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Most software and ecommerce businesses need to accept credit cards.  Over the past four years, as the owner of an ecommerce business TSS Raido, I have learned the hard way how expensive credit card processing can be.  There aren’t a lot of resources on the net to help business owners negotiate on an even playing field, this is part of my attempt to fill the void.

Four Simple Rules to Getting Good Pricing

1. Don’t Accept Cancellation Charges

The fine print of many credit card processing contracts include a cancellation charge of at least $250 and as much as several thousand dollars.   There is no reason for a cancel fee and most salespeople have the authority to waive this fee.  Make certain that the fee is waived in writing, either in the contract or as an amendment.  If you have a big cancel fee your service provider has no incentive to give you good service.

2. Use Interchange-Plus Pricing

Credit card processors’ largest expenses are the payments they make to Visa and Mastercard.  Those payments are set by a complicated formula called Interchange and vary for each transaction (for example, the fee is higher when a rewards card is used).  It is set by Visa and Mastercard and cannot be negotiated (Mastercard interchange rates, Visa Interchange Rates).

When you use interchange-plus pricing, you agree to pay the processor their costs (interchange) plus a constant markup.  Since the markup never changes you ensure that you avoid any tricky fees.

Most smaller businesses do not have interchange-plus pricing, rather they have tiered pricing, where the processor groups the transactions into groups (with names like “Qualified” and “MidQualified”) and sets a fixed price for that group of transactions.

Large businesses such as Wal-Mart and American Airlines have always negotiated on an interchange plus basis because it results in a better deal.   Every credit card processor can provide interchange plus pricing and smaller businesses can benefit from this kind of pricing as much as big ones.

In this article, called Interchange Plus Pricing, a Beneficial Package?, a VP at Global Payments, a big processor, explains how processors use tiered pricing to take advantage of their customers:

“Traditionally, smaller merchants had pricing blended into three or four categories… This simplified the entire process. In addition, common practice was for acquirers to mark up and charge significantly more for ‘downgraded’ transactions (those that did not qualify for the best rate applicable). These ‘downgrades’ often comprised the majority of the profit acquirers received on merchants, as business owners focused mainly on the ‘qualified’ or best rate. Interchange-Plus does not allow acquirers to increase profit on ‘downgraded’ transactions… I would argue that acquirers only take money out of their own hands by accelerating the practice of Interchange-Plus pricing.”

3. Comparison Shop

Best results are achieved by businesses that comparison-shop between at least 5 credit card processors.

Make sure that you compare the offers on an apples-to-apples basis (interchange-plus pricing makes this easier) and make sure to let each of the prospective service providers know that you are comparison shopping.

Gateway (negotiable)

If you use an independent gateway, such as Authorize.net, you can expect a per transaction fee of less than $0.10.  If you use a gateway owned by your processing network, such as Orbital from Chase Paymentech or Linkpoint from First Data, then the per transaction fee should be less.

Interchange (NOT negotiable)

For a business that accepts credit cards over the net, does address verification and whose customers use a typical mix of cards, the average interchange rate should be about $0.12 per transaction plus 1.93% of volume.  So, if your business has $500K in credit card receipts each year and your average transaction size is $50, you will pay $10,850 in interchange fees each year.

You can get a more accurate estimate of what your interchange fees will be using this free credit card processing calculator (disclaimer, it belongs to TransFS, a business that I own).

Processor Markup (negotiable)

The amount that your processor marks up the interchange rate (remember, if you are not on interchange-plus billing this markup will be hidden) varies dramatically.  On average, businesses with $500K in credit card processing volume / year pay their processor about 0.90% on their volume, or $4,500 / year, on top of the $10,850 in interchange fees.
Unfortunately for us, the average pricing is lousy!

Without even trying very hard a business that size could negotiate the fees down to $0.10 per transaction and 0.15% (which would save you $2,750 / year in our hypothetical example).  If you are an informed and tough negotiator you can get it even lower.  Disclaimer- my other business TransFS makes money by automating this negotiation, allowing you to shop for credit card processing with an online interface similar to Orbitz or Priceline.

