understanding of the costs involved and how to manage them efficiently. You might even learn about additional features or services your processor offers that you weren't aware of before!

Know Your Program

Each program comes with its own unique set of costs and benefits. The better your understanding of the intricacies of these programs, the better equipped you will be to reduce your processing fees.

Interchange Program 

Interchange programs are typically adopted by the card companies like Visa and Mastercard. The interchange fee is a charge paid by your business to the credit card company every time a transaction is processed. This fee is variable, often hinging on factors like the type of card used and the method of transaction ranging from.

Reducing fees within an interchange program can be challenging since these fees are primarily set by the card companies. However, you can still lessen your financial burden by encouraging cash transactions or invoking Level II/III auto mapping. You can also consider a processor that has a lower markup. 20 basis points is relatively low, while 50-80+ basis points are absurd and indicate you're being taken advantage of.

Surplus Program

In contrast, the surplus program typically entails a fixed transaction fee potentially blended with a percentage of the transaction value. Transparency is a key advantage here - you are aware of the exact cost you are incurring per transaction. A key technique in managing fees within a surplus program is proactively negotiating your rate. Research prices, come informed and be prepared to bargain with your service provider. Regular review of your statements can also bring to light any unexpected charges.

Cash Discount Program 

A cash discount program rewards customers for paying in cash by offering lower prices on purchases. This can help shift the costs associated with card transactions back to customers, consequently reducing or coming close to eliminating your processing fees altogether. We often reference this program as a "near zero" operating program.

You can manage this by properly structuring and communicating your discount policies to your customers. Promoting the benefits of cash transactions can motivate customers to choose this option, thus allowing your business to avoid card-related fees entirely.

No matter which program you're enrolled in, it's imperative to conduct a rate review at least twice a year. This may seem like an additional task on your never-ending to-do list, but trust us, it's worth the effort. Changes often occur in the financial landscape, like regulatory adjustments and contract transitions, which could impact your processing fees. Not keeping an eye on these changes can leave you paying unnecessary charges. So, think of a rate review as your financial check-up, helping you stay informed and in control of your finances.

How Can I Reduce These Fees? 

Cut through the noise and get to the hard questions. Always ask for a pricing scenario for your situation. You can leverage what we've discussed and lean into these four points:

1. Opt for Cost-Effective Processing Providers: Consider what your business needs from a processor. Do your research and ask bottom line questions. Ask your provider for a side by side comparison of rates and follow the data. You'll know straight away if you're putting your processing in the hands of a company supporting you.

2. Negotiate With Your Current Provider: Don't be afraid to ask for a better deal. Let your provider know if you're considering jumping ship for a competitor – they might just give you a better rate to keep you as a customer.

3. Avoid High-Risk Transactions: Certain transactions, like international sales and specific high-value goods, are considered high risk and come with enhanced fees. Don't make these kinds of transactions a regular part of your business unless they are absolutely necessary.

4. Take Advantage Of Technology: Modern payment systems offer various options for reducing processing fees. Look into your recordkeeping and the time taken to reconcile your books. Consider direct integrations, a processor that you can call on to act on your behalf, offered gateways, and or free placement equipment. All of these bullets collectively can save you time, which in turn can save you money.

The Takeaways

In the end, minimizing processing fees requires diligence, research, and strategic thinking. Don't be complacent about these charges, thinking they're just part of doing business. Examine each fee you pay and question the value you're getting in return. When you understand what you're being charged for, you can make informed decisions and potentially save your business significant money each year.

Keep in mind, not all reductions are made by changing providers, and you should always approach negotiations with an open mind. By negotiating with your current provider or making simple changes to your transaction methods, you can often lower your costs. Not to mention, an upgrade to modern technologies can offer different strategies for reducing processing fees.

Aim for a relationship with your provider based on transparency and fairness. When all's said and done, you're in this together. Remember, small reductions can add up and make a big difference to your bottom line. Don't procrastinate on this – start your review of processing fees today!

From my desk to yours,