Negotiating Your Way to Lower Credit Card Processing Fees

Credit: Fisher Photostudio/Shutterstock

Negotiation is an art form. For some people, it comes naturally. For most business owners, however, negotiating with vendors will require a combination of new expertise and a little bit of charm — particularly in the bewildering world of credit card processing.

"Credit card fees are oftentimes the fourth-biggest expense category, behind employees, advertising and cost of goods," said Mark Abrams, president of E CONOMY, a payment processing solutions provider. To get the best rates and avoid additional costs, negotiation skills are a must when dealing with vendors. The first step is knowing which type of credit card processor is right for your business.

Very small businesses that process less than $2,000 per month in sales will typically do better with merchant aggregators — such as Square, PayPal and Phone Swipe — which usually charge a steep 2.5 to 3 percent of each sale but offer free mobile credit card readers and have no monthly fixed fees or long contract terms, Abrams said. On the other hand, merchants that process more than $2,000 per month will benefit from a traditional merchant account, as the out-of-pocket cost is significantly less, assuming merchants know how to negotiate, he added.

"The biggest secret with credit card processing is that just about any respectable payment processor has the ability to match or beat the rates and fees offered by any other company," Abrams revealed. "Almost no processor has any significant price advantage over any other processor. It's all about negotiation."

Abrams shared the following tips on how small businesses can negotiate lower credit card processing fees. 

1. Demand Interchange-Pass-Thru Pricing.

Also known as cost plus or interchange plus, Interchange-Pass-Thru Pricing is the fairest and most transparent pricing method. Interchange-Pass-Thru Pricing is the only way to compare different processors side by side. This is essentially the wholesale itemized network fees that are passed through from Visa and MasterCard to the processor. It used to be that only large franchise companies or big-box retailers could qualify for interchange pricing, but nowadays, any company can have it — you just have to ask. Many processors don't like to explicitly offer it because it is generally not as profitable as other pricing schemes. Remember: Demand interchange-plus pricing.

How Interchange-Pass-Thru Pricing works: The processor makes most of its money by tacking on a percentage markup and/or transaction on top of the actual network fees. The more transactions you do in a month, and the higher your sales volume, the more negotiating power you will have. However, the second-biggest secret is that the rates/fees you get have more to do with your ability to comparison-shop and negotiate than with anything else. Ask at least five companies for a proposal.

2. Ask for price matching.

Make a spreadsheet and compare the fees across the different companies. Keep in mind that any processor will typically match or even beat the fees offered by a competitor. So, if one company has a better reputation and better service, but offers you a higher initial quote, see if they will match or beat any lower quote(s) you were given. 

3. Pay for equipment.

Do not accept free gifts like credit card terminals or point-of-sale (POS) systems. As enticing as these may seem, you will pay for them one way or another, usually in the form of higher fees and a contract term (just like with cellphones). And if you ever decide to leave that processor, you will not be to able use the equipment with your next processor. Bottom line: Pay for your own equipment! 

4. Negotiate out of a contract term.

Most processors will try to stick the merchant with a two- to five-year term; however, in today's hypercompetitive landscape, as long as you did not accept free equipment, it is very easy to negotiate out of a contract term. Just demand it, and make sure to get it in writing. 

5. Request a sample monthly statement.

Once you've narrowed it down to a few processors, ask to see a sample monthly statement. Any processor should be able to show you an actual statement from one of their merchants. All line items should be clearly labeled, and each fee should be itemized. As boring as it may be, you must be able to understand the statement well enough to identify all of the fee items. If the statement is too difficult to read, move on to another processor.