In many ways, technology has made life easier for small business owners. However, advances in online marketplaces, new payment technologies and regulations within the financial services industry have all made “merchant services” a complex landscape for small business owners to navigate.
In simplest terms, merchant services are the set of activities and support required for a business to accept credit and debit card payments. This covers everything from the way you capture the card number and obtain an approval at the point-of-sale (POS), to the act of clearing the transaction and receiving funds from your bank. Most banks use a third-party processor to actually handle the transactions.
The first thing a small business owner is likely to ask is, “How much will it cost me to accept credit and debit cards?” This can be the most complex part of accepting credit card payments. There are two key components to understand in pricing credit card transactions: interchange fee and merchant discount.
Interchange is the fee that a merchant’s bank (the “acquiring bank”) pays a customer’s bank (the “issuing bank”) when merchants accept cards using card networks such as Visa® and MasterCard® for purchases. The merchant discount is the bank’s fee for processing transactions. Your bank has a pricing model that passes on the interchange and merchant discount to you, as well as other overhead costs associated with accepting credit card payments.
Each bank has different pricing packages and rates – both floating and fixed – which make it difficult to compare payment plans side-by-side. In choosing a bank, it’s helpful to develop a “pro forma” of monthly card sales to run through the pricing model of each bank. This provides a more accurate picture of total bottom line costs of accepting credit card payments. But cost of credit card payments alone shouldn’t be the sole deciding factor.
Each type of card runs on a separate “network,” or line of communication between POS and account authorization. That’s why you decide which credit card brands to accept and which to let slide. Most banks provide services for credit card brands including Discover®, MasterCard® and Visa®,but not all banks provide services for American Express®. Pricing differs between networks. For this reason, many banks offer streamlined pricing packages that place credit and debit card products into various pricing models to fit various business needs.
The next key component is determining how you’ll conduct business, and where and from whom you accept cards. If you have a fixed storefront with a traditional POS, this is a relatively easy decision. Your card terminal (where you swipe the card) is integrated into your register, or set up as a separate, stand-alone unit.
“Card present” transactions, where you physically swipe the card, are less risky and often carry lower costs to your business. Technology also allows banks to offer wireless payment methods that deliver the same functionality as a traditional POS card terminal, but the terminal travels with you (or your sales team) so your business can accept payments from the field, or at different locations.
Web-based businesses can accept payments either online or over the phone. Typically, transactions are passed to banks for approval with the understanding that online sales cost more because of the inherent risk of accepting a credit card payment from an unknown buyer who may be 12 time zones away.
If you own an online business, or you’re planning to start one: (1) get a merchant account to accept credit card payments; and (2) expect to pay a higher percentage of each sale to the merchant bank and/or card issuer to cover the additional risk of doing business in the world of potential hackers. Specifically, for online businesses, many merchant banks offer “shopping cart” or “checkout” module integration with your website. An example of an online payment gateway is PayPal®, one of the most widely used providers in the on-line space. In this case, the merchant bank provides value-added services beyond just card acceptance for a fee. There’s on-line shopping cart technology, reporting, fraud tools and other components built into the agreement.
The (Really) Fine Print
It’s important to understand exactly what you’ll be getting in the service package offered by the card issuer, whether you operate an online business, a traditional brick and mortar store or a combination of the two – something we see more frequently as consumers move online to do their shopping.
Each type of credit card has rules, procedures and fees, and, as the small business owner, you should understand what liability your business assumes when it accepts credit and debit payments. As with any contract, study the full schedule of fees and liabilities to ensure that you understand where the lines of responsibility are drawn.
Accepting credit cards is probably going to cost you anywhere from 2% to 5% of the total sale, plus transaction fees. Each credit card website (e.g. Visa) provides information on merchant service terms, and business support organizations, such as the Merchant Council (www.merchantcouncil.org), contain more thorough background information on each area of the process of extending credit using plastic.
Due to the complexity of this part of your business, it’s highly recommended that you invest additional time upfront to understand how card acceptance fits into your business model, and what it’s going to cost you for every transaction. This better enables you to price goods and services so consumers pay a portion of the fees associated with credit card payments. Crunch the numbers and know what it’s going to cost to create as many payment gateways as you can.
Remember, whether you own a traditional storefront or an online business, the easier it is for customers to make payment, the more payments you’re likely to receive. However, it’s essential to figure out what those credit card sales cost and to price items or services so that your business margins remain attractive on each sale.
The information contained herein may not represent the views and opinions of Nevada State Bank or its affiliates. It is presented for general informational purposes only and does not constitute tax, legal or business advice.