Many small business owners know how to review other monthly expenses‚ from rent and payroll to inventory‚ insurance‚ marketing and software‚ yet they often have less familiarity with payment processing costs․
Once a business has selected a payment processor and begun accepting credit and debit card payments‚ the rest‚ to the business‚ happens in the background: Transactions are completed‚ fees deducted‚ and deposits appear in the business’s bank account․
While this convenience can make payment processing easy to overlook‚ as the organization scales and transaction patterns evolve‚ the solution may differ from what was the right fit a few years prior․
Business owners are advised to examine the fees charged for payment processing at least annually to determine what they are actually paying‚ where costs are being unnecessarily added‚ and to improve decision-making around one of the many systems involved in collecting money․
Small Processing Costs Add Up
A single transaction fee for processing a payment can seem small on its own․
Although 5% of $20 or $50 may not seem important‚ over thousands of transactions, these amounts can in fact add up quickly and become important․
For instance‚ if a business is processing $75‚000 monthly in card sales and the processing fees are 3% of card volume‚ then the monthly and annual fees are $2250 and $27‚000․
Therefore‚ even a small change in effective processing cost for the business can have a large effect․
This is especially true for a company that may have started out processing $20‚000 a month but now‚ as it grows‚ is at the stage of reviewing its payment options for $100‚000 a month or more․
The payment solution that seems most efficient initially may not be the best solution at a considerably larger volume of transactions․
Know What You Are Paying
Thus‚ one reason payment processing costs can be difficult to determine‚ is that the stated percentage does not reflect the costs․
Card-acceptance costs include the interchange‚ card-network fees‚ processor fees‚ transaction fees‚ and additional costs related to the account․
But while business owners do not need to know all the details about the payments industry‚ they do need to answer this question: How much does accepting card payments actually cost my business?
One way to look at this is to consider the effective processing rate‚ which is the total processing cost divided by the total card sales‚ to get a clearer picture of the cost of accepting cards․
Tracking that number over time can help spot any differences․
If the total processing costs are increasing and the number of cards is not‚ this may represent a problem‚ and business owners will want to investigate․
Understand Your Pricing Structure
Businesses need to understand how their payment processor prices its services․
The two most common pricing models are flat-rate pricing and interchange-plus pricing․ With flat-rate pricing‚ merchants pay a flat rate per the provider’s pricing schedule․
Interchange-plus pricing separates the interchange cost from the processor’s markup․
Neither option is necessarily the best solution for every company․
Factors that influence the overall cost include the number of transactions processed‚ the average transaction amount‚ the type of cards used‚ and whether the transaction is in-person or online․
Business owners who want to understand the differences between them may want to read this explanation of interchange-plus pricing vs flat-rate pricing before assessing the options․
The goal is not always choosing the pricing model that leaves you with the lowest number‚ but understanding how the business is being charged‚ and if that still makes sense․
Looking beyond the transaction rate
A common mistake in evaluating payment processing is to only look at the percentage charged per transaction․
The true cost may actually be much higher․
Some accounts or providers charge a monthly fee‚ plus gateway‚ equipment‚ disputes‚ or additional fees for services like fraud protection or chargebacks․
The exact processing statement may be more informative than any comparison to advertisements for the card․
Know what all the recurring charges on your statement are for․ If you don’t know the origin of any charge‚ then find out what it is․
The principle can apply to other situations․ Controlling business costs is about more than cutting out waste․ It’s knowing where the company’s money is being spent and whether the business is actually receiving something of equal value․
Your Business May Have Changed
Another reason for annually reviewing payment is that businesses may change over time․
However‚ a retailer may have only a single physical storefront‚ with a second opening a few years later‚ and an ecommerce platform in addition․
Its payment requirements have changed considerably․
At this point, the company may need to support online payments‚ consolidated reporting‚ additional terminals‚ different fraud controls,s or even integration with inventory or accounting software․
A service business might accept cards for a small share of their payments‚ and begin to receive most payments electronically from customers․
Annual reviews provide an opportunity for owners to assess whether their payment infrastructure matches how the company currently operates․
Don’t Ignore Payment Technology
Price is important‚ but the type of payment technology can affect other business areas․
Customers expect to be able to pay via traditional credit card‚ contactless‚ digital wallets or via online checkout․ Rather than just adopting every new technology‚ businesses should consider which payment mechanisms their customers want․
Payment systems can also integrate with other tools․
Depending on the business‚ integrations with accounting‚ inventory‚ ecommerce‚ customer management and reporting platforms can save time on administration․
Saving employees’ time also saves money․
But if we choose a slightly cheaper payment solution that also results in hours of manual work every month‚ is it really cheaper?
