In a world of debit cards, online banking and other electronic transactions, how a business gets paid can be almost as important as how much it gets paid. That’s because most forms of payment other than cash come with fees. If not actively monitored and managed, these fees can put a serious dent in profits.
While the hardware for processing electronic transactions is fairly standardized, the cost for each transaction can vary widely between vendors. At a time of paper-thin margins, it’s a cost of doing business that’s hard to ignore.
Understand Merchant Account Fees
Fees associated with credit and debit cards are typically paid to a merchant account—a third-party processor that acts as a liaison between your business bank account and either the credit card issuer or your customer’s bank.
A merchant account allows you to accept credit card and debit card payments with a swipe of the card at the point of purchase, or “card not present” transactions over the phone or online. When the transaction is processed and complete, there is a credit to your bank account.
Many merchant account providers offer similar services. One of the key differentiators is their fee structures. Before signing a contract with a merchant account provider, or changing to a new provider, it’s important to understand these fees and how they affect every electronic transaction. Since accepting credit and debit payments is quickly becoming an essential customer service, it is not a question of if you will sign a merchant account contract, but with whom.
As you research merchant account providers, you will encounter terms that you should recognize and understand:
Transaction fees. A fixed fee charged per transaction, whether it’s $25 at the gas pump or $2,500 for a home entertainment system. Transaction fees are going to have less impact on larger sales than on small sales.
Discount rates. This is a flat percentage of sale charged for every transaction. Like financing rates, discount rates vary widely between merchant accounts. Before making a choice based solely on a low discount rate, check out intangible, but still important, items like customer service, contract terms, as well as other fees charged by the merchant account.
Chargeback rates and chargeback reserves. Chargeback reserves may be required by the merchant account provider to cover losses due to sales that are repudiated due to fraud or other reasons. The reserve protects the provider against losses. To build the reserve, the provider holds a percentage of total monthly sales on a rolling basis, with the percentage determined by a risk assessment of your business. Any losses incurred by the provider are then covered by funds in the chargeback reserve.
Monthly limits. As a precaution, some merchant accounts will impose limits on the level of monthly revenue they will process. A fee is charged if you exceed the ceiling. Some set the limit very high; others have no limit at all. Past sales can act as a guide. Plans for a change in the source of sales, from strictly retail, for example, to retail and internet sales, should be considered.
The fees you pay can also depend on whether your customer chooses to process a transaction as a credit card or a debit payment. Generally, the fees are lower for a debit transaction using a PIN number, and the amount is credited to your account sooner. Credit card transactions may be charged a discount fee, as well as a transaction fee and even a monthly fee.
Another factor to consider when establishing your merchant account is the timing of the deduction from your bank account for the discount rate that will be charged by the merchant account. Many merchant accounts will simply debit your bank account once a month for their fee. However, some merchant accounts will deduct their fee on a daily basis. This type of arrangement may make reconciling your bank account more difficult and time consuming.
Don’t Forget Customer Service
Intangibles like reputation and customer service should also weigh heavily on your decision. In the end, you will want low total fees, but cut-rate merchant account providers may be financially unstable, unreliable and provide poor customer service. Also consider the vendor’s capability and willingness to integrate with your existing accounting systems and software.
Electronic transactions should be as routine and uneventful as that old stand-by, cash. Balancing these factors should lead you to the right merchant account for your business. iBi
Matt Smutz, CPA, is a partner in Clifton Gunderson’s Peoria office.