When you run a small business, you know how critical it is that you offer your customers multiple payment methods. And even though it costs you money to accept credit cards, it is pretty much mandatory in today’s movement toward cashless commerce. In 2014, U.S. consumers purchased over $4 trillion worth of goods and services via credit and debit card, and 40 million new credit accounts are being issued every year.
I’ve asked Brad Hanks, a veteran marketing consultant with ZipBooks, a free accounting software program for small businesses, to shed some light on this topic. He is also the father of three precocious girls and an avid drone hobbyist.
But while credit card processing service is mandatory if you want to be in business, it’s not cheap. By accepting credit and debit cards, you’ll pay fees every time a customer makes a purchase, and those fees can take a big bite out of your company’s profitability.
Traditional Pricing Models
Traditional pricing models among credit card processing companies are notoriously complex and difficult to parse. You may choose the company you think is offering the lowest rate, only to find hidden fees that completely blindside you.
Processing companies usually offer a bundled pricing model, which separates your transactions into tiers, usually labeled “qualified”, “mid-qualified” and “non-qualified”. These tier definitions are not standard, and each processor can set its own. The processor then charges you based on how your customers’ transactions are sorted into these tiers.
However, because you cannot see those prices, you generally will have no idea if you are receiving a fair deal or not.
Interchange-Plus Pricing Models
Some traditional processors have switched to a more transparent model in which they charge a fixed amount per transaction, which is a percentage markup over their own cost. In this way, you can compare markup percentages among companies and choose the one with the lowest markup.
New Technology Disrupts the Processing Industry
You no longer have to choose the traditional bank partner for your credit card needs, and you no longer have to pay the fees associated with those entities when you offer credit and debit card payment options to your customers. New technology companies are putting pressure on “business as usual”. Existing fee structures reflect a pre-internet world and technologies like PayPal have left brick and mortar banks behind, but the latest round of innovators are thinking bigger than just a marginally lower processing rate.
Braintree Payments is an offshoot of Paypal, and is an integrated payments provider which permits your business to accept Paypal, Bitcoin, ApplePay, AndroidPay, and credit/debit cards, whichever way your customers want to pay. It’s currently in use with companies such as Uber, airbnb, and Stubhub.
And the best part? Your first $50k in transactions will incur no processing fees!
After that, fees are competitive with other processors, at 2.9% plus 30 cents per transaction. They do offer discounted pricing models for higher-transaction businesses (more than $80k in transactions monthly.)
The advantages of Braintree, aside from the first $50k for free, include support for 40 countries and 130 currencies, consistent pricing across all card brands (so, American Express transactions do not cost more than MasterCard or Visa transactions) and no fee for refunded or failed transactions.
Dwolla launched its money transfer services in 2010 as a competitor to Paypal, permitting users to perform ACH transactions (bank transfers) without incurring money transfer or bank fees. Instead of per-transaction fees, users pay a flat monthly charge that starts at $25.
Dwolla is trying to rethink the whole way we process payments. Think of Dwolla as trying to be the next Visa, not the next PayPal.
Another credit card processor making waves is Stripe, an e-commerce company that offers payment processing tools for online retailers. The company was born from the poor experience offered by other online payment options available at the time, and founded on the principle that an option should be simple, instantaneous, and able to scale to any size organization.
Stripe operates under a transparent pricing model of 2.9% plus 30 cents per successful transaction, with no additional fees or limitations. The solution also permits ACH and Bitcoin transactions at 0.8% with a maximum fee of $5.
Stripe has recently launched a new tool, called Atlas, which is targeted to global small companies. This tool helps entrepreneurs from around the world establish a U.S. presence, including a U.S. bank account, that permits these companies to benefit from the vast, secure and established banking infrastructure in the United States. Stripe is specifically targeting entrepreneurs in Latin America, Africa, the Middle East and parts of Asia, areas which are currently underserved by large banking institutions.
Credit card transaction fees may be shrinking in the long-term but today’s startups are already baking that inevitability into their business model. ZipBooks, a QuickBooks alternative, is accounting software that makes their service completely free by focusing on capital needs instead of capturing transactional fees. They are providing free software as a way to introduce small businesses to sophisticated financial instruments like invoice financing.
In the best of worlds, these software solutions can intersect so you can get great benefits from both parties. For example, ZipBooks uses Stripe as a payment option that lets customers enjoy the benefits of both ZipBooks and Stripe at the same time.
Venmo is a free app that allows you to pay and request money from your friends, has made quick money exchange easier than ever. You simply download the app and add your bank account to get started. If you ever forget your wallet, just tell your friends that you will ‘Venmo’ them and you can easily pay them from your phone. As soon as they receive money from you in the app, they can have it get sent directly to their bank account.
Venmo has made paying back friends a social experience because every time you pay your friends, it will show up on a feed in the app, making paying your friends back almost addicting.
Venmo is completely free to use as long as you insert your bank account instead of a credit card. They do have a 3% transaction fee for those that choose to use a credit card and with some debit cards. However, paying back and forth among your friends does not require a transaction fee.
Long-term credit card processing fees might be going away, but in the meantime, when it is time for your small business to get serious about accepting credit and debit cards from your customers, there is a lot to consider other than the top-line price that a company may quote. Be sure to dig into set-up, monthly and other hidden fees, and make sure that your choice is really the best one for your business.