Total

In total, you should be paying no more than 0.10 (gateway) + 0.12 (interchange) + 1.93% (interchange) + 0.10 (processor) + 0.15% (processor) = 0.32 + 2.08%.  If you are paying more than that, you should consider shopping around or renegotiating with your current provider.

Other useful links:
http://www.informed-merchant.com
http://discerning.com/topics/services/paymentprocessing.html (very detailed but old)
http://www.politico.com/news/stories/0307/3115.html
http://waytoohigh.wordpress.com/
http://transfs.com/blog (disclaimer - my blog)

TECH cocktail Community Contributed Knowledge

Sean Harper is the co-founder of TSS-Radio, an online seller of satellite radios and accessories and
TransFS, an online comparison-shopping website for small business financial services, including credit card processing. Before starting those businesses he worked in venture capital at Longworth Venture Partners and William Blair Capital Partners. He is also a student at the University of Chicago GSB.

Do you have a great idea? So what are you going to do about it?

Many of us that love technology always have those little ideas that pop into our head.  You know the ones that say “Man I wish there was something that did insert idea here”.  Did you ever stop and think that you could actually take that idea and make it a reality?  In today’s technology landscape, the barriers to entry are so low, you should seriously look at taking the next step.  Once you do, you never know what can happen.

About 18 months ago, Amazon had recently released their new cloud storage platform, S3 (Simple Storage Service).  I thought it was way cool, but seemed to be lacking something, an easy interface to manage your data in their cloud.  Around the same time I started using an app on the Mac called Yojimbo.  It is a really cool app that lets you aggregate data, web pages, documents, etc into folders and tag them with metadata.  This was great except for the fact that all that data resided on my laptop.  I could not get to it while at work, on travel, or just away from my computer.  Then one night I had THAT question pop into my head.  “I wish there was a app like Yojimbo but on the web.”  That was my spark.

I thought about it for a while, as many do.  I wondered if I should do anything, but in the end I decided I was going to do something, anything and at least I could say I tried.  I had read books like Founders at Work and gleaned a lot of great insight and saw a direction I wanted to go.  I decided from the beginning I was going to do as much as I could on my own and control as much of it as I could.  I began with small scribblings in a moleskin of design concepts and notes here and there on business plan stuff.  Eventually a purpose, direction, and design came out of all of this.

The next step was to figure out how to take those ideas on paper and make them into a functioning app.  I knew form the beginning that I was not the person to do this.  I could have noodled my way through, but the time it took for me to do that would have been counterproductive.  So I decided to place a posting on Elance and let developers bid on my project.  Eventually I chose a provider and the work began.  I think the most important advice I can give you about this part of the process is to maintain a strong communication channel to make sure your wants and being implemented how you want them to be.  You are paying the bills, so make sure it is done properly.

It was a long process but in the end I got an application called MyDropBin, which is a user front end to your very own Amazon storage space that allows to save and share content, static and dynamic, and pay only for the amount of storage space you use.  It has been a great feeling just taking the step.  I did not spend a lot of money, and any that I did, I considered in investment in myself.

What has been so great about the process is the journey it has put me on.  I have tried to use social media to leverage PR for the product with virtually no PR budget.  It has afforded me the opportunity to meet great people and do a lot of really cool things.  It seems doors open and other doors and opportunities present themselves, ones that never would have had I not taken the first step.  The product has been running along.  Sure it could use some tweaking here and there and I do what I can where I can.  I have a full time job and kids, so time is sometimes hard to come by, but I do my best.

Recently I was listed in the Amazon Web Services Solution catalog and got a lot of registrations every day of people stopping by to check out my product.  I try to interact with all of them and find out what they think about the application and what can be done to make it better.  Eventually I will be able to start another development iteration and take the product to the next level.

What have I learned?  You never know what can happen, so take a chance and see.

TECH cocktail Community Contributed Knowledge

Jimmy Gardner is the founder of MyDropBin and 2Plus11 Technology. He works in the technology field as a government contractor. He also blogs at East Cost Blogging. He can be reached at jimmy@eastcoastblogging.com. Or add Jimmy as a friend in the TECH cocktail COMMUNITY.