This is the last article I authored for PowerSports Business before the editor Dave McMahon moved on to work for Volcon ePowersports as their channel marketing manager. As many times as I’ve discussed with dealers how credit card processing works (or doesn’t), there are still a broad swath of dealers who don’t understand how transaction fees are calculated, or what they can do to reduce those costs. This was also a hard article to put together because none of the parties that benefit from this opaque process were willing to speak on the record.
So, on to the meat of this topic.
There’s a reason why the ability to compare and shop the credit card merchants is so complex. It is designed that way. In building a system that involves a multitude of parties and layers within the system, it’s easy to find areas where costs and fees can be added in, ones that are easy to overlook. Do you remember the movie where the guys modified a computer system so that the small amounts rounded off from transactions were deposited into their banking account? They thought that it would generate a few bucks, but quickly turned into millions of dollars. That movie could have easily been about the credit card industry. Each day you accept credit and debit cards, some of your profits are siphoned off by a third party.
While it’s almost impossible for a business to not accept credit cards, there are many steps that can be taken to minimize the cost for processing those cards. Understanding the costs and processing fees can also go a long way to helping dealers to negotiate reasonable rates. Dealers need to understand there are differences between credit and debit cards and the costs associated with each one, but for simplicity, in this article I’m only going to focus on credit cards.
- Costs for processing credit cards fall into 4 primary categories. There are other incremental fees, but these are the key item to focus on.
- Transaction fee – most processors charge a fixed cost per transaction, and this will normally be the same regardless of the amount charged.
- Interchange fee – this fee is a percentage set by the credit card association that is deducted from each transaction and a portion of this fee goes to the issuing bank. A standard bank issued card will typically have a lower interchange rate than a rewards or points type card.
- Assessment fee – the Assessment fee is charged on the total of your monthly sales for each credit card brand and the entire amount is paid to the card associations (Visa/MC/AmEx/Etc.)
- Processing fee or Markup – These are the direct costs paid to your merchant processor, essentially this is the money they use to pay for their reps, fund their technology, and what’s left over is their profit.
There are a myriad of other fees that creep into the system. Processors might have a monthly statement fee, equipment fees, customer service fees, risk fees, chargeback penalties, and many others. Business owners should also be aware that there are hundreds of interchange classes, and varying interchange/assessment classes are two of the primary reasons why it can be so hard to compare processing costs.
It’s important for business owners to understand that the same card can incur different fees depending on how the transaction is processed. The lowest cost per card is typically obtained when the card is chip enabled, the business has PCI compliant equipment, and the customer’s zip code and address match up with what the processor has on file. Everything you do that deviates from the best-case scenario costs you more. Zip code in your DMS doesn’t match up with the customer’s billing zip code, that’s an additional fee. You swiped the card instead of inserting it and using the chip, there is a penalty for that. Your team manually entered the card # instead of swiping it, that will cost you. The highest cost you can pay is by manually entering the card # along with the address in your system not matching up with the billing address.
What can a business do to reduce the costs (essentially a business tax) associated with accepting credit cards? Here are some of the tips I give to dealers.
- Have a basic understanding of how credit card processing works
- Know that in most cases, interchange and assessment fees are not negotiable. You are probably paying the same base rate for each card type that Wal-Mart pays.
- Limit how much you will allow a customer to charge on a card (especially when it comes to purchasing a vehicle). There’s no legal reason you can’t do this.
- Make sure your equipment is up to date and that it complies with current standards.
- Have your staff confirm the correct address and zip code for the customer and enable the address matching feature. Doing this can also help to reduce fraud.
- Negotiate for a pass-through rate on interchange and assessment fees (i.e. you pay what your merchant pays without a markup). The only money your processor should be making on your account is the processing fee, and you want that to be as low as possible.
- Don’t fall for the old “whatever you are paying, we can beat your current rate” sales pitch. It’s easy to do for a single billing cycle based on the cards that were processed during a single month, but over time you’ll probably end up paying more. A lot of these fly-by-night companies will quickly deploy their rate-creep mechanisms, and each month you’ll pay just a little bit more than the prior month.
- There is no such thing as free equipment, that cost is just buried in your monthly bills. In most cases, the best option is to purchase the equipment you need.
In 2016 the Supreme Court ruled on a case that essentially legalized businesses adding on a surcharge to each transaction, thus the customer pays the processing fees. While Visa and Mastercard don’t like merchants doing this, the law is the law. If you choose to go down this road, just make sure you abide by the restrictions the cardholders have outlined for these surcharges. There are a few things you need to do when it comes to surcharging, but the key ones are to notify the card issuers, charge a flat/reasonable fee, and have that amount broken out on the charge slip. Just adding 3% to the selling price isn’t compliant with what you should be doing, and I don’t think many powersports dealers want to be cut off by Visa and Mastercard. There are other restrictions by state, so make sure you have done your research.
I recommend that each month a dealer calculate what their “effective card processing rate” is. Take the total merchant processor charges for a month and divide that by your total credit card revenue for the month. While different cards incur different rates, over time, monitoring this rate will help you to identify rate creep.
- 1.8%-2.1% – Solid rate, probably about as low as you are going to negotiate it down to
- 2.2%-2.4% – Middle of the road – Just work on some of the tips from above to make sure you aren’t doing things to drive up the rate
- 2.5%+ – If you are doing a lot of mail order with manually entered cards, then this rate is about where most dealers end up. However, if you aren’t processing a lot of manually entered cards, then it’s time to renegotiate your rate. If you run a lot of American Express transactions, then this can also increase your overall rate. Most AmEx customers have other cards, you just have to ask for them.
If you are collecting a lot of payments from customers who are not in your dealership, you might benefit from some of the card processing mechanisms offered by companies like Revvable or Kenect. These companies provide a system where you can send the customer a request for mobile payment. Payment links improve security, reduce risks to the dealership (you don’t have to handle the customer’s card #), and you benefit by paying a fixed processing rate for each transaction. These systems also offer in-depth reporting which can help to minimize the chances of internal fraud.
We are also starting to see new merchants promising to “eliminate credit card fees”. Since the interchange and assessment rates are not negotiable, this is impossible. It’s being done by the equipment for these processors surcharging the customer. If you run a $100 transaction through your DMS, and key $100 charge into the card equipment, the customer will sign a receipt for ~$103.50. The merchant processor will pay the associated fees and keep the difference. The business will be funded the full $100. The effective rate for these programs is typically on the high side, and some dealers are seeing a lot of pushback from consumers. If you choose to go down this road, think it through, because once you have signed the contracts there is not an easy way to get out of them.
With some time and energy, a dealer can reduce their processing costs to a reasonable level. Now that you better understand how this racket works, it’s up to you to do some research and to make the best decision for your dealership.
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