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home | Merchant Account Service | The Profitability and Pitfalls of Cr . . .
 

The Profitability and Pitfalls of Credit Card Processing
By Adam Moss, Charge Card Systems

In today's marketplace businesses everywhere are experiencing shrinking margins as competition and the cost of doing business increase.

But it is not only shrinking margins that are of a concern to a business, it is also the cash flow crunch caused by increasing receivables and the inevitable bad debt. The combination of these two places a tremendous amount of strain on a business in its efforts to grow and succeed.

The acceptance of credit cards helps alleviate these woes.

Accepting credit cards helps to lower receivables, eliminate bad debt, improve cash flow, and earn a cardholder a significant amount of reward points. The list goes on. What a wonderful concept, the answer to our prayers! However, somewhere in the back of your head you think "Caveat Emptor", Let the Buyer Beware.

As I mentioned, accepting credit cards is a winning proposition for all businesses. At the retail level customers tend to spend more when they know they can put the sale on a credit card and have 30 days to pay.

Accepting credit cards provides people with a payment option that gives them flexibility and at the same time helps earn them a new iPod or their next trip to see Grandma.

However, when working with a credit card company how do you know if you are getting the best possible deal? Do you feel comfortable that you asked all of the right questions and received all of the right answers? Do you feel comfortable that what you are being told is what will occur as opposed to fearing the bait and switch?

The processing industry can be very complicated, and too often businesses, though no fault of their own, don't understand the pitfalls that await them. Just like we need to maintain our health by exercising regularly, business owners must exercise their financial acumen when analyzing whether they have the best credit card program for their particular organization.

The word "program" here is critical as there are different programs and solutions depending upon the needs of an organization.

"What is your rate?" is the first, most common question asked by businesses already accepting credit cards, or by someone shopping around and looking to accept credit cards for the first time.

Yet the "base rate" is only part of the equation. The credit card industry has numerous "hidden" costs which can, and will, inflate credit card fees. Unfortunately most businesses are unaware of the potential pitfalls and how the additional fees are adversely affecting the bottom line.

You need to know

Visa and MasterCard maintain different rate structures for different types of cards and based upon how a transaction is processed.

Did you know that there is a higher fee structure for manually entered transactions? It is therefore imperative to understand the way a transaction is conducted and the effect on your business. For instance, are the majority of the transactions swiped (card and cardholder present) or manually entered (card and cardholder not present?) and should the account be set up as a swipe account or manually entered account?

To give you a sense of the difference in pricing, a business that is set up to mainly swipe cards and is being charged a rate of 1.76%, could pay up to 3.50% if they were to manually enter the same transaction and did not provide the information required by Visa and MasterCard.

Conversely, a business set-up to manually enter its transactions could be charged a rate as low as 2.25%. Did that get your attention? Here is a quick tidbit. On manually entered transactions Address verification, entering the billing address and zip code, will ensure the transaction is priced appropriately and will not be hit with a high surcharge. Needless to say, if a business is unaware of how a particular transaction can be priced or is set up incorrectly, it will have an adverse affect on the bottom line.

In addition to discount rates there are transaction fees.

Not having a transaction fee does not necessarily ensure the best rate structure. Companies will "bundle" their rate, combining the discount rate and the transaction fee to give businesses the appearance of a better rate structure. However, in situations such as this the discount rate will be much higher, which could adversely affect the bottom line.

Bundling a rate makes sense for those businesses with a low average ticket, $50 or less, and hundreds of monthly transactions, such as a restaurant. Don't get caught up in the game of not having a transaction fee, it may not make sense for your business.

Many credit card companies will offer a low introductory rate, which to a layperson will seem unbelievable. However, what will be unbelievable will be the "downgrades" or penalties that a business will be paying, without even realizing it.

There are so many additional issues that have to be addressed besides a low base rate, such as transaction fees for third party cards (Amex, Discover), the percent of manually entered transactions, number of business cards accepted, monthly fees, batch fees, etc. As a result of the additional fees, in order to run your business in a financially astute manner, you must know your "effective rate" (takes into consideration all charges) vs. your "base rate", the most common rate expected.

Two issues that are rarely raised are funding and collection of fees. Do you know how long it takes from the time the batch is settled and the money is deposited into the bank account -- is it 24, 48 or 72 hours?

Why should you have to wait three days to get funded, doesn't 12 hours sound better? Guaranteed 12hour funding is available. When is your discount fee taken, daily or monthly? Would it be easier to reconcile your bank statement if the funds deposited were gross? Think about the savings on interest, the float of your money plus increased cash flow if your fees were removed at the end of the month? It certainly adds up and these issues will help greatly with your cash management.

As stated at the beginning, accepting credit cards is a winning proposition for businesses. Hopefully now you have the information necessary to ask the right questions the next time someone wants to speak with you about your credit card processing.

Or you decide it is time to check up on your current processor to ensure they are taking care of you. Ultimately it is important you are made to feel empowered that you are making an educated decision. After all, it is your business and your bottom line. There are many good company's in the marketplace, do your best to align yourself with one that wants to build a relationship and partnership. Just be careful


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·  Credit Card Processing 101
·  Merchant Account / Credit Card Terms Glossary
·  About Charge Card Systems -- Our Preferred Merchant Account Provider
·  We've Chosen a "Preferred Vendor" to Process Credt Cards