2009 July: Necessary Evil

2009 July: Necessary EvilWhen Bill Poss, owner of Luigi’s Pizza & Fun Center, opened a bill recently, he was surprised to see the credit card processing fees were hundreds of dollars more than he had expected.

“Usally it’s three percent. It was 3.79 percent. That’s $500 or $600 more in fees,” says Poss whose restaurant is located in Aurora, Illinois.

Joseph Gallina, vice president of operations for Pizzeria Venti, sympathizes with Poss’s plight. His company has 21 franchises and is planning to open 18 more over the next year.

“The costs and expenses of credit card fees are so outrageous, we actually have special training on it for our franchisees,” Gallina says. Credit card processing fees may be only pennies on the dollar, but they quickly add up. Web site true cost ofcred it. com reports that the average local pizzeria (not a big chain) pays $11,213 in credit card processing fees. That is enough to pay for a new delivery vehicle and reason why pizzeria owners should think about how they can reduce the costs of those fees. Depending on the credit card used, the Web site also estimates that pizzerias pay anywhere from .85 cents to $1.20 in interchange fees per a $25 order.

Interchange fees are paid by a merchant’s bank to a customer’s bank when the merchant accepts credit cards such as Visa and MasterCard for a purchase. When a customer uses a credit card, the bank that issues the card deducts the interchange fee from the amount it pays the bank that processed the transaction.

The bank then pays the pizzeria owner the transaction amount after subtracting the interchange fee and another, small fee for itself. The fees are to cover the expenses related to issuing credit cards and operating credit card networks. It’s not surprising that pizzeria owners and other small businesses find credit card processing fees confusing.

Sanford Brown, chief sales officer for processor Heartland Payment Systems, estimates there are more than 110 different interchange rates. “It’s tough,” Brown says. “People become frustrated. They just ship the statements off to their accountants or put them in a drawer and forget about them.”

Unless they are going to accept cash only, credits cards are a necessity in every pizzeria owner’s operation. Poss says fifty percent of his restaurant’s annual $2 million revenue is generated from credit cards. Gallina estimated the large majority of purchases from his company are made with credit cards.

“Credit cards are 90 percent of our business,” Gallina says. “To even receive a cash payment is rare. People don’t carry cash anymore.” So what’s a pizzeria owner to do? Providers of credit card processing and some pizzeria owners have some ideas on cutting costs. Sean Harper, CEO and co-founder of Chicago-based TransSF, an online comparison company for small business financial services, says, “Interchange fees are set in stone. The way to reduce them is to follow the rules.”

One rule he recommend following is swiping cards whenever possible. The lowest interchange rate is charged when a card is swiped through a terminal. He also recommends buying a terminal that can be purchased for $100 to $400 at an office supply store. “Many small businesses lease a credit card terminal for between $10 and $40 a month over a three-year term, paying three to five times the actual value over the term of the lease,” he said. Owning your terminal also increases your ability to switch your provider if you are not pleased with its services.

When operators key credit card information by hand, they can lower the interchange rate by using Address Verification, a fraud prevention tool which compares information contained in the cardholder’s address, such as the zip code, to the billing address. Harper said it’s a good practice to settle or batch terminal transactions at the end of each day. That’s because payment processors have just two days to process transactions and forward them to Visa and MasterCard which, in turn, sends them to the issuing bank.

If an operator settles their accounts weekly or monthly, they miss the two-day window and accrue higher interchange fees. Philip Wimberly, senior vice president of Payment Processing Inc., a merchant services provider, agrees that settling transactions daily will reduce interchange fees. He said having a POS provider who knows your business, and a merchant services provider who knows your POS system, can help reduce interchange fees. For instance, an employee may forget, but the POS system will remember to settle transactions daily.

“The most industry-specific measures should be in your POS system, (which) relieves your staff of the burden,” Wimberly says. “Your merchant services provider needs to be familiar enough with your POS to help you use it. Every day we meet excellent negotiators (of credit card processing fees and contracts) who lose the benefits of good rates because of bad work fl ow.”

Contracts are another area where Harper says savings can be found. He noted that the fi ne print of many credit card processing contracts includes a cancellation charge of at least $250 to several thousand dollars. “Never agree to a contract that has a cancellation fee,” Harper said. “It reduces the incentive to give you good service and pricing.”

Simply asking ‘credit?’ or ‘debit?’ is another easy way to reduce intercharge fees. Debit cards have lower fees. For people like Poss who would prefer more predictability in the amount they are charged each month, Harper recommends asking for interchangeplus pricing.

“When you use interchange-plus pricing, you agree to the pay the processor the costs (interchange) plus a constant markup,” Harper said. “The markup never changes to ensure that you avoid any tricky fees.” Getting the best possible interchange fees is crucial for pizzerias that want to survive and thrive. “This is a business of dimes and dollars,” Gallina says. “When you’re trying to survive, every penny counts.” 

Got some free time?

“Take an hour, add up your credit card processing fees and divide it into your credit card revenue,” says Sean Harper, CEO and co-founder of TransSF. “That will give you your effective rate. It can be very large. It’s a not atypical for it to be four or five percent.”

Harper has been thinking about the fees that small businesses pay for fi nancial services for a while now. He started his business in fall 2008 after working in an e-commerce business.

“I got really frustrated with fees,” Harper says. “I thought, ‘These sorts of things exist for mortgages and airline tickets, Why not for credit card processing?’ ”

Just as Orbitz or Travelocity enables people to shop for airline tickets, TransSF enables small businesses to compare and purchase fi nancial services such as credit card processing, payroll processing and business loans.

Since January, the company has had eight credit card processing providers sign up to compete on the company’s Web site (transfs.com) and 40,000 people have visited the Web site.

Harper’s notion that owners need to aggressively shop for a merchant services provider — and use their effective rate — to help them make a decision is endorsed by Philip Wimberly, senior vice president of sales for Payment Processing Inc.

“The fees are very confusing,” he says. “But don’t spend too much time pouring over each fee. Focus on the effective rate — what’s the percentage of total monthly volume that you get to keep? Your merchant services provider should be able to provide you with breakdowns and comparisons.”

Anne-Marie Mannion is a freelance journalist based in Willowbrook, Illinois

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