Walmart made news last week by announcing the launch of their own mobile pay service for the Walmart app. Although Walmart’s mobile pay service can be funded with a variety of payment methods, including credit cards, Walmart will likely try to steer its customers away from credit cards in order to save hundreds of millions of dollars in credit card processing fees.
Your company doesn’t have to develop its own payment app, or be as large as Walmart, to reduce the amount of money that you pay for credit card processing. Companies that process less than $1 million in card transactions per year can obtain favorable processing rates by understanding how credit card processing works and negotiating with their current provider.
UpMentum has recently helped two clients reduce their credit card processing fees. One retail client was paying 3.3% of their credit card sales in fees. By helping the client get their fees reduced, they saved nearly $40,000 per year in fees and used the savings to hire additional part time employees. Another client, whose annual revenue was under $1 million, was able to save $10,000 per year by renegotiating their rates.
The question is, how did these clients start with such high rates in the first place? The starting rates were outrageous. A student doing a bake sale that yields a few hundred dollars in revenue would get better possessing rates using Square, so how does a company with over $1 million in revenue pay a higher rate than that?
The answer is that they were tricked by a credit card possessor by using a tiered pricing model. In the tiered model, cards are grouped into three different tiers with different pricing. The processing company then advertises the lowest priced tier to the customer. Unfortunately, the majority of credit cards swiped don’t qualify for that lowest price tier. The result is many businesses thinking they were going to be paying 1.5% in processing fees, but in reality end up paying over 3%.
A more honest form of pricing is the interchange-plus pricing model. The “interchange” is the fees set by Visa, Mastercard, and Discover. Your processor than tags a small fee on top of that to arrive at your total processing fee. This model is also known as “cost-plus” where the “cost” is the interchange fees and the “plus” is the fixed markup that your processor charges. This pricing method is much more transparent and usually yields significantly lower overall rates. Both of the previously mentioned clients were moved to an interchange-plus pricing model.
It is also important to remember that freebies offered by your credit card processor could limit your ability to negotiate for better rates. Some processors offer free gift card processing in order to prevent you from switching processing companies by holding your gift card data hostage. If they know you can’t switch, they will be less inclined to lower your rates or switch you to an interchange-plus model.