Finding the right merchant services account to process credit cards at a small business is a little like trying to book a room at a choice summer vacation spot in the middle of August. It can take so much research that the temptation is to give up and collapse on a shady hammock in the backyard.
"It is a commodity product, but no one who is actually researching it or going to a particular vendor would know it is a commodity product," says Marc Prosser, publisher of FitSmallBusiness.com, a New York City-based product-review site that covers merchant services providers and accepts credit cards itself. "Everyone slices and dices their fees in different ways."
Daunted by the thought of repeating the hunt again, some business owners stick with a merchant services account they secured as a startup, but that now costs them more than they should be paying. "Generally for a small business, especially if they don't have a demonstrated history of ability to process credit cards, most of the time in the beginning they are going to pay a little bit more," says Kim Stuart, a veteran of the payment processing industry who is a partner in Domino Research, a San Francisco Bay Area consultancy.
You don't have to be stuck with ultrahigh rates. If you know some basics, it's possible to find a new account or improve an old one so you are getting the lowest fees -- or the most stable ones, if that's what matters to you -- without hours of grueling hassles. Here are some questions to ask yourself to determine if it is time to shop for a new merchant account.
Have my fees suddenly skyrocketed?
Many small-business owners get their merchant services account through their bank. If your fees have suddenly gone up, ask a banker at your current institution to sit down and figure out with you if your plan reflects the way customers are now using cards at your business, advises Vito Pagano, CEO of Independent Merchant Group, a merchant services auditing and consulting firm in Westbury, New York, that is not affiliated with any bank or credit card company.
You may need to try a few different branches of your bank before you find a banker who can be an advocate for you. "Most of the time, the people in the banks selling merchant services came from the mortgage side of the bank," says Pagano. "They are not seasoned to understand how a small business functions."
Once you've found a banker who "gets" your industry, bring statements from your merchant processor and take a close look at where you are getting hit with fees. It could be that a plan you chose shortly after launching your business no longer works because of a subtle difference in card usage at your business.
Say you started a pizzeria eight months ago and chose a "tiered pricing" model, where the fees you pay to process transactions depend on variables such as the card issuer, whether the customer's card is a rewards card, or where the sale was conducted -- in person or via the phone or Internet. Two months ago, you added free deliveries and began taking credit card orders over the phone. Suddenly you notice you're paying higher processing fees.
There's a reason for that, says Pagano: Fees are higher for phone transactions because the risk of fraud is greater. However, there are ways to mitigate that risk, such as asking for card holders' ZIP codes when they order by phone. If you set up your processing machine to follow procedures like this on every transaction, it should lower your fees.
"There is no reason your bank can't reprogram your machine to do card-not-present transactions," says Pagano. "Once they reprogram the machine, it is now going to start asking for a ZIP code."
Going to a "friend of a friend" who does credit card processing will generally not get you the best deal, Pagano says. "Because there is a third or fourth party involved, the fees are astronomically higher."
Are my credit card fees unpredictable?
In startup businesses with limited cash flow, a substantial swing in overhead from month to month can be disastrous. As a result, a merchant processing plan with tiered pricing, where not all of consumers' cards have the same processing fees attached, can create too much unpredictability for some businesses to manage comfortably. If that is the case, you may find that it is better to switch to an "interchange plus" plan, where you pay the same fee for every card in every circumstance.
John Walko, a former outside salesperson for First Data who runs the Web design company webdesign59.com in Charlotte, North Carolina, with his wife, chose the interchange plus model for the business, which they founded in 2010. In interchange plus, merchants pay a fixed rate plus a set markup. "We got a very favorable rate," he says. "Interchange plus is always the same. Once a year, it may change. There are no hidden fees built in."
As Walko explains, Visa and MasterCard set the interchange rate, and they periodically evaluate and adjust it, though the markup percentage remains the same. For instance, if interchange is 1.58 percent, and a merchant is paying 0.1 percent above interchange, a merchant would pay 1.68 percent in total. If Visa and MasterCard raise the interchange rate, the merchant will pay 0.1 percent above the new number.
