How to Evaluate a Credit-Card Processing Contract

Posted by: Today's Tip Contributor on February 14, 2011

Credit-card processing can often be one of the most confusing and frustrating aspects of getting a business set up. As a result, it’s pretty common for business owners to get ripped off. Here are some best practices to keep in mind when you’re about to sign a credit-card processing contract:

1. Cancel that cancellation fee. Make sure to strike the early termination fee clause from your contract. Credit-card processors have the ability to take out cancellation fees (regardless of what they may tell you) if they are asked.

2. Get up to speed by comparison shopping. The best thing you can do to make sure you’re getting a good deal is comparison shop. The more you search and get information on your industry’s standards for credit-card processing, the less likely a salesperson will be to try something tricky. Consider a minimum of three different offers (try to get apples-to-apples comparisons) before settling on one.

3. Ask for "interchange plus." Interchange plus is the most transparent pricing structure for business owners. Unlike tiered pricing structures, interchange plus ensures that processors get paid the same amount no matter what kind of transaction occurs. For example, in tiered pricing, rewards-card transactions are charged a higher interchange rate as well as a higher processor markup. Although the higher interchange cannot be avoided, with interchange plus pricing the processor markup is the same no matter what kind of card is swiped. This makes it easier for you to estimate your processing costs each month.

4. Never lease equipment. If you’re looking to use a terminal or POS system, never rent or lease it from processors, even if they offer it to you for "free." Those little black terminals that you see in small retail stores usually cost $100 to $300, while a full-fledged POS system typically costs less than $2,000. If you own your own equipment, not only is there less chance for processors to sneak in extra profit by padding your lease payments, but there is also more freedom for you to switch to another processor if something goes wrong in the relationship.

5. It’s never really 1 percent. Credit-card processors try to trick business owners by offering seemingly low effective rates in ads. When you see an ad like that, give the processor a call and ask how much the rate is when a rewards card or a commercial card is swiped. Most salespeople will get uncomfortable telling you that information, because it will be much, much higher. This kind of teaser pricing is typical for tiered and its evil cousin ERR (Enhanced Recovered Reduced) pricing, which should always be avoided.

Stella Fayman
Head of marketing and customer service
FeeFighters
Chicago

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