Let’s face it: merchant services is a confusing topic for most business owners. And sometimes that’s not an accident. Between intentionally vague terms and sales reps that range from well-intentioned but inexperienced to outright deceptive, it’s no surprise that myths about merchant fees persist. I’ve written about credit card processing for decades and helped thousands of small businesses find the right processing solution. In this post, I’ll set the record straight on 5 of the most persistent processing fee myths.
Myth #1 - Flat Rate Pricing is the Cheapest
Many business owners believe that “flat rate” pricing - the kind offered by companies like Square and Stripe - is the lowest cost. The truth: Flat rate pricing is simple, but simplicity is not the same thing as lowest cost. In reality, flat rate can be the cheapest for very specific businesses. Specifically, businesses with very low monthly processing volume (~$5,000 or less) and businesses with small transactions. (Under $10.) Here’s why: In credit card processing, there are different rates and fees for different types of cards (debit or credit) and even within types of credit cards (rewards or traditional.) There are also different fees depending on your industry and other factors. This complicated matrix of charges based on those factors is called interchange and I’ve written about it extensively in the CardFellow blog. With some credit card processors, you pay the “true” cost of interchange, plus a markup that your processor charges. That’s not what happens with flat rate pricing. Instead, you pay one flat rate regardless of the card type, industry, etc. That means that when the interchange cost is lower, your processor makes more money instead of you seeing the savings. For example, let’s say your business processes $20,000 per month in cards with an average transaction size of $100, meaning you process 200 credit card transactions. If you sign up with Square and get their 2.6% + 10 cent flat rate, you’ll pay $540 in processing fees. (2.6% of $20,000 + 10 cents * 200 transactions.) But a competitive interchange plus pricing model, like the kind processors in the CardFellow marketplace offer, can often come in closer to 2% - 2.25% (for $400-$450 in processing fees) all in for the same processing profile. That savings can really add up. The reason that flat rate is so appealing to many businesses is that they’re weary of reviewing lengthy credit card processing statements that detail all of the interchange categories and charges. Flat rate conceals all of that and looks much simpler. But the simplicity will cost you. Curious how much? Sign up for a free CardFellow account to see real, fully-disclosed quotes from processors so you can compare to what you’re currently paying. It’s completely private and there’s no obligation. Sign up today! Bottom line: Flat rate is simple, but it’s rarely cost-effective. If you’re processing more than a few thousand dollars per month and have transactions higher than $10, it’s worth exploring interchange plus.Myth #2: Processors Set the Fees
Many business owners believe that processing fees are completely in the processor’s control. The truth: What most people think of as the “processing fee” is actually an equation of three different types of fees: interchange, assessments, and processor’s markup. Interchange fees go to the issuing bank (the bank that provides credit cards to consumers). Assessment fees go to the card brands themselves (Visa, Mastercard). Markup fees go to the credit card processor. The only fees your processor sets are the third one: markup fees. Interchange fees and assessment fees are completely outside of your processor’s control. Furthermore, they’re actually the same for all processors. No processor can get you lower interchange fees and if they promise that, you should run. Bottom line: Since your processor only sets their markup fees, those are the only “negotiable” fees. You’ll want to secure the lowest markup over cost in order to ensure the lowest total processing fees. If you can’t separate the processor’s markup, it’s very difficult to negotiate a competitive processing solution.Myth #3: POS Systems Only Work with One Processor
This one can be true, but it’s worth looking at closer. Many business owners think that all POS systems are locked into one processor. The truth: Many POS systems can integrate with other processors, even if the POS company has a “preferred” merchant services provider. There are three types of POS system compatibility when it comes to processors: universal, selective, and exclusive. Universal POS systems are what they sound like - they can work with (virtually) any credit card processor. Selective POS systems work with several processors, but it’s a defined list. In some cases, such as Shopify, you can technically choose from several processors, but in reality it’s impractical and expensive. That’s because if you don’t use Shopify payments, you’ll pay a surcharge. Exclusive POS systems work with only one processor. Toast and Square are examples of exclusive POS systems. Some POS companies (such as Square) bundle hardware with credit card processing, requiring