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6 tips for keeping merchant account rates and fees low

By Elaine Pofeldt

For some business owners,  fears of seeing their companies' profits swallowed up by fees and extra charges is enough to keep them from accepting credit cards. But a cautious approach to getting a merchant account -- an arrangement with a bank or other provider that will allow your business to accept credit cards -- and a little homework now can help keep those fears from becoming a reality.

Tips for keeping merchant account fees and interest rates low
  1. Compare, compare, compare
  2. Understand the interest rates that apply to your business
  3. Understand how customer returns are handled
  4. Consider how often the bank will deduct charges
  5. Evaluate recurring fees
  6. Consider the cost of breaking contracts

Tip No. 1: Compare, compare, compare
Your first step to getting the best deal is to find a local bank that offers merchant accounts to many small businesses or an independent sales office (ISO) that represents multiple providers. To find a trustworthy ISO, ask for several referrals from local merchants you know, says Barry Godofsky, CEO of Automated Merchant Solutions, a 25-year-old independent sales office for electronic payment solutions in Boynton Beach, Fla. Like a good insurance broker, a knowledgeable salesperson will help you find the deal that meets your needs best, instead of pushing one arrangement on everyone who walks in the door, says Godofsky. "No two businesses are alike," he says.

Tip No. 2: Understand the interest rates that apply to your business
The interest rates on merchant accounts are complicated, so it's important to make sure you get handle on them before you sign any agreements. In teaser ads, most merchant account providers advertise a discount rate, which is the percentage of the purchase price that they charge you per transaction on Visa, MasterCard and Discover. Contrary to what you might expect, getting the lowest advertised rate doesn't mean you're getting the best deal. "It doesn't work that way," Godofsky says.

Sometimes, the opposite holds true. Typically, the advertised rates are for "qualified" purchases, says Godofsky. These are the transactions that merchant account providers consider to have the lowest risk. The purchases have to meet detailed criteria. For instance, they usually must be made on a personal Visa or MasterCard that was issued in this country, swiped rather than entered by hand and settled in a timely way, says Godofsky.

If a purchase fails to meet even a single requirement, you'll pay a higher surcharge for the transaction to be processed. Because the provider will consider the purchase to be riskier, it will apply higher "mid-qualified" or "non-qualified" rates, each of which has its own complicated list of criteria, Godofsky says.

You may be surprised at the reasons a purchase may not qualify for the best rate. For instance, if a customer makes a purchase on a corporate card or one that belongs to a rewards program that offers "points" for purchases, you'll often pay more. If you are an Internet merchant who can't swipe purchases in a terminal, the same holds true. And if the software in your terminal falls out of date and prevents you from using the latest security technologies, a higher rate will apply. Result: If a lot of your customers' credit-card purchases fall into the lower-rated categories, a great "qualified" rate won't help you much.

One exception to the rule is American Express. It charges merchants the same rate for all purchases on its charge cards, says Godofsky. And contrary to what you may have heard, accepting its cards won't necessarily cost you more than other types. "It's a myth that they are typically more expensive," he says.

With any account, ask for paperwork detailing the rates for each type of transaction, and how each category is defined, Godofsky suggests. Then do the math to make sure the fees that will apply to you most often are the most attractive, he says. "You need to consider your sales volume and your average ticket," he says. You can probably expect to pay in the 3 to 3.5 percent range on most purchases, he says.

Tip No. 3: Understand how customer returns are handled
Interest rates aren't the only thing to consider. If you run a business, such as a shoe store, where customers return purchases frequently, pay attention to whether a bank uses "gross" processing or "net" processing, Godofsky says. If your bank uses "gross" processing -- the most common system -- you'll still have to pay the transaction fee when customers make returns. In some cases, you may be charged a second time for the processing of the return. Banks that offer "net" processing will refund the transaction fee to you, he explains. However, you'll probably have to pay a higher discount rate to get this arrangement.

Tip No. 4: Consider how often the bank will deduct charges
Also consider whether the bank does daily or monthly discounting, which can affect your bottom line indirectly, says Godofsky. In daily discounting, the bank deducts fees for transactions from your company's checking account on the day they occur; in monthly systems, as you might surmise, it's once a month. Unless you have plentiful cash in your coffers, you're often better off keeping the money in your bank account until the end of the month to minimize use of your credit line, he says. There's a trade-off for monthly processing, of course.  "The discount rate is going to be a little higher," he says.

Tip No. 5: Evaluate recurring fees
On top of credit card processing fees, certain merchant account deals will require you to pay a monthly minimum fee of $15 to $35 whether you make credit card sales in that period or not, says Jolyn Hohnstein, owner of a sales office for Northwest Merchant Services, which helps businesses in the Seattle area secure merchant accounts. "That's how a lot of processors or banks guarantee that they'll get paid on an account," she says. If you run a seasonal business, the fees can add up.

Some companies will also require businesses to pay an annual fee and a "startup fee" to cover the salesperson's commission. Hohnstein recommends that you make sure you find out, so there are no surprises later.

Tip No. 6: Consider the cost of breaking contracts
To get many merchant accounts, you have to sign a contract. Some can lock you in for three to five years unless you pay a termination fee, which may range from a couple of hundred dollars to $3,000, says Godofsky. Given the potential cost of ending the deal if you're unhappy, make sure you read every line. "If you don't understand it, go to your attorney or accountant," he says. And of course, don't sign if any terms you value aren't included in writing.

As an alternative, you may want to try a bank that requires a processing agreement but not a contract, Hohnstein says. "They will charge you a little higher discount rate," she says. Given that you've never accepted credit cards before, keeping your options open may be worthwhile.

Published: May 1, 2009

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