Some entrepreneurs seeking predictable fees have turned to middlemen such as Square, Stripe and PayPal, which offer set fees for transactions. In a 2013 survey by the National Small Business Association, 69 percent of firms said they accepted credit cards or debit cards for online payments, down from 91 percent in 2010. Meanwhile, the percentage of respondents that take online payments via PayPal rose from 22 percent in 2010 to 47 percent in 2013.
Michael Lepinay went with Stripe, a PayPal competitor. He is a co-founder of Clearstream, a provider of SMS marketing software based in Pensacola, Florida. The startup, founded in 2009, initially used a traditional merchant account provider and payment gateway for credit card purchases -- all of which take place online -- but got frustrated. "Their fees were not transparent," he says. "We weren't able to predict what we were paying per charge."
Finally, about two-and-a- half years ago the company switched to Stripe, which charges a flat fee of 2.9 percent plus 30 cents per transaction.
"With Stripe, it's a pretty clear set fee," Lepinay says. So far, he has been happy with Stripe, saying the company's technology works well and payments flow smoothly. "We receive the money within 24 hours," he says.
What kind of customer service am I getting?
When Allen Walton set up his online security camera store, SpyGuy Security, in May 2014, the path of least resistance was to use Stripe. Stripe is the default payments platform for his store, which was created with the Shopify e-commerce solution. Stripe is integrated into the Shopify Payments service, which enables those who set up Shopify stores to accept payments over the Internet. "Shopify will charge a transaction fee to merchants on their website if they do not use Shopify Payments," says Walton.
But when the business took off quickly, his cash flow suddenly came to a screeching halt. "After three months of doing payments on my website they shut me down for no reason at all," says Walton. He suddenly got an email from Shopify Payments noting that he was processing a lot of payments. It requested information such as a copy of his driver's license within five days.
"They didn't give me the five days," he says. "The day I got that email was the day they shut me off. They didn't deposit any money in my bank account. I couldn't make orders for equipment and pay for ads. I couldn't do anything for a whole week. I had the CEO of Shopify message me about how sorry he was about the whole thing."
Although Shopify gave him a few months free as result, he says, "It was a really, really difficult time for my business." Walton got frustrated in a separate situation when a customer disputed an order that resulted in a $1,200 chargeback. When he requested details so he could dispute it, he says, Shopify did not provide him with what he needed, so he turned to American Express to get the facts. Once he disputed the chargeback, he says, American Express resolved the charge in his favor. Nonetheless, Walton is now on the hunt for a new way to process his payments.
Asked to comment on Walton's problems, a Shopify representative sent an email that said, "Unfortunately, we are unable to comment on specific merchants or transactions due to our privacy obligations. We are always interested in feedback from our merchants and have already reached out to this merchant to resolve any issues. We are committed to ensuring our merchants' satisfaction with Shopify and Shopify Payments."
Can I leave my current processor easily?
Many entrepreneurs run up against a thorny problem when they try to change processors: The processor won't hand over the records of their past transactions so customers' records can be transferred to a new account.
That happened to Lepinay. "That was one of the things that left us with more of a sour taste with the traditional merchant providers," says Lepinay. "We were using one of the biggest in the world. Once you want to request records, you had to give a reason. Ours was we were moving to another provider -- and they wouldn't release them."
This isn't an easy obstacle to get around -- especially if you use one of the newer middlemen. "When you use PayPal, Square or Stripe you are using their merchant account," says Stuart. "If you try to walk away and go somewhere else with that business, they are not going to give you that customer's data."
But if you are paying fees that far outstrip what you should be, starting over from scratch with a new processor could be worth it. "If you shop around and go to five different account providers, they will tell you the exact rate you'll get on everything," says Walton. That information may be all you need to save a boatload of money.