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October 28, 2014
by David Goodale



Techniques to use when renegotiating for lower credit card processing rates


You want the best possible rate every time you process a credit card for your business. It's a perfectly understandable desire. Turning that desire into a reality is a matter of negotiating effectively, while having and setting reasonable expectations.



It is entirely reasonable to request a lower rate over time.


Negotiating lower credit card rates. At some point you started accepting credit cards for the first time. At that point in time your business was young and growing. When you initially set out to establish a merchant account and begin accepting payments, it's quite possible that as much of the focus was simply on making sure your application was approved as it was on getting the lowest rate that you could.

It's likely that much has changed since then. If business has gone well your trading volumes have grown, the balance sheet has strengthened, and you aren't the new kid on the block anymore. If you feel that the time has come to revisit your pricing, you are quite possibly right because the profile of your business has most likely changed significantly. If you want to get a lower rate, you have to ask for it. In this discussion we will explore how you can do that, and go about it effectively.



Step 1: Don't negotiate in the dark. Get your facts and numbers. Learn the pricing models.


A surprising number of merchants will try to shop around or renegotiate the rates without understanding their existing pricing. The first stop along the way is to look at your current pricing. Make certain that you understand what you are currently paying. If you can't do that, learn how to analyze your credit card processing statement to figure out your effective discount rate. You simply can't get started without understanding what you are currently paying.

Once you are familiar with your existing pricing you must get to know a little bit about interchange and the popular pricing models that exist in the payments industry. We will explore a bit about interchange in this article further below. Without a knowledge of the pricing models, and in particular at least a basic understanding of interchange you cannot set a realistic goal to work towards. If you can be confident in your demands <ahem> "requests"... you can negotiate effectively.



A short story: don't negotiate like this...


Taking a moment to speak from personal experience, I remember a specific incident when a prospective client came to me to talk about pricing. In this case I am referring to it was not an existing client renegotiating pricing, but a potential new client that was negotiating the rates when opening their account for the first time. Regardless, this example still applies to renegotiating your existing pricing.

This prospective client was quite aggressive about the rate that they wanted to pay. It was very low. I can't remember exactly what it was, but it was below interchange cost from Visa and MasterCard. The merchant told me (adamantly) that they had been promised this rate at another processor. They didn't want to hear very much from me, other than that I'd beat it, and by how much.

I took the time to thoroughly explain interchange so they knew what our cost would be from Visa and MasterCard when processing the transactions. I made it clear that every credit card processor receives the same interchange structure from Visa and MasterCard. I showed how the rate that had been quoted to them by the other processor was below interchange. I tried to explain that when a rate quote appears to be below interchange cost it means with almost 100% certainty that they had received a qualified / non-qualified quote. That is the type of pricing model in which a really fantastic rate is offered, but most transactions (when processed) don't actually qualify for that rate. It's a very misleading type of pricing that I strongly dislike (and we don't support at Merchant Accounts.ca). In short, they weren't going to get the rate they thought they would. I pointed out that since interchange is public, and since the costs are clearly disclosed, to consider a question: why would a processor choose to service their account for an ongoing loss? All throughout this time the merchant spoke over me, and basically just didn't want to hear it.

At this point, this may seem more like a rant as opposed to an educational point that I am trying to make. However, I wasn't upset, or frustrated. I felt bad for the merchant because I knew they couldn't negotiate effectively. They hadn't researched interchange and THEY HAD NO WAY OF SETTING A REALISTIC GOAL OR EXPECTATION.

They were going to get taken advantage of. It was that simple. They were going to demand what they wanted until some salesperson at another processor just told them whatever they wanted to hear. Unfortunately, there are some less scrupulous processors out there. I did everything I could to help them understand why the method in which they were trying to negotiate the rate would never be effective. Everything they were doing was setting themselves up to fail. In the end, I don't know what happened to that merchant. I wasn't angry or upset, I just gave them the best quote I could and suggested they do their research on interchange (and gave them a link to our blog). The one thing that I can guarantee is that they did not get what they thought they were going to receive in the end.

