“So, how much are you paying for transaction processing?” I once asked a friend of mine who owned a small retail store. According to his words, he was paying only 2.5%. But when we looked through his merchant statements, it turned out he was actually paying 5.8%. Quite a difference, isn’t it?
Was that merchant so ignorant? Well, yes and no; the truth is, some people simply do not read their merchant statements carefully enough. One item of the guy’s merchant statement indicated that his processing fee, indeed, amounted to 2.55%. However, after that, the statement listed additional surcharges and markups. When put together and compared to the overall processing volume, total processing costs amounted to almost 6% of this volume.
So, how can you figure out how much you are actually paying as a merchant? And what can you do if you are really paying too much? Here are three intuitive steps you should take to understand your processing costs and reduce them if necessary.
Step 1: How much are you paying?
As you can see from the story, first and foremost, you have to understand, how much you are actually paying.
The rule of thumb is as follows: if you are paying more than 3% of transaction amount, then your processing terms are not so great. The approximate “standard” for the industry is 2.9%. However, even this amount can be reduced.
Moreover, if you are paying less, for example, 2%, then in some cases you can negotiate even better terms. However, such a possibility will depend on card types you are accepting and your processing volumes.
Step 2: Why are you paying that much?
If you are paying the above-the-average amount of fees, then there must be some reason for that.
3 reasons behind high processing costs:
1) Payment types. Which card and payment types are you accepting? Maybe, your customers are paying exclusively with rewards cards, which carry high cost associated with them. So, while you are thinking that 3.5% is too much, it might just be the reality of your business. (There are Amex cards, for which the cost of processing exceeds 3.5%).
2) High risk. Another reason might be that you business is classified as high-risk. So, your processor wants to be rewarded for processing of high-risk payments with an adequate premium in the form of extra fee to offset the risks.
Have you joined the latest trend and started growing marijuana? Say, you are legally selling it for medical purposes, but the fees somehow seem too high. Well, in your case it is not only your processing costs but also your customers that can get high, so it is not surprising you are considered a high-risk merchant.
3) Low volume. Still another reason might be your relatively low processing volume. The rule of thumb is: “the processor roughly makes a 1% margin”. Some make more, some less. So, if you are processing $10,000 on a monthly basis, then that is a $100 worth of profit for the company providing the service to you. Some say, that’s too much; however, there are infrastructure-related indirect costs, security, PCI, etc.
Let us say, you are making websites. Their designs are great. You are charging your clients $10,000 a month. The amount makes you feel proud of your successes and provides you with awesome living. But for your payment processor that is still very little profit. So, you have no reason to feel offended if he refuses to lower the processing fee for you.
Step 3: If you are really paying too much, make your move!
But what if none of the above-listed reasons apply? You are not a high-risk merchant. You accept just the most common card types, like most of your competitors. And recently you have reached significant processing volume. But you are still paying a lot. Well, it looks like it is the right time for you to renegotiate your processing conditions. You can either ask your current processor for more favorable processing terms or look for a new processor.
Before searching for a new processing partner it never hurts to consult the specialists. If you need targeted advice regarding your particular situation, you are welcome to consult payment experts at UniPay Gateway. They have helped many companies establish mutually beneficial acquiring and processing partnerships.