Lower Credit Card Processing Fees for Merchants

Retailers have long been annoyed by interchange fees -- the fees they fork over to banks for processing when a customer pays with a credit card. The fees average around $2 on a $100 transaction and really add up. In fact, interchange fees are the second-highest expense for most small merchants, after labor costs.

But as irritating as they are, exorbitant swipe fees have been unavoidable for years. Customers use credit cards more often every day, and any small business wanting to stay in business has been forced to hand over a significant percentage of its sales to one of the big card-transaction processors.

Recently, though, competitors have begun to emerge. They promise small businesses lower costs -- to the tune of thousands of dollars a year -- and contracts with no tricks and no hidden fees.

Card Games

The floor price to process a credit card transaction is set by Visa and MasterCard. That's the starting point used by the third-party companies that do the actual processing. The higher they go above the floor price, the more profit they make.

Most transaction-processing companies have a three-tier pricing system. They charge a lower rate when a customer swipes a card in person at the counter. They charge a higher rate if the card number is punched into the register or if the customer is using a rewards card. (Who did you think paid for rewards? The card companies? Nope. It's merchants.) And they charge a higher rate still when the card is a corporate card, when the customer's address and zip code don't match what's on record, or when the sale isn't processed through the terminal within 24 hours.

Processing companies typically advertise only the first-tier rate. So if you're a small business owner, it's important to ask about all of the rates. You should also ask for a complete list of the processor's fees and dues. For example, Visa and MasterCard recently enacted fines for any merchant that doesn't comply with the Payment Card Industry Security Standards. But Visa and MasterCard left it to the processing companies to set the amount of the fines -- and they may vary a lot according to the processing company.

To learn more about the many new, lower-cost merchant account companies, check out Cheapest Merchant Accounts. The website features basic information and ranks merchant account providers according to the rates they offer, the dues and fees they charge, the customer service they provide, their PCI compliance fees, and the application/startup fees they charge.

There are scores of credit card processors that market themselves to small business, including Kredit Karte and BluePay, or you can compare bids from different processors at FeeFighters.

Hip to Be Square

If you're a merchant, you've no doubt heard of the various pay-by-smartphone systems that are on their way to retail counters from Google, Visa, and others. One of the first to arrive -- and also one of the easiest and most interesting -- is Square.

Square (which was started by Twitter cofounder Jack Dorsey) offers a little gadget that plugs into an iPhone or an iPad. It reads a customer's credit card the same way as a traditional card terminal does, and Square processes the payment -- for less. It charges a flat fee of 2.75 percent on each swiped transaction and a 3.5 percent fee (plus a 15-cent surcharge) for transactions that are keyed in. There are no activation fees, recurring charges, or hidden fees.

Recently Square introduced the Card Case, which lets customers pay just by saying their name.