Encountering interchange

Credit and debit cards are common forms of payment at most wholesale nurseries. However, the fees associated with accepting credit and debit cards — which can be as high as four percent of the total sale for a single transaction — can cut into profits. As a small business, it’s critical to identify and understand all of the fees and surcharges in your processing statements to begin controlling them and saving money.

Interchange fees and the Dodd-Frank Act
A hotly-debated fee, especially in recent months, is interchange, or swipe fees. These are a percentage of each transaction amount imposed by the card brands (Visa and MasterCard; Discover and American Express follow a different pricing model) that the issuing banks collect from retailers every time a customer uses a card. Currently, interchange fees range anywhere between 1.5-2.5 percent for each card-based purchase.

In July, the Dodd-Frank Wall Street Reform and Consumer Protection Act (aka the financial reform bill) was signed into law. It contains provisions affecting Wall Street, lenders, banks, mortgage underwriters and hedge funds. Most important to business owners and retailers, however, is the impact of debit interchange reform and the issue of “swipe” fees.

How does the debit interchange reform affect you?
The new law directs the Federal Reserve Board to ensure that debit-swipe fees are “reasonable and proportional” to the cost of processing transactions. The Federal Reserve has nine months to write the new regulations, most likely taking effect July 2011. These changes only affect debit cards issued by the nation’s largest banks. Some experts believe debit interchange reform may be the first step in regulating credit card interchange as well.

The reform does not directly impact credit card rates, except that business owners can immediately establish a minimum dollar value for accepting credit cards. This measure will prove most helpful to retailers. The minimum may not exceed $10 and applies to credit cards only, not PIN or signature (non-PIN) debit or prepaid cards.

Also, businesses won’t be penalized by the card brands for incentives to customers who use debit cards, checks and cash. However, according to state laws, you’ll be required to disclose those discounts to customers.

Benefits can depend on card-processing agreement
While trade groups have long lobbied for interchange-fee legislation, many business owners won’t actually reap the potential benefits and cost savings from the legislation unless they’re on a certain pricing model with their credit card processor (“interchange-plus”). This is a transparent, simplified model that passes the interchange fees directly through to the merchant while also divulging the separate fee the processor charges for its processing services. However, most businesses across the country, especially smaller ones, are on tiered pricing or discount rate models that group together interchange fees and the processor’s fees, which will make it hard for processors to separate the fees and pass down the reduced interchange rates and savings to businesses.

Since many grower operations may be priced this way, the two most important questions you should ask your card processor are “What is my pricing structure for accepting credit and debit cards?” and “How can I be sure I will benefit from the new debit interchange bill and see some cost reductions as a result?” Don’t accept anything less than a detailed answer that outlines exactly how your processor plans to ensure you receive the appropriate cost savings.

Complexities of processing
Interpreting the statements you receive from your processor can be a challenge. However, learning more about how to read them will help you control what you are really paying. Fees for card processing services may be among the three highest expenses small businesses incur. You deserve to know what you are paying for — and why.

In addition to interchange fees, there are two other components of processing fees you, like every card-accepting merchant, must pay every month:

Dues and Assessment Fees: These are fees imposed by the card brands, and are charged on a per-transaction and percentage-of-volume basis.

Processor Fees: These are the fees your card processor charges for authorizing and/or settling credit/debit/prepaid cards and routing money and data to complete transactions. Charges vary from processor to processor.

Look for hidden fees
Besides these standard fees, processors often charge hidden or “junk” fees, such as membership fees, access fees and compliance fees. These vague, deceptive fees are typically disguised behind cryptic codes, jargon and fine print in offers and contracts. Some also use the card brands’ seasonal interchange increases in April and October to their advantage by not disclosing the breakdown of costs, raising their prices while assigning the blame for the increase to the card brands.

Many processors also tend to quote a low rate just to make the initial sale and fail to point out that only a small percentage of transactions will ultimately qualify for the special rate, with the remainder being charged double or triple that low rate.

Since every processor approaches pricing differently, educate yourself. Know which questions to ask to ensure you’re getting a fair deal. A helpful tool is www.CostOfABurger.com, which offers a fictional monthly statement to use as a tutorial when reviewing yours.

Now, more than ever, businesses like yours are looking for ways to cut costs to help boost the bottom line. By learning the facts about payments processing and knowing the right questions to ask, not only can you eliminate hidden fees and reduce your out-of-pocket expenses on every transaction, but you can also maximize the benefits of the recent debit-interchange bill.  These savings can then be put to toward more important things—like your business.
 

Sanford Brown is chief sales officer at Heartland Payment Systems (NYSE: HPY), the fifth largest payments processor in the United States. To learn more, visit www.HeartlandPaymentSystems.com and www.MerchantBillOfRights.org.