The Critical Canadian Merchant Services Guide – Part 6
September 26, 2008 by Matthew Hunt
18 Essential Questions Every Canadian Small Business Owner Must Ask Before Choosing a Credit Card Processing Provider
Most Canadian small business owners don’t know what questions to ask Credit Card Processing Companies, resulting in many owners being shocked by the true costs when bills begin to arrive.
Fees and costs associated with debit card and credit card processing are somewhat negotiable. The best way to avoid being surprised is to ask the right questions. This section identifies 18 essential questions that every business owner will want to ask each merchant account provider.
Before you sign on the dotted line consider this:
1. What are the Credit Card Discount Rates?
Every Credit Card Processor will have this fee. Discount rates can range from as low as 1.59% right up to as high as 5.0% on low-risk merchant accounts. High-risk merchant accounts can see discount rates from 5-14%. The discount rate is really not a discount.
“Discount Rates” are a percentage of your sales that the Payment Processing Service Company charges your business to be able to offer your customers the ability to pay with credit cards.
For example: If you sold $10,000 in Visa sales in one month and your discount rate was 2.5% then you would pay $250 in fees to your Credit Card Processor that month.
Merchant Account “Rates” vary and are dependent on:
- business model
- business volume (annual sales)
- average sale per customer
- type of product and service your business offers
- the way you process orders “card present” transactions or “card not present” transactions
- how soon your customer receives a product/service after payment
All these factors can have an effect on what Discount Rates you and your business will qualify for.
Usually high-risk business will have higher discount rates (2.5%-5%). High risk businesses are ones that have:
- Higher ticket prices ($1000 plus per sale)
- Businesses that process 40% or more of their sales through Internet/E-commerce or MO/TO
- Businesses that take payment before delivering the product or providing the service
WARNING: Most payment processing companies’ agreements are for three years. Do not forget to ask: What would the termination costs be if you were to terminate your agreement early?
Most companies charge a $300 early termination fee that is retro-active from the time the agreement started. Also, most agreements state that if you do not write them within a certain period of time at the end of your agreement the agreement will then automatically renew itself for another three years.
2. Are “keyed in” Credit Card Discount Rates at a different rate then “swiped” Credit Card Discount Rates?
The two questions you want to ask:
- What will the “Qualified Rate” be?-Means card is present for the transaction (swiped)
- What will the “Non-Qualified Rate” be?-Means card is not present for the transaction (keyed in)
As well, many owners are not aware that corporate credit cards usually charge a higher rate then the “Qualified Rate,” typically 0.50% higher (but can go as high as a full 2%). Fortunately, most businesses have less then 5% of their credit card sales made with corporate cards. However, there are many businesses for which a large percentage of their sales involve a high volume of keyed transactions. This is where you really need to make sure you are also being quoted the “non-qualified” rates-and that you take into consideration the percentage of business you will be doing which will fall under that umbrella.
3. What are the Transaction Rates?
Transaction fees are sometimes called IDP transactions. Every payment processing company has at least a transaction fee for debit and, usually, for credit card transactions too. Some companies are creative and will call this fee and “item rate fee,” an “authorization fee,” or something along those lines.
It has become more common that any transaction made on your point-of-sale terminal will be considered a “transaction” and a fee will apply-whether is it is a void, debit, credit card, refund, batch close, etc. Don’t be fooled if the common “debit transaction fee” is the only one advertised! Often there are many more fees that apply to different types of transactions that take place on your POS Terminal.
Transaction fees can range from 0.07 cents up to 0.75 cents and can be different for each type of transaction, although typical Point-of-Sale Terminal transaction fees are between 0.10 cents to 0.15 cents (though I have seen Payment Processing Companies charge as high as 0.25 cents on Debit Machine transactions).
Non Point-of-Sale card processing services like IVR, PC, & E-commerce processing transaction fees are usually much higher and typically range from 0.35 cents to 0.75 cents.
4. What is the monthly cost for the Point-of-Sale Terminal?
In your business you may need to use Interac Terminals, Debit Card Machines or Credit Card Machines. In the industry they are commonly called Point-of-Sale Terminals and will be referred to from this point forward as “POS Terminals.”
Traditional Retail POS Terminals can hook up via a regular phone line (Dial-up POS Terminal) or a DSL High-speed Internet connection (IP POS Terminal); or more recently to the Wireless Data Network-making some POS Terminals wireless and mobile (Cellular POS Terminal).
Most traditional retail type businesses only need a regular Dial-up POS Terminal or an IP POS Terminal. Dial-up will work for the merchant who does under 25 transactions a day. A Merchant who does a high volume of transactions and needs to move customers through a check-out line quickly should consider using an IP POS Terminal.
Most bank-related card processing companies offer a “rental ONLY program” for POS Terminals. Rental costs can range from $20 up to as high as $100 a month depending on the type of Point-of-Sale Terminal your business requires.
Private label card processing companies usually only offer a “Lease-to-own or Buy option” program on their POS Terminals. Lease-to-own programs usually run on 48 month leases with a 10% buy-out option at the end. Lease-to-own POS Terminal prices range from $30 – $80 dependent on the type of POS terminal. Buy-out POS Terminal prices typically run from $999 – $1800 (without taxes) dependent on the type of POS Terminal.
Two very important questions to ask before buying a POS Terminal:
- What are the warranty conditions?
