If you run a small business you probably get 1-2 calls per day from companies that want to provide you credit card processing services. Obviously there is money behind it, if the sharks are circling like this, but really, what’s going on?
I’ve been on and off the road for the last 6 months representing a credit card processing firm and I’d like to share what I’ve learned. Sadly, one thing I’ve learned is that travelling for a living is a young person’s game and my body isn’t up to the stress and strain of it.
This industry has really blown open in the last decade, ever since the real estate crash and changing regulations on the banking industry. There now are about 2500 companies vying for your custom, ranging from mom & pop shops and banks up to the companies that do BILLIONS of dollars a year in bookings. Every one of them can offer a different deal, and make up their own jargon to describe their pricing structure. With this kind of competition, the prices are coming way down, but if you don’t want to be the shark’s lunch you need to stay alert.
The “traditional” pricing structure of 3-4% is no longer a good deal, and I’ve seen clients paying as high as 5% to process their cards. The national average is 3% (all-in total cost) so a lot of small businesses have yet to take advantage of dropping prices.
“The Square” is a program that anybody with internet access and a willingness to look around is aware of. They make everything really simple and charge a flat 2.75% across the board, regardless of what you’re doing. It’s a great place to start, but if you’re running an established business that moves most of your money through cards, it’s still a big premium to be paying for that user-friendly interface.
“Retail Pricing” is what I’ll call most of the deals being offered today. If you can read a bank statement, balance your checkbook, and want to retain more profits by sharpening your pencil, then you have to start distinguishing between Amex, regular credit cards, and debit transactions, as well as between the variable costs of processing vs. fixed monthly costs of equipment and account access. Most larger businesses I encounter are in programs that run between 2.1 and 2.5% total cost all in. This seems to be “what the market will bear” and to make the processing companies profitable on a year-to-year basis – and it has to be on a yearly basis because the competition is fierce and there is a lot of jumping from one program to the next. And, yes, there is still money being left on the table by merchants that the sharks want a piece of. And yes, sales tactics can get ugly, salesmen can misrepresent things out of greed or ignorance, and some companies try to change the deal on you if you’re not sharp enough to notice (and of course most business owners have better things to worry about from time to time!)
There are lots of perks that the bigger companies can offer to help your business, that the little ones can’t. 24/7 customer support, funds back in 24 hours or less, customized footers with coupons and special event announcements, gift card programs, help with EMV & PCI compliance, and even lines of credit based on your demonstrated cash flow. Banks are somewhere in between the extremes, since credit card processing is a sideline for them. A lot of people trust their local bank, but recent headlines make us all uneasy about that.
“Wholesale Programs” break below the 2.0% barrier by pricing based on multiple years. They get their rates down super low by accepting that they won’t make money the first year, since they are investing hundreds of dollars in equipment and start-up costs, but then make a profit in years 2, 3, and 4. To do this, they must find customers that are able stick with them for multiple years. They do this with both carrots and sticks. The carrots include, of course, the best customer support they can give (there are however human limits) and guarantees that nobody can beat their rates, or they’ll match them and give you a finder’s fee. The big stick is that they’ll ask for a lease to lock you in, then aggressively enforce it. They have to, remember, as they’re losing money the first year.
Point of Sale software systems are where the credit card processors have embraced the digital age and really come into their own. You might even be willing to pay more to get the power of a system that knows your menu, tracks your raw materials and helps you manage inventory, schedule your employees flexibly and sends out reminders, and tracks payroll. Some interface with QuickBooks to take care of accounting and taxes. Unfortunately, many of these older systems lack ongoing software support and are not designed to accommodate the latest security features, i.e. EMV chip readers. The penalties for not being EMV chip compliant have been mounting since October 2015 and many of these small companies just don’t have a solution and are stalling in lieu of an upgrade. Others like pharmacy POS’s are industry-specific and the providers try to hold onto their clients, despite the traditionally high rates, by raising unfounded fears of chaos ensuing if the clients try to change who processes their cards. Actually, the software company and processing companies are already independent and it’s a simple matter of redirecting the bank routings, but for example the old RX30 systems won’t let you keep using their software unless you keep processing with a company that gives them a kick-back, whereas the newer QS1 is more open.
All in all, credit card processing is a confusing and stressful aspect of running a business. But, the reason the sharks are circling is that merchants are leaving so much money on the table. The First Data Network, that actually shuffles most of the money around, moves about $1.5 TRILLION dollars around each year. If we all saved 1% of that, it would put $15 BILLION back into the pockets of the merchants – but merchants can’t talk directly to them, you have to go through one of the 2500 independent sales organizations that provide the equipment and customer support interface.
That’s a lot of money, and it’s out there flying in the wind for anybody to grab. And that’s why there are 2500 companies trying to talk to you about it. On the bright side, you’ll never be lonely again – just wait, and your newest best friend will be calling you shortly….
If you really don’t want to talk to them, say “no” and hang up, or they’ll think they have a foot in the door and will send somebody like me, but younger, to drop by for a chat.
If you want the long story and all the gory details (the professor in me is irrepressible) about what a wholesale program looks like, or just need some help understanding what you’ve got now, give me a call.