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Manage the cost of accepting credit card paymentsManage the cost of accepting credit card payments

Almost every business accepts credit and debit cards. With the growing use of mobile electronic payment transmittals, it’s now easier than ever to accept card payments—even when you’re a self-employed CFI (independent contractor). iPads, iPhones, and Androids have become cash registers at traditional brick-and-mortar flight schools and for the roving CFIs operating in and out of different FBOs, flying clubs, and airports.

The simple reasons to accept card payments are that our customers expect it and doing so improves business cash flow. Although it is possible to deposit checks electronically, who among us even carries a checkbook anymore? As with all business processes, this business service isn’t free. However, there is an opportunity to negotiate for better merchant rates and fees.

After reviewing our latest merchant statements and gnashing my teeth at the charges and other mysteriously labeled service fees, I decided to see if we could do better. The goal was to lower our merchant account’s overall costs and determine if we could or should invest in any new payment processing technologies (card-readers, software, etc.).

We have two types of merchant accounts; one account for our on-site point-of-sale (POS) terminal, which we use for swiping or keying-in credit and debit cards, the other account processes payments for our Web e-commerce site.

The major card brands, Visa, MasterCard, Discover, etc., along with each organization that participates in the transaction authorization and settlement process get a cut of our business. These fees, while seemingly small, add up and whittle away at our profits. I am not inclined to do aerobatics, but if I were, I think learning to do a reverse Cuban Eight would be easier than attempting to understand the plethora of terms and merchant processor fees that slice and dice away at our gross sales.

The first order of business is to understand the transaction process itself and some terms used by the payment industry. Terms like tiered pricing, qualified or non-qualified rates, and interchange plus pricing.

The path of each transaction goes like this:

  1. The customer’s card data is entered by swiping or keying it into the POS equipment, or if e-commerce, the card data is enter on a website.
  2. Funds authorization is performed.
  3. Clearing and settlement occurs.

The card data gets routed to an acquiring bank/payment processor, or for e-commerce, a “gateway” provider that further links the request for funds authorization to the issuing bank. The issuing bank verifies the card is legitimate and that credit or funds are available, and then generates the authorization code that is sent back via the acquirer/processor to the merchant. Of course, all of this happens in the blink of an eye.

Interchange charges: The major card brands charge set rates that vary by card type (rewards, credit, debit, gift, etc.,), plus an assessment fee. (Learn about MasterCard and Visa interchange fees). Interchange rates are non-negotiable and are one component on our monthly statement.

Merchant discount rate (MDR): These are the processor and bank fees charged to the merchant. Banks and processors often add on rates or “tiers” for qualified or non-qualified transactions. For example, if the card’s data is keyed-in and not swiped, they will charge more because this implies a card-not-present risk. Interchange-plus pricing is becoming more popular because it offers a fixed rate over the interchange rate, plus a small percentage added on by the processor. For example, the interchange-plus rate may be 2.1 percent plus $0.10 per transaction (Interchange percentage plus assessment) plus the processor’s fraction.

Obtaining quotes and making comparisons with our current merchant rates and fees takes some time. The built-in complexity of the interchange rates is further compounded by the terms used on applications and contracts. The importance of reading any service contract before agreeing to it cannot be overstated. Some processors or sales organizations had other costly provisions for early termination, address verification (AVS), and other types of fees.

The time spent doing this research has been worthwhile. We are changing to one merchant account with an established processor (skipping the middleman sales organizations). This processor’s system will work with both our school and website transactions. By using interchange-plus pricing we lower our effective rate. In addition, our bottom line will improve by cutting out the middleman’s other unnecessary fees that were tacked on each month. We’ll also begin running most of our payment transactions through a virtual terminal. This method works well with our internal business processes and provides us with better customer management functions, added levels of card security, and improved service to our customers.

The takeaway here is to do the research before you sign any merchant agreement; read their contract closely so you understand all of their terms, rates, and fees; and be sure to read any customer reviews of their apps or processing equipment. And, finally, do an annual audit of your merchant services costs to ensure you are not spending more than is necessary.

Dorothy Schick is the owner of a flight school in Oregon.

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