As a small-business owner, Scott McManus knows well the benefits of aggressively negotiating lower credit card processing fees. The savings have enabled him to increase medical coverage and set up a matching 401(k) program for about 40 employees at his custom-printed apparel company in West Hempstead.
"The problem people miss is that they think that 3, 4, 5, 6 percent is not a big percentage, but after your gross sales, it is," said McManus, president of retail websites EZCorporateClothing.com and Something Greek, which makes and sells custom-printed clothing to college groups. "After rent and other expenses like labor, it's a huge deal."
Credit card transaction fees have become a significant expense for many small- and mid-size-business owners, especially online merchants like McManus. The proliferation of credit cards promising benefits such as travel and shopping rewards has added to the costs for businesses to process those sales. And consumers see these added costs in higher prices at the register.
Processing fees have long been a contentious issue for retailers. A $7.2 billion settlement was reached last year in an antitrust suit accusing credit card companies of fee-fixing, but thousands of retailers opted out of the deal and several major chains have filed a new lawsuit.
Three weeks ago, a federal judge struck down new rules capping debit card processing fees, saying the allowable fees were still too high.
Check your statements
Swipe fees from card issuers have become "the fastest-growing expense retailers face by far," said Doug Kantor, counsel to the Merchants Payments Coalition, a national group of merchants pushing for fee reform. But the Electronic Payments Coalition, representing credit card companies and banks, says retailers are paying for the benefits credit cards offer, such as guaranteed, fast payment, fraud protection and higher sales.
However these issues are resolved, small-business experts say there are ways for companies to keep their fees in check.
Small businesses "are in a position where they have to accept credit cards," said Julie Marchesella, president of the Nassau Council of Chambers of Commerce. "The onus is on the owner to get the best rate they can."
But knowing how to do that and deciphering monthly processing statements -- with their myriad levels of fees and surcharges and pricing changes buried in fine print -- can be major hurdles, said Vito Pagano, founder and CEO of Independent Merchant Group, the West Hempstead auditing firm that helped McManus save $38,000 a year on fees. IMG continues to monitor McManus' monthly statements with its custom-designed software.
Pagano, a former executive in the merchant services unit of a national bank, regularly encounters clients whose credit card processing statements don't make rates and fee increases clear. Sometimes the processing companies aren't offering all the specialized industry discounts and incentives available from Visa or Master Card.
"Most processors do not revisit the growth or changing needs of a business, which results in outdated pricing and excessive surcharges to the business," Pagano said.
Where the fees come from
Each time a customer makes a credit card purchase, the merchant pays fees to process that transaction. A large portion of the fee goes to the bank that issued the card and is effectively loaning the customer money to pay for the purchase.
Companies such as Visa or Master Card, which own the electronic payment networks through which these transactions are processed, also receive a fee.
The merchant's bank, which accepts payment from the customer's card issuer, also gets a fee for each transaction. And if the business uses a third-party credit card processing company, there are additional fees.
Typically the merchant bank or credit card processor bundles all these fees into a single pricing structure. Several factors go into setting fees, including the merchant's type of business and volume of transactions. The type of card used -- traditional, reward or business -- also affects the fee, as does the way the purchase is processed. Using a terminal carries less risk of fraud and a lower fee than Internet transactions where the card isn't present.
Ultimately, merchants should look for a bank or processor who pays attention to their needs, Pagano said. "Choose the provider that wants to learn about the needs and future changes of your business."
Reducing transaction fees
1. Calculate what percent of your credit card sales are going to transaction fees.
2. Have an annual review with your processor.
3. Use up-to-date point-of-sale technology; it could reduce processing costs.