Let’s face it.
If given the choice, the majority of today’s diners would prefer to pay with a card. When that option isn’t available, it can be a major inconvenience for your customers that can cost you repeat business.
That said, the ability to accept credit cards comes with a price tag – primarily in the form of fees that cut into a restaurant’s already razor-thin margins. No surprise that this is a deterrent for many independent restaurant owners.
If these fees have been preventing you from jumping on the credit card bandwagon – or if you’ve been blindly paying processor fees and wondering whether it’s really worth it – we’re here to help.
How?
By explaining how payment processing companies work, where your fees actually go, and how to make sure you’re getting the best bang for your buck.
Ready?
Let’s get started.
First Things First: What Is a Payment Processing Company, Anyway?
Before you can accept credit cards, you need a payment terminal – the small machine that lets customers swipe, insert, or tap their credit and debit cards. This terminal is provided by a payment processing company (otherwise known as an “acquirer” or “credit card processing company”).
In addition to providing you with essential hardware such as credit card readers, payment processing companies also do quite a few things behind the scenes to connect you to the complex credit card ecosystem.
Essentially, they act as a middle person between:
- The customer (diner making the payment);
- The merchant (your restaurant);
- The credit card network (e.g. Visa or Mastercard); and
- The issuing bank (the institution from which the diner received his or her credit card, such as TD Canada Trust or Chase)
Payment processing companies work with all these players to fulfill their most important task for you: to clear and route the transaction so that the diner’s money is deposited safely into your account.
Credit Card Processing for Small Business: How It All Shakes Out
While it may seem like a simple process, the truth is that a credit card transaction is comprised of various steps.
- The customer requests to pay by credit card.
- You authorize their credit card by inserting it into a payment terminal and sending the card information to your payment processor.
- The payment processor takes that information and sends it to the brand network (i.e. VISA, Mastercard, American Express or Discover).
- The credit card company requests payment authorization from the customer’s issuing bank.
When you close out at the end of a business day, you’re sending a batch of all your approved authorizations to your payment processor. After that, the process looks like this:
- The payment processor sends the information to the appropriate card network and, at the same time, deposits the appropriate funds into your account (and debits all associated processing fees).
- The credit card network, meanwhile, debits the merchant’s bank (aka the issuing bank) and reimburses your payment processor.
- The merchant is then required to repay his or her issuing bank when they receive their credit card statement at the end of the month.
Virtually every party in this process charges a fee for their efforts because of the risk involved.
Not only are payment processing companies responsible for making sure everyone gets a slice of the pie, they also assume the majority of the risk if something goes wrong (i.e. if a customer uses a fraudulent card, or your restaurant ends up going bankrupt).
In exchange for this service, payment processing companies charge you a fee. Exactly how much depends on a number of different factors.
Everything you need to know about credit card processing
Finding the Right Rate
The credit card processing fees you pay will likely differ from the fee paid by the restaurant down the street. That’s because these rates depend on a variety of factors, and they vary from processor to processor.
Before giving you a custom rate, a payment processor will closely examine your specific situation, including:
- Your industry
- Your business and credit history
- Your projected or established transaction volume
- The number of card swipes expected to take place in a given month or year
- Your average transaction sale
This will help the company determine what type of risk you carry and how much business it can expect to see from you.
Spoiler alert: Lower-risk businesses with higher volumes will generally pay lower rates, especially if they already have a proven track record with other payment processors. New restaurants with high volume will likely be able to land a competitive rate if they shop around, while low-volume businesses will inevitably be charged higher rates.
Payment processing companies take information like transaction volume and industry level to use it to calculate your processor markup fee – a flat or percentage-based fee (or combination of the two) that pays the payment processor for routing your money and assuming the risk.
Everything you need to know about credit card processing
Decoding the Pricing Puzzle
As we mentioned earlier, your payment processor isn’t the only player in this game.
The fee they charge must cover all the fees they’re going to incur down the road – from the credit card network and banks – as well as the services they provide you. As a result, their fee structure can be a little, um, complex.
To boil it down as simply as possible, you can expect to see three types of fees outlined in your payment processing contract: flat, situational and processing.
Flat Fees
Flat fees are the fees you’ll see every month with little variance – meaning, they’re not percentage-based. These will include terms like network access fee, monthly fee, and online reporting fee.
Situational Fees
Situational fees are charged on a per-event basis, so you won’t see them all the time. They can include charges like monthly minimum fees, international fees, and set-up fees.
Processing Fees
Along with the processor markup fee we mentioned before, you can expect to see a couple other processing fees on each transaction, such as:
- Interchange fee (a percentage-based cost of authorizing a transaction, charged by the credit card companies)
- Card brand fee (a percentage-based fee paid to the credit card network on each transaction)
While some of these fees are non-negotiable, others come with a bit of wiggle room.
All in, though, you can expect to pay between 1% and 4% per transaction, along with a potential fixed dollar amount ranging from $0.10 to $0.30. This is in addition to your monthly fixed fees.
What Am I Paying For Exactly?