The lesson of this story is that to negotiate effectively you must understand interchange. If you know the costs that your processor will pay when you process transactions you can be firm and confident without being unreasonable or bullish. We have a few in depth articles about what interchange is and about interchange plus pricing, but you don't have to be an expert in interchange to negotiate effectively. You just need a general understanding, which we will explore below.



Interchange for Canadian Merchants


Every time a credit card transaction is processed, the credit card processor incurs a fee that they must pay to Visa and MasterCard. This fee is called INTERCHANGE. Interchange is the same for every processor within a region. Regions are Canada, USA, UK/EU, Australia, etc. In this example we are looking at Canadian interchange.

At Merchant Accounts.ca our expertise is in online / e-commerce payment processing. For that reason, in this discussion we are going to look at the interchange fees that are incurred for e-commerce and over the phone transactions. (Payments taken over the phone and e-commerce transactions clear at the same interchange level). If you do POS (in-store) payments you can still benefit from this advice, but should Google to find the applicable interchange rates for card-present transactions.

1.65%:Basic Visa cards
1.85%:Rewards / Points (Visa Infinite)
2.00%:Corporate Visa cards
2.65%:Visa super premium cards
 
1.72%:Basic MasterCard
2.13%:Rewards MasterCard
2.00%:Corporate MasterCard
2.65%:Super premium MasterCard


A couple of notes:

- This is an incomplete table, and is only intended to be a point of reference that gives a very accurate overview, if not detailed granular information. The Visa Canada interchange rates and MasterCard Canada interchange rates can be found online.
- Super premium cards are fairly rare, so for the most part you don't need to worry about processing too many super premium cards.
- If you sell to international customers (located outside of Canada) Visa and MasterCard will assess additional cross border fees of 0.40% or 0.80% (depending on the location of the cardholder and currency processed).

We don't need to get overly analytical though. Instead, we can make a very helpful, generalized statement:

Cost to the credit card processor, on average, will be somewhere between 1.65% to 2.13%.
Although we can dig into interchange at a deeper level, we really don't need to. Now that you know the processors approximate costs, you can begin to speak with conviction and confidence without having to worry about making unreasonable demands or requests.



How much margin is reasonable?


Your credit card processor must earn some money for the service that they provide. Most business owners understand this. That is why you will not pay interchange, but will be quoted a rate that is above interchange. The extra bit above the interchange cost is the margin that the credit card processor gets to keep.

For example, if you are quoted a rate of "Interchange + 0.50%" it means that the margin that the processor gets to earn for providing your credit card processing service is 0.50%. Working with this example, if you processed a basic Visa card your rate would be 1.65% (interchange) + 0.50% (margin to processor) = 2.15% (the rate you pay). There are other pricing models, but interchange plus pricing is the most transparent and desirable from a rate negotiation perspective.

From a value perspective as a business owner, you want to feel that you get a good value for the money you pay, and that the support you receive is also good. (Both from a customer service perspective, and also a technical / uptime perspective).

In order to determine how much margin above interchange is reasonable for the processor to charge we'll look at some of the considerations a credit card processor must keep in mind when pricing an account.



Trading Volumes


In the payments business, margins are primarily determined by trading volume. Let's think about the far ends of the spectrum for a moment. If your company processes $1,000 per month in sales, and the processor has a margin of 1%, they are going to earn about $10/month from your account. It does not take much for a processor to eat through $10 worth of cost to support a client over the course of a month! On the flip side of the coin, consider a company processing 500 million dollars per month. If the processor was earning a 1% margin this would translate to $5,000,000 per month in revenue. If I'm being honest, we'd love to earn five million dollars per month from a single account. But it's probably not reasonable, is it? Although these are very extreme examples, they drill home the point:

The trading volumes of your business will play a big role in determining how much margin above interchange is required by your payment processor (and thus the rate you will pay).

