Practically every business accepts credit cards today, especially given the growing popularity of ecommerce. But as a result, businesses end up losing a slice of their profit to credit card processors which ValuePenguin estimates takes 2 percent of each purchase. Credit card processors confuse business owners with a long array of fees and charges, and business owners end up paying more than they have to because they do not understand which processor is the best.
Accountants can help with this problem. We already advise businesses on cost cutting measures, and cutting credit card processing fees is an easy way to reduce costs which many business advisors overlook. In order to know how to reduce these fees, accountants have to learn the nature of credit card fees and where businesses can look to reduce costs. By educating businesses, you can reduce costs and make them more willing to accept credit cards, reducing the risks of fraud and theft.
The Important Fees
Websites like Authorize.net have a useful guide for understanding how the credit card process works if you want to learn, but the most important thing businesses and accountants need to know are the different fees. And while there may seem like a whole range of different fees, they can be categorized into two groups: base fees and markups.
Base fees are the cost of your sales transactions. These consist of interchange fees, which are the percentage-based fees per transaction most of us think of when discussing credit card processing fees, and assessments, which are based on a percentage of the total transactions per month. The important thing to remember is that these fees are essentially the wholesale fees for processing your credit card and are determined by credit card associations. As a result, there is no point trying to shop around for a lower rate with these fees.
Markups are where credit card processors try to make a profit, especially when issuing credit cards for bad credit. These are payments such as annual fees, leasing a payment processor, early termination fees, or fees which the business has to pay if it does not reach a certain transaction total. These are the obscured fees which give credit card processors a shady name, but most importantly are the areas where you or your client can negotiate to reduce costs.
To save money, you and your client should question each and every fee which is not related to interchange fees or assessments. The fee examples which I listed above are all bad examples of fees, but there are plenty more. A particularly noxious fee is when credit card processors impose a punishment for if your client decides to terminate the contract. Given how confusing said contracts can be, you should advise clients to not work with any processor which imposes that fee.
In addition to striking down as many fees as possible, also look at the pricing system. The two main pricing are known as interchange plus and tiered. Tiered is the more common option, but it is by far the worse of the two.
Tiered pricing works by placing businesses into one of typically three, though sometimes more tiers. More qualified businesses get a lower rate, while less qualified businesses get a higher rate. The problem is that processors can actually force you into the lower, more expensive tiers through methods which are outside of your control. Even if they are not so unethical, tiered pricing makes it harder to distinguish fees apart, making it harder to tell what clients are being charged.
Interchange plus by contrast separates the interchange, which as noted above every business has to pay, from the other payments. This makes it the most transparent method of payment and so you should strongly recommend your clients adapt a processor which uses this.
There are other ways to reduce costs as well. Processors will often encourage businesses to lease credit card processors from them, but this is a horrendous idea. Businesses will be using credit cards for a long time, and you should always buy instead of lease anything you intend to own for a long period of time. Good credit card processors can be found on Amazon for less than $200.
A Thorough Investigation
Given how complicated credit card processor contracts can be, it can take some time to go through them and figure out where your clients can pay less. But that is all the more reason to get started as soon as possible.
Credit cards are a net benefit to consumers and businesses despite the fees and other downsides, and accountants should encourage their use by making it as cheap and efficient as possible. Work with your clients to reduce costs by thoroughly going over fees and seeing where they are losing money and your clients will be surprised to see how much they save.
Gary Eastwood is a CPA licensed senior accountant from Seattle, Washington. He received his CPA license from the Washington State Board of Accountancy in 2001 before relocating to Onawa, Iowa in 2008. Over more than 15 years of accounting experience, Gary has worked with multinational health service providers and independent CPA firms. He has a proven ability in dealing with business clients from a variety of backgrounds as well as leading companies to greater efficiency and profitability. He is familiar with both US GAAP and China GAAP.