To FREE, Or Not To FREE!


What is Merchant Processing? I've never heard of it?

If you're a customer like me, I love the convenience of paying with my phone! The app on my phone is connected to my favorite credit card which earns me "stuff" like cash back, airline miles, rewards points, etc. Using my credit card allows me to earn FREE stuff which seems great since using cash doesn't seem to earn me anything extra. Plus, with Covid-19 precautions, some businesses don't accept dirty fiat (cash) anymore.

Have you ever wondered how these credit card companies can offer all these FREE perks? Well, they aren't exactly free. Someone is paying for them, and that someone is the merchant. Merchants might pay up to 5% for YOU to use your credit card at their business. (Some businesses pay even higher fees with those supercharged business credit cards with top of the line earning benefits).

A merchant processor charges the business a merchant processing fee, sometimes called a convenience fee, for the privilege of accepting your credit cards. Some businesses understand that this is the price of doing business with their valuable customers who prefer using credit cards over cash. Keep in mind, the smart businesses are passing that credit card convenience fee onto you, the consumer, in the form of higher prices.

If I'm a merchant, how can I accept credit cards from my customers? 

If you're a business that already accepts credit cards, then you definitely know what merchant processing is. What you may not know is there are many companies to choose from. Depending on what you need, there are usually several merchant processors who can fit the bill.

If you have a bank account for your business, your bank may be able to create a merchant account for you. If you choose to go outside of your banking institution, you will most likely be working with an agent or broker with relationships with large merchant processors. Most merchant processors don't work directly with their customers but through one of their agents.

There's a third way to process credit cards, and that is through a service like Square, PayPal, Stripe, or even companies like Quickbooks. who will process your credit cards for a flat fee. The nice thing about these companies is it's relatively simple to signup and start accepting credit cards right away.

The drawback is that the flat fee is usually higher than what you can negotiate directly with a merchant processor. Last time I checked, most of these flat-rate services charge you 2.6% + $0.10 per transaction went the credit card is present. If you accept payment over the phone when the credit card is NOT physically present, that fee jumps to 3.5% + $0.15 per transaction. 2.9% + $0.30 per transaction is what you will be charged for most online purchases if you are using an API that connects your eCommerce store to your account.

I think many of the companies which charge you using the flat-rate model provide tremendous value to a new business. Many of the additional business building apps are free and there are usually no monthly charges. I personally used Square for several of my businesses. The merchant terminals are beautifully designed and the mobile options are super convenient.

If I'm a merchant, is there a way to lower my merchant processing fees?