If your launching a startup, free cash flow is almost certainly at a premium. Therefore, the last thing you want to do is spend more than you absolutely have to for transactional fees that don’t meaningfully contribute to growing your business (e.g., credit card processing fees). Thankfully, there are some pretty straightforward methods that your company can use to significantly reduce the total cost of accepting credit and debit cards.
1. Process cards in the lowest cost way. Not all credit and debit card transactions are equal in terms of cost. In fact, a cheap transaction can cost you 0.2 percent, whereas an expensive one can cost you upwards of 3.5 percent. The difference is in how you accept the card, and what card you accept. Therefore, consider the following options for guiding customers to a certain payment method, from cheapest to most expensive.
- PIN debit transactions: Transactions where the customer physically swipes a debit card and enters a PIN are the most secure and least costly. These transactions generally cost you 0.2 percent of the total transaction (or roughly $0.20 for every $100 processed). The key here is that the customer must enter their PIN.
- Swiped credit and signature debit transactions: The second cheapest type of transaction is an in-person swiped credit card or non-PIN debit card transaction. In situations where the customer isn’t willing to enter their PIN (or more commonly your staff doesn’t encourage them to), then sales made with signature debit cards are treated and priced exactly the same as credit card transactions because they're processed the same (a simple swipe) and have similar levels of security. As a result, signature debit transactions are dramatically costlier than PIN debit transactions (e.g., 1.5 percent v. 0.2 percent). While you could set up your point-of-sale (POS) terminal to require a PIN for all debit transactions, you run the risk of missing out on sales if customers don't know their PIN. Therefore, best practices dictate that merchants should guide their customers to enter their PIN when possible. This could save you between .2 percent and 1.4 percent depending upon your pricing structure per transaction.
- Secure online transactions: E-commerce transactions are the next most expensive. Although the customer is directly entering their credit card information, there's added potential for fraud by someone pretending to be the customer and ordering through the website, which is minimized with in-person (aka “card present”) transactions. Additionally, online transactions require a payment gateway and shopping cart, and each of these pieces of software adds additional cost. Accepting payment in person is cheaper than online.
- MOTO (mail order/telephone order) or key-entered transactions: A key-entered transaction, in which the credit card information is manually entered rather than swiped, continues the climb in cost. In this case, whether you’re accepting payment over the phone or even in situations in which the card and cardholder and both present, the transaction will be treated as “card not present” and priced accordingly. On average, this will increase your transaction cost by .3 percent. This is an acceptable cost of doing business in situations in which you need to accept an order over the phone, but in situations in which the customer is present, you should only accept payment in this manner if your POS terminal is malfunctioning or if there's difficulty reading the card. Note, however, that a difficult-to-read card should raise a red flag and be examined for signs of fraud. If you have a concern about card authenticity, you should contact the issuer for authorization. The reason these transactions cost more is that a merchant cannot easily verify the customer identity or whether the purchase is authorized. This increases the risk of fraud and, consequently, the cost of processing. While secure online sales have taken the place of many MOTO transactions, MOTO is by no means obsolete, particularly among telemarketers, restaurants that take to-go orders and catalog-based merchants. And even for standard online retailers, it's still necessary to offer this convenience for that customer segment having concerns about entering credit card information online. When possible, however, guide your customers to use secure online processing, making the checkout process easy and highlighting the security features.
- Mobile transactions: If your company has brick-and-mortar stores with POS terminals, but occasionally makes outside sales (e.g., at craft shows, farmer’s markets, etc.), you may currently be taking down credit card information, entering it later and incurring these increased costs of processing as a "key-entered transaction." If you do this on a regular basis, you should consider whether a mobile card-swiping device might be more cost effective, as the transaction gets treated as "card present" and thus avoids the 0.3 percent surcharge.
2. Ensure your business is PCI compliant. Any business that accepts credit or debit cards must meet the Payment Card Industry Data Security Standard established by the credit card companies. This means that it's properly and securely handling, processing and disposing of sensitive credit card information. There are different levels of compliance, but most small businesses (less than 20,000 e-commerce transactions and 1 million other transactions per year) can remain compliant by filling out a short online assessment. It may be tempting to avoid this task, but failing to do so can cost you. Noncompliance fees for small business can be around $30/month. Additionally, should you have a data breach and you were not PCI certified, additional fees and audits could cripple your business and shut it down. Therefore, when you sign up for a merchant account, inquire about how to remain PCI compliant.
3. Understand the consequences of chargebacks. Companies that are new to accepting credit cards often think that once a customer has paid you, the customer’s exclusive remedy is by following the terms of your refund policy. Unfortunately, chargebacks exist. Chargebacks are situations in which the customer calls their issuing bank to complain about a charge and request a refund. In these situations, the funds are immediately pulled from the retailer's bank account and held in escrow while the dispute is worked out. Unfortunately, the default ruling is against the merchant, so you’ll need to respond in a timely way and using a specific size paper, font and format that complies with the card brand rules. For businesses new to accepting credit cards, this is often a surprising and overwhelming process, and as a result many just end up losing otherwise validly received revenue.
As a consequence of this hassle, plus the fact that you’ll be charged roughly $40 in fees by your processor for having a chargeback, it’s often wiser for new businesses to tell their employees that when informed of a disgruntled customer who is requesting a refund, to simply provide the refund, even if it falls outside of the scope of your company’s refund policy. This may not apply if you’re selling big-ticket items with large fixed costs, but if you’re in a service business or selling low-cost goods, sometimes simply walking away from a sale is better and almost certainly cheaper than having to go through the chargeback process.
Startups that are just beginning to accept credit cards often fail to appreciate all of the nuances of the process that can dramatically impact their businesses. By educating yourself — and your staff — on the three best practices discussed above, however, you can make a significant impact in reducing your cost of processing and free up some valuable cash flow.
Amy Choyke is a corporate attorney and writer on behalf of Soar Payments, a high-risk credit card processor that enables small businesses and startups to accept credit and debit cards.