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Credit Card Processing Fees; Get Out the Magnifying
 Glass and Carefully Read the Entire Agreement
By Melissa Campbell, Alaska Journal of Commerce, Anchorage
Knight Ridder/Tribune Business News

Nov. 27, 2005--Sunshine Sports owner John Bice freely admits it: He has next to no idea what all those charges and fees are on his monthly merchant services statement.

"It's incomprehensible," he said. "But it's just part of the costs of doing business, an increasing cost. You just suck it up. It's not like we have bargaining power."

He's not far off, say those in the business of credit and debit card processing.

"It's all very confusing," said Mark Lawrence, relationship manager with Heartland Payment Systems, a company that provides merchant services to businesses.

Heartland is one of the nation's few third-party administrators of merchant services to openly discuss the processes and the various fees relating to accepting debit and credit cards. And even Lawrence doesn't know it all.

Many merchants open their monthly statements and quickly develop this befuddled expression. There could well be 15 or more different types of fees, depending on how many different types of cards the business accepted that month. There are also various processor fees and something called discount per item fees -- a seemingly oxymoronic term that no one seems to know much about. (Attempts to contact Visa Corp. for information about the fees were unsuccessful.)

And those rates and fees can change with little or no notice.

"They make it as absolutely confusing as possible," said Marx Brothers Café co-owner Jack Amon, who has been in business for 30 years. "That's why a lot of people fail in small business. You think you can cook great, then no problem. But you have all this other little stuff to deal with too."

Customer demand dictates that businesses take credit and debit cards. Debit card transactions have now topped the number of checks written to merchants.

What are all these fees, and how are small-business owners supposed to know if they're being overcharged?

Finding help -- especially from an entity that has nothing to gain by ending the bewilderment -- is difficult. Web searches on the issue on the national Small Business Administration, the Small Business Development Corp. and the Chamber of Commerce -- all organizations that strive to help small companies -- came up empty.

Though they don't consider themselves experts, Gene Fairbrother, lead small business consultant with the National Association for the Self Employed, and Amon had some common sense tips on shopping for merchant services.

Heartland's Lawrence also provided some ideas.

The first step to finding a merchant services provider is to ask businesses around you who they use, Fairbrother said. Also, check with your local trade association to see if it has brokered a deal with a processor. Many trade associations have agreements with processors and have bargained for reduced rates and fees for their members.

Before signing a contract, shop around and compare the fees. This is probably the most confusing part of accepting cards.

"Merchants should shop three to five processors, and tell them you're shopping," Fairbrother said. "That way, business owners tend to get more information, and that increases the learning curve."

When businesses want to accept credit cards, they go to a bank or a third-party administrator, which is a processor that resells the service for the credit card companies.

Amon said he used Wells Fargo Bank for merchant services for years, but the bank raised its rates to a point that he felt was too high. So he started shopping around.

He called Heartland because that organization is associated with the Alaska Cabaret, Hotel, Restaurant and Retailers Association. In the end, Amon signed up with Electronic Merchant Services, an Outside company, but in talking to Lawrence, Amon said the process became much clearer.

Lawrence suggested asking the merchant services salesman for a list of every fee that may be applicable to your account, and for how long those rates would be guaranteed.

Businesses that accept cards -- credit or debit -- are charged fees for every transaction. The fees are called interchange rates, and are a percentage of the value of the transaction. That percentage is different for various types of businesses: restaurants are charged different interchange rates than a department store, for example.

In addition to the interchange rate, each transaction is also charged fees that go to pay the merchant services provider and something referred to as a discount per item fee, which is paid to the credit card company.

The rates may change for small purchases, $15 or less, purchases of between $15 and $25, and for $100 or more.

The average interchange rate ranges from 1.12 percent to about 2.8 percent, Lawrence said. The interchange rates vary depending on whether a credit or check card is used, whether it's swiped or hand-entered into a system, and if you have the customer's billing information. There are different fees for the various credit cards -- awards cards (such as airline miles), signature cards (various rewards cards), corporate cards or just a plain bank-issued credit card.

The lowest rate is given for PIN-entered debit card purchases that typically incur the merchant a flat fee. Signing for a debit transaction puts the sale into the interchange rates and comes in at a slightly higher fee.

The processing company serves as the middleman for the transaction, taking care of the money transfers between the customer's and merchant's banks, and between Visa and the merchant. The company charges a fee for that service, about a nickel.

Overall, the processor generally keeps 15 percent of all the fees, while Visa or Mastercard receives 85 percent, Lawrence said.

At the end of the month, the business owner gets a statement displaying the total transactions and the various fees.

While talking to the salespeople about the services, ask too about equipment costs. Processors generally encourage leasing equipment. Determine the costs of leasing versus buying. Fairbrother said that leasing the slide card terminal can cost upward of $1,000 during the term of a contract, where buying a terminal may be closer to $300.

Once deciding on a provider, get out the magnifying glass and carefully read the entire contract, Fairbrother said.

"The person who finds the information confusing is probably also the person who hasn't read the information and understands it," he said. "Business owners don't read the contract, and it has everything in there. They say they don't have time to read a 20-page, small-print document. Credit card companies are more complex and (extra charges) come after the fact. But you should understand what all those charges are, and they are in the contract."

As with any business decision, make sure to sign up with someone you feel you can trust, Fairbrother said. "Make sure they are giving you a fair value," he said. "They may not be the cheapest, but they will treat you right."

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To see more of the Alaska Journal of Commerce, or to subscribe to the newspaper, go to http://www.alaskajournal.com.

Copyright (c) 2005, Alaska Journal of Commerce, Anchorage

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