- Is the POS Terminal smart-card ready? (PCI & EMV compliant)
When renting, if you require a new POS Terminal it will usually be fixed or replaced at no cost to you. However, you pay rent forever! If you have been renting a POS Terminal for $40 a month for 5 years, then you’ve just paid $2400. If you have been renting a POS Terminal for 10 years at $40/month then you’ve spent $4800-and you do not have the terminal as an asset. You might want to consider owning a basic POS terminal for as little as $1000: less money spent in the long run and another asset in your business.
In terms of warranties, most private label companies will offer some type of warranty on the POS Terminal, sometimes at no extra cost, sometimes for an additional fee. There are even a few payment processing companies that offer a life-time warranty all-inclusive in the original retail purchase price. Sometimes it is better to pay more for an all-inclusive warranty on hardware with free software upgrades then to pay less with a limited warranty.
5. What are the Set-up Costs?
Every debit and credit card processing company will have set-up fees, some more then others. Set-up fees can range from $50 – $400. Usually the set-up fees are one-time only set-up fees for Visa, MasterCard, Amex, & Interac cards; usually around $25 per card. Some companies also charge an initial set-up fee for programming the POS Terminal or a fee for initial training. Set-up fees can vary greatly from company to company.
6. Are there any Application fees?
Not all payment processing companies have an application fee; however, some companies do. This is usually a non-refundable fee, whether your business is approved or not. Application fees can vary from non-existent to $300.
7. Is there a Statement Fee?
Not all payment processing providers have a statement fee; however, some do. The average statement fee is usually around $5 or free if you are willing to receive your statement via e-mail. (I am not sure if this is a nickel-and-dime fee or if companies are trying to “go green.” I let you decide!)
8. Is there a Settlement Fee?
All merchant account providers have a settlement fee. Settlement fees can range from 0.05 cents 5 dollars. The settlement is what sends your funds to your bank account.
9. Are there any Minimum Processing Fees?
All payment processing providers have minimum processing fees, ranging from $5 – $25. Often there are minimum processing fees for each type of card you intend to have processed. Basically, what this means is if you do not do enough business sales to have high enough fees you will still pay a minimum every month.
For example: let’s say your discount rate is 1.85% on Visa, you do $1000 worth of sales on Visa that month and your minimum processing fee is $10.
Well, 1.85% x 1000 = $18.50 in fees that month on Visa. Therefore, you have cleared your minimum of $10 and you have nothing to worry about.
Now, what if you take the same rate and minimum, but you only made sales of $250 that month on Visa? That would be 1.85% x 250 = $4.62 in fees that month on Visa. Therefore, you did not make your minimum and would be required to make up the difference of $5.38.
10. Is there a Gateway Fee?
Most card processing providers usually have a gateway fee, but usually only for IP POS terminals, PC and E-commerce payment solutions. Gateway fees can range from $5 to $75 a month.
11. Is there a Monthly Maintenance Fee?
Some card processing service providers have a monthly maintenance fee; others do not. If they have it, it is usually a fee that is associated with IVR, PC, & E-commerce payment processing solutions. However, some companies have it on POS Terminal solutions too.
12. Is there an Added Value Fee?
Some payment processing service providers have a monthly added value fee and some do not. This fee usually ranges from $5 – $10 a month.
13. Is there a Low Achievers Fee?
Most payment processing providers have a monthly “low achiever” fee. Low achiever fees can range from $5-$20. This is why it is important to get your monthly/annual estimate of total business volume correct on your Visa, MasterCard, & American Express applications. Most merchant account providers have 25-35% error lenience. If you are not sure it is always better to under-estimate your monthly/annual sale amounts when applying for credit card merchant accounts.
14. Is there a Chargeback Fee?
Most payment processing providers have a chargeback fee. Chargeback fees can range from $10-$50. A chargeback is when a card holder holds a dispute on a Visa or MasterCard or Amex transaction that came from your business. If the card holder wins the dispute, they will be refunded their money and you will be charged a chargeback fee, a similar fee to bouncing a cheque.
It is always the merchant’s burden of proof to prove that the card holder had used or bought the product or service from their business. This is why it is so important to check that, on credit card purchases, the signature matches the back of the card holder’s credit card, and if it does not to ask for photo ID. Here are 15 tips to prevent chargebacks.
15. What are the Technical Support Service Hours?
Most card processing companies have a help desk/technical support line. However, not all are 24/7 and some are better then others. This one is easy to test! Get a hold of the customer support number and call it several times through the week at different times, when you think you may need it. You will see exactly what type of service you will get. You may even want to go as far as to seek out references and phone them. Ask how the service is; ask if there have been rate hikes, how service is during peak periods like the Christmas holidays, and so on.
16. How soon can I have a new POS Terminal in my Business if my POS Terminal is not working & can’t be fixed over the phone?
Payment processing providers can vary on this from company to company. Some can have one to you within 24 hours, while others can take two to four weeks. The question you have to ask yourself is: how long can my business run without a functioning terminal? Sometimes it is better to pay more for better services.
17. How long does it take to initially get set-up with full services?
Most card processing companies usually take at least 2 weeks (sometimes as long as 4-6 weeks) to have your application processed, merchant accounts set-up, point-of-sale terminal programmed and shipped to your business ready to use. However, there are a few payment processing companies that can have one ready in your business in as little as five business days. Typically we can have a new POS Terminal ready to go in your business in as little as 5-7 business days.
18. What are the early termination fees?
Most card processing companies will have a minimum three-year agreement and usually have anywhere from a $200-$300 early termination fee. However, I have seen some with agreement terms as high as seven years and early termination fees as high as $1000. So it is very important that you ask this question.
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