Why a Merchant Should Never Pay Over 4% in Total Processing Costs

How to spot a bad processing deal 101

It's true: I've spoken with merchants who thought that they were paying a fair price on their processing service even though the aggregate total they were spending for a month of processing was coming out in the range of 5 to 7%. That's right, because they had been with the same service for years and it was provided by a "reputable" company (or even their own bank), these merchants assumed that they were paying market rates and not getting ripped off. But they were wrong.

One of my clients, a plumber, had been paying over 7% when the "discount" rates and transaction fees and monthly fees had all been added together. When he told me this I responded that I was sure he must be mistaken, that no legitimate company should be setting him up at rates that high for his business. But there were his statements, clear as day, and he had been with this same processor for over a decade, just handing the company his hard-earned cash.

All a merchant has to do is check their bottom line. If your total costs to process exceed 4% for any given month and you swipe cards in a retail environment, you have a bad processing deal. Period. Go ahead and figure in the cost of PCI compliance, too. If you're still over 4%, there is a better option on the market. Even if a merchant is primarily processing keyed-in transactions via the Internet, phone or mail order, the total costs should normally be under 4% as well. (Because of some additional costs to process through gateways or shopping carts online, those expenses may need to be removed from this discussion. However, many businesses do spend much more than necessary on gateway fees, so those ought to be examined carefully as part of the bottom line.)

Mobile Processing Solutions With No Contract or Commitment

The bottom line is that the movement to process over mobile devices has opened a number of options with relatively fixed costs and little risk. Using a product like PhoneSwipe, SquareUp or PayPal Here will allow merchants (and even individuals taking personal payments) to swipe cards for pre-determined rates without any monthly fees or PCI costs. In theory these costs are built into the higher percentages charged for this type of "Pay As You Go" service. The inexpensive card readers, which retail for about $99, are actually so cheap that the providers essentially give them away. But the theory goes that these transactions are still profitable in spite of the lost transaction fees on most swiped payments, and this niche of the industry continues to be more competitive.

For most high volume merchants, these "Pay As You Go" plans are still going to be much more expensive than a competitively structured Interchange Plus or even a four-tiered or six-tiered "Discount Rate" plan. But merchants know going in that the most they will get charged is in the range of 3.5% and less than $0.20 per transaction with these no-commitment arrangements. If that totals out to more than 4%, which is possible if the average ticket total is too low, then there is still going to be a better plan available. But by and large this is a litmus test for any business: how would costs compare if the simple switch was made to a mobile plan? 

Even when mobile plans are not the appropriate choice for a business, the fact is that there are affordable processing solutions out there. No merchant should be paying higher costs for processing than necessary and all it takes is a quick check of the statement.