Payment processors allow you to safely accept credit card payments like Visa, Mastercard, American Express, and Discover. They all typically offer online billing, e-notifications (to communicate when service offerings are changing), and some form of customer support.
But that doesn’t mean all payment processing companies are created equal.
Basically, the payment processor space can be divided into two camps: aggregators and merchant account providers.
Aggregators are popular with small businesses (think one or two employees) because they offer quick-and-easy set-up and a simple fee structure.
Merchant account providers, on the other hand, are more popular with larger or higher volume businesses, in part because they offer a range of additional services. These can include:
- A more customized service experience by means of a personal account representative or 24/7 customer support
- Higher-end software programs that allow you to track your transactions and protect your business against service interruptions
- Quicker batch settlement times, so you won’t run into cash flow issues while waiting for your credit card payments to come through
- Full-service integration to ensure your payment terminal is properly integrated with your point-of-sale (POS) system
Of course, all of these services from merchant account providers are built into the fees they charge. This means that if you opt to go with the provider with rock-bottom fees, you’re going to get limited service options. That’s why it’s important to figure out what your business needs and what it doesn’t before seeking out a payment processor and negotiating your rates. In some cases, you may also consider charging your customers a credit card surcharge to recoup some of the money paid out in payment processor fees.
Everything you need to know about credit card processing
Choosing the Right Provider
We’re not going to lie – the payment processing landscape isn’t always an easy one to navigate.
Not only do most credit card processing companies offer a similar service (at least on the surface), but you may find both good and bad online reviews for each processor you look into.
That’s why it’s important to do as much preliminary research as possible before you begin your search and then carefully interview each potential processing partner (and compare their answers).
We know, we know – this takes up your valuable time. But since it can save you both time and money in the long run, it’s worth the investment now.
To help you out, we’ve put together a list of questions you can use as a starting point, as well as why these questions are important ones to ask.
1) What are your rates/fees/pricing model and how do the numbers break down?
Payment processor fees are notoriously complex, which is why transparency is the top sign of a good provider.
Others may leave you (intentionally) in the dark or make it difficult to compare their pricing structure to others. Some charge incredibly low processing fees but make up for it in their vague (and confusing) flat fees. Others combine the wholesale costs (like the credit card brands’ interchange rates, which are universal) with their markup costs, making it difficult to differentiate the two.
That’s why, if you’re going with a merchant account provider (one that doesn’t charge a flat rate), make sure they offer a pass-through pricing structure, which separates the wholesale from the markup costs.
Now could also be a good time to find out what their contracts are like and whether you’ll be signing your life away with a long-term deal. If they seem reluctant to provide in-depth answers, it’s probably a good clue to look elsewhere.
2) What are your differentiators?
With so many payment processors in the market, it’s important to uncover what they think sets them apart (i.e. get the information straight from the horse’s mouth).
Maybe they offer best-in-class customer support, or an innovative software solution that also allows for inventory management and more accurate billing, or the security of being backed by a reputable financial institution.
Whatever it is, ask them to lay it out for you in detail and make them explain why that matters to your business.
3) What are my payment processing needs and wants?
Okay, so this isn’t something that can be answered by a payment processor, but it’s a question that should nevertheless be asked.
Once you have a decent list of reputable providers – with a clear understanding of their pricing structures and differentiators – it’s time to figure out what you’re willing to pay for.
Do you need a merchant account provider or will an aggregator suffice? Do you need a company that specializes in ecommerce, mobile payments, credit card machines, or phone orders? Do you want the flexibility to switch your payment processor without switching your POS (or vice versa)?
The answers to these questions will help you whittle down your list of providers and zero in on the ones that are the best fit for your business.
4) Are you PCI compliant?
Chances are if your chosen provider is able to work with the major credit card brands, their terminals are PCI compliant. But it doesn’t hurt to ask.
If they’re not, you need to know (otherwise you could be charged a huge fine by the credit card companies).
If they are, they may have additional security features they’d like to tell you about – such as full-service integration options that could strengthen your POS system. Even if you’re not in the market for them, it’s good to know they exist – in case you require them down the road.
Credit Card Processing Myths Debunked
There’s no getting around it: To provide your patrons with the convenience of credit card payments, you have to be prepared to part with some hard earned revenue.
But what you get for that money depends on your payment processor.
While it may require a bit of legwork and self-reflection, it’s definitely worth your while to survey the payment processing landscape and decide which services you’re willing to pay for and which you could do without.
With that information in hand – and the ability to truly understand what your fees are getting you – you’ll be able to rest a bit easier, knowing you’re getting the best possible bang for your buck while increasing your number of satisfied customers.
Still feeling overwhelmed by the payment processing landscape?
Ready to look at payment solutions?
TouchBistro Payments powered by Chase is currently available for U.S. customers only.
As the former Senior Product Marketing Manager at TouchBistro, Korry helped restaurateurs navigate payments by deeply understanding both restaurants and the payments market. He has a passion for hockey, beer, and hot wings, and loves when all three happen at once.
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