You are virtually guaranteeing that you will overpay for credit card processing if you're comparing processors based on which ones are willing to provide a free terminal.
The Economics of "Free"
Credit card processing is a for-profit business, and the average basic machine costs a processor anywhere from $100 to $300. If a processor provides a business with a free machine, it begins the relationship at a loss equal to the value of the terminal. Losing money is bad for business, so the processor must recoup the cost of the terminal as quickly as possible to make the account profitable. In order to do so, it will employ any number of tactics from excessive surcharging to raising rates to adding fees. The only benefit to receiving a free machine is the lack of initial expense when opening a new processing account. But it's a benefit that is quickly eclipsed by the excessive fees that are soon to follow. Receiving a free machine isn't as costly as leasing a credit card machine, it's just the lesser of two evils.There's an Exception to Every Rule
Some processors, like those in CardFellow's marketplace, may offer extremely discounted equipment to businesses that meet certain criteria. For example, a processor may offer to rent a new terminal for only $5 a month to a business that processes at least $10,000 a month in sales volume. This type of arrangement is far more sustainable for the processor than simply giving a machine away. The monthly rental fee brings in a little revenue, and requiring a certain sales volume guarantees the processor will generate a given amount of profit even when offering competitive pricing. This type of relationship is a win-win. It allows the business to avoid start-up costs, and it allows the processor to generate an honest, realistic profit on the account.One-Two Punch: Free Machine & Cancellation Fee
The credit card processing industry is extremely competitive, and processors will use any tactics they can to get a leg up on the competition. Free equipment often provides that little extra incentive needed for a business to choose one processor over another, but it leaves the processor scrambling to generate revenue. Once a business falls for the free machine marketing ploy, the processor needs to ensure the business sticks around and pays high fees long enough to generate profit after covering the cost of the machine. The perfect safeguard processors employ to ensure this happens is a hefty cancellation fee. Not surprisingly, many credit card processing companies require a business to agree to a cancellation fee in order to receive free equipment. This guarantees that the processor will cover the cost of equipment and make a profit regardless of how long the business endures its excessive fees. Keep in mind that your pricing can change (read: go up) during that time, as well.True Cost of a Free Machine
A free credit card machine can cost a business thousands of dollars in a relatively short period of time. To illustrate how, let's pretend that two retail businesses both processing $10,000 a month in sales volume sign up with two different processors. Business A chooses a processor that charges a fair price of $400 for a modern, EMV-capable credit card machine, and Business B signs up with a processor that provides the same machine for free. Business A uses CardFellow's marketplace to quickly secure competitive rates, interchange-plus pricing, and a month-to-month contract with no cancellation fee. Business B chooses a processor from some affiliate marketing site like TopTenReviews and receives tiered pricing, bait and switch rates, and a merchant account contract with a hefty cancellation fee. With its competitive pricing, Business A's effective rate is only 1.90%. And with its less than competitive pricing, Business B's effective rate is 2.85%. This means that Business A will pay $190 to process $10,000 in volume ($10,000 * .019), while Business B will pay $285 to process $10,000 in volume ($10,000 * .0285). Compared to Business B, Business A will recoup the cost of the $400 terminal it purchased in about four months ($400 / $95 in savings = 4.2 months). Business B, on the other hand, will end up paying $1,140 a year ($95 in excessive fees * 12 months = $1,140) for a machine it could have purchased for a third of that cost. Multiply this scenario by five years, and the “free” terminal that Business B received actually costs a total $5,700 ($95 in excessive fees * 60 months = $5,700).EMV Chip Cards and "Free" Machines
The switch to EMV chip cards in the United States caused a lot of headaches for businesses and processors used it as an opportunity to push "free" machines if you switched to them. The appeal of free machines and becoming EMV compliant at the same time was temping to many, but remember, it may cost you. Read our case study of one CardFellow client who was lured away by a free chip card machine, only to find his new solution was more expensive overall. Fortunately, he was able to come back to CardFellow and resume processing at much more competitive pricing. While EMV has been the standard for several years now, there will always be newer and better technologies and therefore processors offering free machines with those new capabilities. There's always a catch to a free machine.Focus on What Matters
Free credit card machine offers are tempting, but they're nothing more than a marketing ploy. The important features of a truly competitive processing solution go way beyond the initial cost of equipment. Ignore shifty sales tactics and focus on things that will keep processing cost low over the long haul. Look at things like pricing model, the processor's markup, and discount method. These important aspects of a competitive credit card processing solution are described in depth in CardFellow's guide: Credit Card Processing Exposed.
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.
