In these challenging times, doing business has shifted heavily online. This raises the question of providing a way for customers to make online payments for the products and/or services provided. This post talks through market conditions and consumer trends, as well as addressing some major misconceptions about credit card processing fees and electronic bank drafting.
Online Payments Are Key to Growth
Regardless of what you have heard, there’s no reason why you shouldn’t provide online payments of some kind to your customers. Businesses have been providing payment options via PayPal for years and it is super simple to provide with no upfront cost to you to set up. Providing some form of electronic payment processing allows for you to receive payments at any time and eliminates the friction of having to track down a payment or having to wait for a check payment to come in the mail. All of this increases cash flow.
Card Processing is Cheap and May Be Tax Deductible
Business owners don’t like the idea of losing out on a percentage of what they charge for their products or services, and that’s a valid concern. Our suggestion is to thing about card processing from an accounts receivable perspective. For many small businesses, the owner plays this role. They spend their time tracking down unpaid invoices, dealing with disputes, and having to make frequent trips to the bank to make deposits. Most of that time gets eliminated with electronic payment processing. We typically see small business owners have more time, have better cash flow and the drop in the frequent bank trips brings down their fuel expenses. What’s also important to know is that credit card processing fees may be tax deductible for your business. We encourage you to talk to your CPA and tax preparer about credit card processing fees.
Understanding How Processing Services Work
There are a lot of different options regarding credit card processing and online bank drafting. It’s important to be aware that credit card processing services are not comparable directly and you have to read the fine print to understand where all of the fees are located. Below are some common structures within these services that you need to be aware of:
Variable vs Fixed Processing Rates
One of the most common differences between card processing services is variable credit card processing fees and fixed credit card processing fees. Every different card provider (Visa, MasterCard, Discover, American Express) has different processing fees and interchange fees. A fixed pricing structure means that regardless of what those fees actually are, your service will continue to charge you the agreed-upon rate. As an example, if you have a credit card processing service that has a 2.9% + 30¢, You will still pay that rate even though American Express charges your service provider 5% for that transaction. Now the opposite will happen as well. Transaction fees for debit cards are usually quite lower than 2.9% so a fixed rate will charge you more.
Service or Network Fees
It’s important to ask upfront if the credit card processing service has a fixed monthly service cost or has additional network fees. Many times, you will find a provider that has a very attractive charge rates but require a fixed monthly service charge to be paid to the service provider. If you have a high number of monthly charges, going with a monthly fee and a lower variable card processing fee could be a big cost saver.
Bankers Don’t Provide Unbiased Advice on This
The classic mistake made by small businesses is talking to their bank about credit card processing for their business. For banks, providing you credit card processing is an up sell service that they get paid to sell you. Need payment processing for your retail store? They will likely “recommend” a service that they get a referral fee for or that the bank is white labeling as their product. These products have additional margins built in for your bank to profit from your use. Same goes with ECommerce or any other financial service they provide. This is one of the many ways banks make money. What’s important to understand is that these services are almost always higher than what you could get directly from the service they are suggesting or from competing services.
What we recommend to small businesses
The type of business and what products/services you are selling need to be taken into consideration when selecting an electronic payment service. Typically, most small businesses are best served by a fixed rate credit card processing service like Square or Stripe. Both of those services have a fixed card processing fee of 2.9% +30¢ with no monthly service fees. PayPal just recently went from that rate to a higher processing fee rate.
It’s good to start with a service like this and then audit your processing fees to see if you’d be better served through a variable processing rates and other pricing structures. In our experience, we find that a small business needs to generate at least 2 million dollars in revenue for variable processing to make sense. When businesses say their credit card processing fees are high, they usually get their processing services through a bank.
There’s a lot to discuss regarding card processing and how you approach payments between you and your customers. Reach out today and let’s talk through your options. You may be surprised at what’s available!