In most situations (and this is an overly generalized statement but necessary to give you a point of reference) when negotiating rates the margin for the processor will be quoted between 0.25% above interchange on the lower end (if trading higher transaction volumes) to 1% above interchange on the higher end (if you trade lower transaction volumes). These numbers are just a point of reference. In extreme circumstances the processor may quote higher or lower. While it is true that the a primary factor in pricing account is the trading volumes of the business, it is also affected by other criteria we will explore further below.



Product Risk


Let's take a moment to think about the risk associated with certain products or services. Again, we'll think at two different ends of the spectrum. In the first example, let's consider knitting books. That is a product that might appeal to folks of all ages, but in this example let's agree that it appeals broadly to senior citizens and retirees as a hobby. In comparison to that product let's think about World of Warcraft, an online videogame that is going to appeal to a 17 year old kid.

Between the retired senior citizen, and the 17 year old, which is more likely to get into shenanigans with stolen credit cards?

I am not trying to make any sort of stereotypical statement (I was 17 once!), but am only making the point that some products have more risk associated with them than others. Selling knitting books vs online blackjack. Selling t-shirts vs guns. Selling endangered unicorn hides vs children's coloring books. (Okay... stretching on the last one).

If your product is higher risk, expect the processor to want a larger margin in terms of the rate. If you are curious as to why the answer is fairly involved, but at a high level it boils down to high risk products or services being more likely to have disputes, requiring more of the processors time to manage, and most importantly increased chargeback risk. Every time a dispute happens between a cardholder and a merchant the processor is actually liable to the card issuing bank. So if a merchant sold bitcoins, and if some fraudster ran a bunch of stolen credit cards to transfer bitcoins to themselves, at some point the cardholder would notice. They would complain about the unauthorized charge to their card issuing bank. A chargeback would ensue. The merchant is liable for all of those chargebacked funds. If the merchant didn't have enough money, it would fall onto the credit card processor.

In fact, every time a sale takes place, the credit card processor is exposed to some financial risk in terms of potential chargebacks. In many cases this risk will be very low (most likely meaning an account will be priced a bit lower), and in other cases it might be high, or even very high (in which case the account would most likely be priced higher).



Financial Strength


Building off our last point about chargeback risk, we can tie this straight into the financial strength of the company. If your company is financially stable, it means that if chargebacks did occur there is less of a chance of the credit card processor having to fork over money, because as a merchant you would have enough money on hand to refund a cardholder in the case of a chargeback.

Strong financials are actually very important when it comes to both approval and rates. If you established your merchant account back when you were a startup, and if the balance sheet has strengthened over the years, that is absolutely something that you should point out when renegotiating the rates with your credit card processor.



Processors reward loyalty


A credit card processor survives and thrives because of it's client base. A sign of a good processor is one with a very low turnover of accounts. That is because this means that clients are happy and are choosing to stay and work with them long term. A processor with a lot of churn in the customer base is a major sign that customers are unhappy. You want to work with a processor with a low churn rate.

If you are working with a good processor, they will value your business. Hopefully, you have the type of relationship with your processor in that they are open about this, and open to discussing your needs. One of the most important things to point out (in a respectable way) is that you have been a long time customer of the processor, and that you are happy, but would like to revisit the rate.

Tell the processor that you are a loyal customer, and you are willing to stay loyal. Tell them that you are open to signing into a term (so you will work with that processor for a period of years, usually 3 years).

Even if you aren't working with the same processor as before, you can still offer to sign a longer term agreement as a negotiating point in order to secure a lower rate for your business. You certainly don't need to sign a long term (nobody can force you to do that), but if you are happy, and if you plan to stay long term, you should be able to use this as a negotiating point in order to secure a lower rate. (As a side note, I generally recommend not to sign long term agreements where possible when you are moving to a new credit card processor. Ideally, if you are moving to a new credit card processing platform you'd like to sign a month to month agreement. This gives you time to evaluate the service and make sure you are happy with it. Some credit card processors allow this, while others do not.)



Is the salesperson that you are working with knowledgeable, or are they reading off of a pricing template?