The annual review should therefore examine direct costs of processing‚ and operational efficiency․
Consider the Customer Experience
Payment processing is not just a back-office financial function‚ but an essential part of a business’s customer experience․
A customer could want to buy a product or service‚ but leave feeling frustrated at the unnecessarily complex checkout process․
It is an even bigger problem for online merchants‚ since visitors to the checkout page tend to leave within seconds․
The payment experience should be intuitive‚ secure‚ and reliable․
When reviewing a payment system‚ a few simple aspects to consider are the speed of a transaction‚ whether popular payment methods are accepted‚ and whether there are technical issues during the transaction․
Money saved on processing costs is not worth the degraded payment experience provided‚ which costs the company otherwise legitimate sales․
Review Declines and Chargebacks
They should also consider what happens when things do not go as intended while reviewing payment on an annual basis․
Declined payments may represent lost revenue but may also be legitimate in cases of fraud checking‚ incorrect customer details‚ or other issues related to payment processing․
Instead‚ businesses should look for unusual patterns and not look to every decline as inevitable․
Chargebacks deserve similar attention․
An increasing number of disputes are related to issues other than payment․ The customer may not recognize a business name appearing on their bank statement‚ may expect a certain delivery time‚ or may be confused about cancellation or refund policies․
Consequently‚ payment data can indicate problems elsewhere in the customer experience․
Cash flow was also part of the equation
Business owners should also consider how quickly the funds will be processed․
Cash flow is especially important for small businesses that must spend money regularly to purchase inventory‚ make payroll, and pay rent and other expenses․
Predictable settlement makes financial planning easier․
Businesses should be aware of their normal funding timeline‚ and look into any major deviations․
But speed isn’t the only issue․ Whether the structure meets the business’s cash-flow needs and is sustainable for the future is also important․
Customer Support Has Value
They are critical infrastructure‚ and when something goes wrong‚ it needs fixing fast․
Meaning customer service is yet another thing to consider at the yearly reviews․
Current owners recommend assessing your provider’s experience, such as whether good customer support is available. How well did we solve the issues? What happened to fees‚ accounts?
In fact‚ the lowest-cost provider may not be the cheapest‚ given that payment problems may prevent the company from making money․
Reliability and responsive support can provide real financial value․
Make the Review Part of Your Annual Routine
Reviewing payment processing may require important effort․
Business owners should review processing statements‚ total processing costs‚ questionable fees‚ transaction trends‚ and whether their payment processing technology and their current payment technology still meet the needs of the business․
Additionally‚ it allows for consideration of changes in transaction volume․
If the company has grown considerably since the last review‚ it is likely that its processing needs have changed enough for it to consider discussing price or technology options with its supplier
The aim is not to switch payment processors annually․
It is not our job to constantly change things that are basic to the business․ We seek to help the business understand its current arrangement and realize value․
Final Thoughts
Small business owners spend a huge amount of time trying to create more revenue through marketing‚ new product development‚ customer acquisition‚ and other growth opportunities․
But improving profitability also requires a focus on cutting down on the outflow of money․
Payment processing fees are recurring expenses that people can easily overlook because they occur automatically․ This being said‚ these fees add up‚ especially at higher transaction volumes‚ and typically track as a small percentage or flat fee․
Annual reviews also inform owners of what they are paying‚ what has changed in their pricing‚ whether their payment needs have changed‚ and what technology and service level they are receiving․
Which is not to say that you should go for the cheapest processing rate․ You want a payment solution that is cost-effective for the business‚ reliable‚ easy for customers‚ and appropriate for the way your business works now․
For small businesses trying to protect margins and build back to sustainable growth‚ that could be a financial checkup worth putting on the calendar․