you to use their in-house processing if you want to use their machines. This convenience can come at a cost. When you’re locked into a single processor, you lose all of your competitive leverage to negotiate lower pricing. In some cases, the companies might negotiate, but typically you’ll need high sales volume for them to consider it. With universal and selective POS solutions, the processing company knows you have other options and may be more willing to negotiate, even with lower sales volume. Bottom line: If credit card processing costs are your priority, consider finding your credit card processor first and then choosing equipment from the options that they can support. If specific features of hardware matter more, consider choosing your POS system first, but realize that it may limit your choice of processors and ability to negotiate better pricing.Myth #4: PCI Compliance Fees are Non-Negotiable
Many processors charge a PCI fee - or several PCI fees! - and business owners assume those are just a cost of doing business. The truth: Being PCI compliant is required. But fees may or may not be. Some processors charge monthly PCI fees, some charge “PCI non-compliance fees” and some charge both. PCI non-compliance fees are the “easiest” to avoid. Processors only charge them when you haven’t filled out your PCI compliance questionnaire to ensure compliance. If you become compliant, that fee goes away. If you’re being charged a non-compliance fee, it’s a good idea to get compliant, both for security and to eliminate the fee. PCI compliance fees are a different story. In some cases, processors charge them for legitimate reasons, such as assisting you with PCI compliance. However, if you aren’t getting any assistance or if the fee is high, try negotiating it. Processors do have control over that fee. Bottom line: PCI fees aren’t part of interchange and your processor has control over them. You may not be able to eliminate it completely, but it’s worth trying to negotiate.Myth #5: If I Switch Processors They’ll Just Raise Rates Again Anyway
This one is tricky, because if you don’t make the right switch, it can be true. Many small business owners realize that their processing costs could be lower, but don’t take the right steps to secure better processing long-term. The truth: Any vendor change for a small business owner can be stressful, especially if it impacts taking payments. I’m categorizing this one as a myth because it IS possible to switch processors without dealing with the same old rate increases. Many small businesses do change processors, chasing lower rates, only to find themselves in the same position again soon. In some cases, processors offer to “match” better rates, hoping the business owner will just give in because it’s more hassle to switch. The trick is to stop chasing “rates.” If you’re looking to secure a low-cost processing option long-term, you need to secure the lowest markup over cost - preferably with a lifetime rate lock. I’ve reviewed thousands of processing statements from frustrated business owners over the years, and the stories are often the same: I signed up with a processor that had low rates, but my pricing keeps going up. They matched another processor’s low rates and I saw savings for a bit, but the pricing is going up again. These businesses needed to stop chasing rates and instead focus on securing a low markup over cost. When these business owners learned that they could choose a processor through CardFellow’s marketplace and enjoy a lifetime rate lock, it was a no-brainer. Additionally, CardFellow monitors your processing statements to ensure you’re paying as little as possible. Bottom line: You’ll keep dealing with rising “rates” if you don’t secure a processing solution with a lifetime rate lock. Be sure to find a solution that provides separation of the processor’s markup. If you need help, check our CardFellow.com. At the end of the day, these myths can cost you thousands over the years. But credit card processing doesn’t have to be mysterious. The CardFellow blog is chock full of helpful articles to show you how to find the most competitive solution for your business - and keep it. Or if you don’t want to do it yourself, check out our private quote comparison marketplace. We’ve helped thousands of businesses with side-by-side processor comparisons. It’s completely free and there’s no obligation. Try it now!
Ben Dwyer
Ben Dwyer began his career in the processing industry in 2003 on the sales floor for a Connecticut‐based processor. As he learned more about the inner‐workings of the industry, rampant unethical practices, and lack of assistance available to businesses, he cut ties with his employer and started a blog where he could post accurate information about credit card processing. As the blog gained in popularity, Ben began directly assisting merchants in their search for a processor. Ben believes in empowering businesses by providing access to fair, competitive pricing, accurate information, and continued support. His dedication to transparency and education has made CardFellow a staunch small business advocate in the credit card processing industry.
