How to Choose a Merchant Processing Partner

You’ve heard the horror stories—the car dealership down the road that got stuck with the faulty terminal and a six year, no-outs contract, or the furniture dealer that’s consistently paid more per month in fees than they were originally told they’d have to—but you know that not accepting credit cards just isn’t a viable option for your business. How then should you go about making sure that you aren’t getting completely scammed with your merchant service provider?


There are many factors that are going to influence the rates you may end up paying. First of all, it’s important that you have a general idea of the average number of swipes and average amount per swipe that you’ll be accepting per month. Are you processing many small purchases per month (like a bakery or convenience store) or fewer larger amounts (like a car dealership or furniture store)? Transaction size limits, frequency limits, and even volume commitments are relatively common in credit card processing contracts, so you’ll want to be sure that you know what’s going to work for your business so you don’t end up consistently shouldering heavy fees later on.

Similarly, it’s vital that you keep your point of sale in mind when shopping around for a merchant processing partner. Are the majority of your credit card transactions going to happen with the customer right in front of you swiping his/her card, or are you going to be accepting payments over the phone and manually entering in the credit card numbers? The latter is considered more high-risk as far as your merchant processing partner is concerned, so the rates for those types of transactions will be higher. When you start your search, make sure that you request to see those rates, and not the rates that they usually advertise (which would be for the lower-risk transaction with the customer swiping the card in person).

It will also be important to compile your paperwork before seeking out a merchant processing partner, much like you would before going to the bank to take out a loan. While each processor is likely going to ask to see different things, in general you should be prepared to share basic business information (your tax identification number, filing status, years in business, etc.), accounting information (profit and loss and balance sheets), and relevant credit card processing details (the rough percentage of credit card payments you’ll be accepting in person versus over the phone, your estimated annual sales volume, the average size of your transactions, etc.).

Lastly, understand that it’s very difficult to do comparison-shopping with merchant processors. Trying to get a merchant processor to give you details about what your transaction costs will be before you’ve actually signed any paperwork with them is very difficult. In fact, because each processor is likely going to run a credit check on you before providing you with any details, trying to get quotes from multiple companies may actually end up negatively affecting your credit score. This being said, there are some internet resources out there that allow you to comparison-shop and show ratings for processors, like CardFellow and Merchant Maverick.


Lease or Buy?
Many new business owners get sucked into leasing credit card processing equipment because it seems much more manageable to pay small monthly amounts instead of one large amount for a machine. Companies that lease equipment will try to entice business owners by emphasizing the lack of an initial investment and the fixed monthly payments. However, you’ll almost always end up paying more money trying to lease a machine than you would if you’d just bought one outright.

Tiered or Interchange-Plus Pricing?
While more business owners use processors that use tiered pricing than interchange-plus pricing, chances are that you’ll actually end up spending less money in fees with an interchange-plus plan. The main issue with tiered pricing is that because of the bundled amount you are being charged per transaction, you will not be able to differentiate between the interchange fee and the discount rate. In other words, you’ll no longer be able to tell what your merchant service provider is charging you and what the fixed amount the card-issuer is charging. While interchange rates are capped in the United States for card-issuers (Visa/MasterCard/etc.), processors that use tiered pricing can get away with charging far more than the capped percentage because they don’t have to disclose to you what they’re charging on top of the interchange rates. Furthermore, more often than not, the rates quoted initially by companies that use the tiered pricing model are only representative of the lowest/cheapest tiers, even if the majority of your transactions may actually come from one of the more expensive tiers. At the end of the day, the only real benefit to tiered pricing is that you’ll get “simpler” statements every month!

Reserve Account
If you run what a merchant provider views as a “high risk” business (i.e. you’re in an industry with a higher risk for chargebacks, you tend to run fewer and more expensive transactions, you primarily take payments over the phone, there’s a significant lag between when the customer pays for the goods and when they actually receive them, etc.), be prepared for them to require a reserve account. With a reserve account, the merchant processing partner will take a certain percentage of your initial sales until they reach a set amount. While it may be hard for you to avoid having to set up a reserve account if you run a “high risk” business, you may find that different processors will require very different amounts. This is an especially important factor to consider when you are a brand new business and may have a more difficult time losing the extra income to a reserve account.

Contract Length
While the processing contract term will of course depend on your individual contract, in general, most processors in the US will be looking for three to five years. This is key because just about every processor is also going to have a substantial early cancellation fee.

Understand Before You Sign
Most contracts are written in very complicated legal jargon that’s difficult for your average business owner to understand. While it’s important that you have a general idea of what you’re signing, don’t be too concerned if you don’t understand every feature. The most vital thing is to look for red flags when you’re reading through your agreement. Push the sales person you’ve been working with to provide you with further details or clarification on anything that you’re unsure of.

Don’t Over-Stress
If you start to feel overwhelmed by the process of having to find a merchant processing partner, take a step back from the situation and re-evaluate. As long as you’ve done a little bit of research into your processor, chances are that the savings you may have from one processor versus another are actually quite minimal in the grand scheme of things. It’s important to keep in mind the value of your time, and to recognize that the few thousand dollars you might potentially save switching to a new processor may actually be less than the amount of money you’d be making if you were to divert your time and energy into a different aspect to your business.

When it comes to setting up a new business, most business owners are in such a hurry to get up and running that they neglect to pay much attention to searching around to find an ideal merchant processing partner. After all, there are usually other seemingly more significant details to be ironed out. However, it is important to be knowledgeable about your business’ needs and to make sure that the processor you choose is the right fit for your business before you sign any paperwork with them.