In the hyper-competitive world of credit card processing, businesses are constantly trying to find ways to differentiate themselves. Because many merchants don’t really understand much about processing apart from the fees, this often comes down to trying to make the fees seem the cheapest. But as anyone who’s bought airline tickets from an ecommerce website knows, this “race to the bottom” of fees often invovles deceptive pricing, so you have to look at the fine print – or you might end up paying a $60 luggage fee on a $100 flight! The same applies in merchant services. So as a merchant advocate we’re providing some information to help you understand some common fee models and how they can be misunderstood.
Choosing the right card processing fee model for your business is essential to maximize your profits and minimize costly fees. Unfortunately, it’s not always easy to compare “apples to apples”. Providers use many tactics to make one plan seem appealing, while in reality it might end up costing you more.
In this article, we’re going to review two common payment structures: “free” card processing services and no contract, short-term processing services to see what they really mean for your business. We’ll also break down the many ways companies try to market these structures to make them more appealing.
“Free” Card Processing Services (aka “Surcharge”)
Everyone likes the idea of getting something for free. But of course there are significant costs associated with credit card processing services – including big fees that are paid to the card brands (called “interchange”). So someone has to pay for these costs – or as Robert Heinlein famously phrased it, “there ain’t no such thing as a free lunch.”
There is a valid and legitimate processing fee structure called “surcharge” which, when done correctly to comply with regulations and card brand rules, can allow your business to process credit card payments without paying a fee. In this system, the fee is passed on to the customer who actually pays it.
So it’s true that your business won’t pay processing fees, but calling this “free processing” can be deceptive. There are specific rules about disclosing the surcharge, and you need to assess whether your customers will have concerns about it – this can vary from one industry to another.
Typically, in addition to the processing fees which are passed on to the customer, there is often still a monthly fee and/or startup fee, along with fees associated with early contract termination.
A free card processing service will pass the processing fees onto your customers, adding the charge to their receipt when they go to pay. In some businesses, this works just fine. In fact, it’s a strategy nonprofits have long found success with for example, because donors want to ensure the full amount they are donating is received by the nonprofit. However, in a highly competitive space, your business may lose customers if they know they’re going to have to pay a fee for shopping with you.
This structure is also marketed as:
- “Free Credit Card Processing”
- “Zero Cost Card Processing”
- “Zero Fee Processing”
- “Unlimited Processing for just $X per month” (where $X is very low, often $99 or less)
When you go to review a “free” card processing service, the provider will be sure to list plenty of perks. They’ll gloss over the fact that they’re adding a “small service fee” to your customer’s bill and instead draw your attention to all the savings you’ll enjoy as a business. It’s up to your business to determine if passing the fees onto your customer is a viable business model given your pricing, competitors, and market.
Surcharge pricing is available through National Merchants Association if you’d like to consider this model. There’s nothing wrong with it – it’s just not always the best solution. So as with all our programs, We Work for You® to help you choose the best approach.
“No Contract” Processing Services
As a small business, signing any sort of service contract can be daunting. After all, your profits are unpredictable, and signing a card processing contract could put you in a tough place — especially if the contract has minimums and other clauses that could rack up your charges if business slows down for any amount of time.
For businesses who fear uncertainty, a no-contract processing service can be quite appealing. These services are sometimes marketed as “month to month” services, as there is no long-term commitment on behalf of your business. You may have to give a 30-day notice before canceling, but otherwise, you can be off the hook fast if your business slowed down or paused.
This structure is also marketed as:
- “No Contract Processing Services”
- “No Minimum, No Contract Card Processing Service”
- “No Hidden Fees, No Commitment”
Whether you pay monthly for a contract, you can cancel anytime or sign a shorter-term contract, say for three or six months, there is a downside. These services give your business more flexibility, but you’ll end up paying for it. Without a long-term contract, you’ll have much less room for negotiation and likely end up paying higher fees than you would with a 12- or 24-month contract.
In addition, it’s important to understand that having “no contract” cuts both ways – a longer-term contract at a great rate can actually protect your business and keep your rates low for a longer term, where a shorter term could mean your rates could go up unexpectedly.
In addition, the reality is that processors know it’s a pain to switch providers. So even if you aren’t in a “contract” you’re still unlikely to switch unless something really goes wrong. In the end, this tactic can ultimately be a way to sign up merchants who end up staying for a long time, but paying too much because they weren’t willing to commit in the first place.
Before you jump on the opportunity to get out of a contract and start paying for a month-to-month card processing service, it’s important that you analyze your business’ options. It’s not easy to compare these services side by side, but it’s worth the time and effort.
A statement review from NMA is a great way to assess your options, and see if we can provide you with a contracted rate that will lock in a fair and reasonable fee structure for a longer term for your business.
Truly Free Processing: The NMA 2021 Stimulus Plan
At NMA, we recognize that this pandemic year has been tough on many small businesses. That’s why we created our NMA Stimulus Plan. This program includes free processing for the first three months for brick-and-mortar businesses who sign up, to help you with cash flow needs today. Some restrictions do apply of course, but we’re confident this is an amazing opportunity for your business. Learn more about this program here.
Choosing The Right Service for Your Business
Which card processing payment structure is right for your small business? The answer will depend on your business’s unique circumstances.
If you’re in a market where patrons are accustomed to paying extra fees, like in the food delivery or services industry, a “fee-free” card processing service may fit your needs. However, you have to consider if the extra fees will take away from your competitiveness or negatively impact your company image.
Meanwhile, if your small business is wary of signing long-term contracts, a month-to-month card processing service may offer flexibility. Still, the excess fees you’ll end up paying could substantially impact your profit margins. A long-term contract provides you with negotiation capabilities these short-term services simply don’t offer.
So, how does your business come to the right conclusion? You’ll have to sit down and review all of your options.
Get The Resources Your Business Needs
National Merchants Association (NMA) strives to offer small businesses like yours access to reliable services and information. If you’re deciding between a fee-free card processing service or a month-to-month option, consider NMA’s solutions.
At NMA, we tailor our card processing services to fit small businesses’ needs and budgets, giving you the flexibility, stability, and resources you need to thrive. For instance, if you’re looking to cut down the fees you pay, we offer a surcharge program that passes the fees onto your customers along with a small ticket fee waiver that eliminates fees entirely (for you and your customers) on small-ticket sales.
Together, our team will work with your business to help find the solution that’s best suited to your business needs, now and in the future. We’re the merchant account that Works For You®, and that means we strive to grow with you for years to come while offering the most competitive pricing and services along the way. When you join NMA, your membership unlocks a number of perks that will help your business thrive. Learn more about what NMA can do for your small business.