Credit Card Processing Cost and Quality

on Jan9

In this article we explain:

  • Why credit card processing cost is just one of the processing partner selection criteria;
  • What features play important roles during credit card processor selection;
  • How to define, whether you are paying too much for electronic payment processing or not.

Is credit card processing cost the only thing that matters?

Businesses from different industries that accept electronic payments are constantly thinking of ways of credit card processing cost reduction. Their management is spending time looking for processors to offer them their services at the lowest price.

As we wrote in one of our first articles on this blog, transaction processing cost was always one of the most important factors a business had to consider wile choosing the best processing solution. However, it often turns out that the cheapest processing solution is not the best option to follow. In our Payment Gateway 101 and 102 series we describe other important factors of payment gateway/processor solution selection. They include ease of integration and availability of various features, both basic and advanced.

Basic features include the following ones:

  • seamless reconciliation and settlement;
  • understandable reporting formats;
  • fraud prevention and protection tools;
  • chargeback handling mechanisms.

Advanced features include the following ones:

  • both real-time and batch transaction processing logic;
  • support for ACH payments;
  • automated deduction of fees and taxes
  • recurring billing tools;
  • merchant lifecycle-specific functions (relevant for a payment facilitator or payment service provider).

Seemingly cheap credit card processing solutions often lack critical advanced or basic features, listed above.

Costs related to credit card processing

Beside lack of some critical features, the new processing partnership might entail additional costs related to migration, integration, and certification.

When the processing solution you have laid your eyes on requires you to migrate all your data to the new processor’s platform, you should think twice before integrating with it. Migration from one processor to another (even the one that is charging low credit card processing fees) is a laborious process, as we wrote in our respective article. Plus, as an integrator, you will have to dedicate lots of development efforts to harmonization of your operations wit your new processing solution. Finally, you will definitely have to certify your system with the new processor and/or acquiring bank. Your development and support personnel will work on integrations and certifications, instead of focusing on the core product.

Resulting losses of time, funds and efforts are referred to as indirect and opportunity costs that we mentioned in the article on cost reduction. They are related to credit card processing, but not included in the low fees, with which the processor might try to attract customers.

Do you really pay too much for electronic payment processing?

Some businesses think that payment processing fees charged by their respective processors are too high. There might be several reasons for relatively high fees that your processor is reluctant to reconsider. The most common ones are as follows.

  • Your processing volume is too low. On low transaction processing volumes the processor cannot get much for the services it provides. Processor’s revenues depend on the amount and number of transactions it handles on your behalf, say, every month. The lower your volume, the lower the processor’s revenues, and the higher the fees charged.
  • You represent a high-risk industry. Some merchant category codes are considered high-risk ones. If your MCC is a high-risk one, then, as a sort of compensation for working with your type of business, the processor might charge slightly higher fees, or withhold merchant services reserves.
  • You come from a high-risk geography. We are often approached by startup merchants looking for cheap processing solutions. Many of them come from the so-called high-risk geographies, and the best way for them to enter, say, US market, is to get tax IDs in the US.
  • There are some issues with your processing history.

If you would like to calculate your processing partner’s potential revenues, a reality check should help. The average processing fee lies within the range between 1.5 and 3 %. For example, if your expected monthly processing volume amounts to $10,000, then the processor will only get $300 at most. So, it might offer you just the basic service package or require you to pay more.

Conclusion

If your processor offers you low fees, you should carefully analyze what you are getting in return and try to estimate potential indirect costs, resulting from this particular partnership. The rule of thumb is: the cost of migration, integration, certification, and addition of missing features should not offset the “savings”, promised by the “cheap” processing solution. If it seems like your processor is charging too much, again, check how much you are actually paying in absolute and relative measures, and see what you are getting in return.

If you need a specific advice regarding your business case, feel free to request a free consultation with our payment experts at unipaygateway.com. Armed with their rich experience in the industry, they will help you find an optimal processing partnership.

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