If you work with a junior salesperson, or someone without pricing authority your negotiation will probably not be productive. Oddly, having read this article you will know more about interchange than some salespeople that actually work in the industry. (Really!)

This is where the type of organization that you want to work with will come into play. If you work with a smaller, more client focused merchant account provider you far more likely to be able to engage into a meaningful discussion about the rate. (Admittedly, this is not an entirely unbiased point, since at Merchant Accounts.ca our model is to have each client work directly with one specific member of our team who becomes their dedicated account manager). However, the point stands that if your inquiry is routed to a call center agent without the ability or authority to engage in a meaningful discussion, the odds of securing the rate that you are looking for are significantly reduced. This is where you will have to use tact and determine through your conversation if the person speaking to you genuinely has the knowledge, ability and authority to negotiate the rate with you.



Other considerations


In every pricing related discussion on our blog I am always quick to point out that rates are hugely important, but they are not the be all and end all criteria in which to make a decision. When you are renegotiating the rate, consider for moment that if you switch to a new processor there is a very real risk that the service may not be as good. Will your support inquiries be handled efficiently? Or, are you likely to be left on your own to sort out the natural bumps in the road that are always going to happen, at least to some small degree, when moving to a new payment platform?

When you are renegotiating for the rate, also renegotiate your service agreement. Do you have a go-to person at your credit card processor? If not, this is a good time to get that commitment. If you can get the processor to assign one person as your "go-to" when problems arise, it can help shorten the pain that comes up whenever a problem occurs. Support isn't something that is valued... until it's needed. If you operate a startup you may not value this, but if you've been processing for a while you'll realize that even in the most stable platform possible, small issues will always arise. Don't just negotiate for rates, negotiate for all of the aspects of the service that are important to you, and try to get better commitments from your provider.

As a closing note on this point, our support structure at Merchant Accounts.ca is to assign a dedicated account rep to each client. That rep becomes the central point of contact for any issues that arises. That is not to say they are the only person you work with, but when problems arise you have one central person to contact. This person will act in your best interests to get the issue resolved as quickly as possible. This eliminates bouncing between teams, figuring out who to contact, and having to re-explain the issues over again between different people. The idea is to have one person to contact for resolution on almost any issue.



Summary


Your credit card processing costs should be reduced over time. It does not matter who your credit card processor is, because it is universally true that as your account ages you should be rewarded. As a merchant you should leverage your business strength and your history of a strong relationship with your processor in order to make it happen. In fairness to your processor though, realize that your account must be in good standing, the company must be in good financial shape, and you must ask for it. It won't happen if you don't make it happen.

It starts with thinking about what you want, setting a realistic goal, and making a case for why it should happen. If you do this, and more specifically, if you go in having done your research, understanding your current pricing, and understanding interchange then you can secure a fantastic value for your business.

As a final word of caution, remember that not all processors are equal. If you get to the point that you are re-signing for a new contract term you should make sure that you have examined the pricing and are on either an interchange plus or flat pricing model. If you go to all the effort of doing your research and negotiating for a better rate, then you most certainly deserve to get what you were promised. That is where staying with a processor you trust can be the easier decision, and moving to a new processor slightly stressful. For that reason, always make sure that you have read and checked over the new agreement carefully before signing. If your processor has a history of treating you well, and a reputation of treating it's other clients well, then you should be in good hands. If it has been a rocky relationship consider taking that processing history and bring it to a new processor that will treat your business well and value you as a client.


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If you haven't reviewed your processing costs in a while take a moment to view our rates.

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- About the Author

David Goodale My name is David Goodale, CEO at Merchant Accounts.ca. Pricing is often one of the most confusing topics in the merchant services industry. I strongly believe that flat (non-fluctuating) pricing and interchange plus pricing are the only good pricing models in the industry. If you have any questions about this article, pricing, or other questions in general about your merchant processing agreement don't hesitate to contact me. I'm always happy to help with an honest opinion, and enjoy chatting with folks from interesting businesses!

Toll free: 888-414-7111 ext. 5 / Direct: (905) 901-2254
david.goodale@merchant-accounts.ca

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