Opening a new retail store is a difficult and time-consuming process for any business owner. From selecting the right location to securing inventory, retail stores involve layers of complexity that determine the ultimate success of your business.
Among the more important aspects of opening a new business is selecting a credit card processor. With hundreds (even thousands) of available processors to choose from, proprietors are often overwhelmed by the options.
While the credit card processing industry can be difficult to understand initially, business owners have a profound incentive to learn quickly. Today, less than 40 percent of all point-of-sale transactions are carried out with cash. Since credit card processors receive a percentage of every transaction and each charge a different amount, this decision can have significant consequences for the success of a business.
To help you find the right credit card processor for your business, we’ve compiled some tips on how to navigate your various options.
Selecting a merchant payment processor for your store:
Businesses that exist in physical locations face different challenges than exclusively online retailers. Due to rent, marketing, and utilities, retail stores typically have a larger overhead, making every decision relating to minimizing costs incredibly important.
Listed below are just a few tips to help clarify the process of selecting a merchant payment processor.
1. Determine your risk level
The first thing to know about choosing a processor is that there are low-risk and high-risk processors, with very little overlap between the two.
What is “risk”?
Risk, in the merchant services context, is determined based on the propensity for customer chargebacks, of customer fraud, of a poorly-run business, and the regulatory risk associated with the merchant’s industry.
For most retail businesses who are accepting the vast majority of purchases in person, there is very little risk of customer fraud through large scale schemes such as using stolen credit cards.
However, where the average ticket is very large (say, over $500), such as with furniture or appliance sales, the business may be categorized as high-risk due to the fact that chargebacks, when they do occur, are for large sums of money.
What does a high-risk business look like?
In addition to the types of businesses mentioned above, retail business in a highly regulated industry, such as pawn shops, vitamin shops, pharmacies, or law practices, may also be considered high-risk. This is simply due to the fact that the processor may have liability exposure if the business does not fully comply with industry regulations.
Finally, a retail business may be categorized as high-risk simply because it is new, and or because the owner has a poor credit history or a poor history of managing businesses. A new operation with inexperienced principals and leaders, especially if the business is not particularly well-capitalized, can be labeled high-risk by credit card processors because ultimately the processor may become liable if the company incurs excessive chargebacks which it is unable to pay for on its own.
Once you have determined the risk level of your business, you can dramatically shrink the pool of potential credit card processors to only those that suit your risk level. That’s because, in general, high-risk merchant accounts are going to come with significantly higher fees that low-risk merchants will not want to pay, and low-risk credit card processors (and their sponsor banks) will not accept high-risk merchants.
Some high-risk businesses do slip through the cracks from time to time, but bank review audits usually catch the mistake and quickly drop the merchant from their program. A few low-risk merchant providers to keep in mind are Total System Services LLC (TSYS), First Data, and Chase PaymentTech, and on the high-risk side are companies like Soar Payments.
2. Understand your business and its unique payment needs
If your business plans to accept 100 percent of its transactions in person via a traditional swipe or chip terminal on your countertop, virtually any processor has equivalent capabilities to provide that type of payment processing to your business.
If by contrast, your retail business can benefit from a new industry specific point-of-sale system, mobile processing, eCommerce processing, accepting payments over the phone, or accepting check payments, then your choices may be more limited.
Additionally, if your business needs ancillary services like recurring billing, or the ability to sell gift cards, then your choices may be more limited still. That’s because most credit card processors focus on a subset of all retail merchants and serve them most effectively.
For example, HeartLand focuses on food services businesses and serves this community exceptionally well with aggressive pricing. Vantiv, by contrast, is known for serving larger retail businesses and providing completely customized payment solutions that meet their specific needs, at a slightly higher price point.
3. Understand credit card processing pricing models
For all retail businesses, managing costs is at least as important as increasing revenue in terms of determining profitability. One area where that can be done is with your credit card processing rates. But in order to choose a cheaper option, you need to understand the various different pricing models used in the industry, and the costs and benefits of each.
At the most simple end is the flat rate. This flat percentage plus few cent transaction fee is the same for every transaction, no matter what. Companies like Square (2.75 percent flat fee for all swiped charges) use this pricing model.
The benefit to this pricing model is that it’s very easy to understand. The downside is that it’s typically significantly more expensive than the other pricing models.
Another common pricing model is interchange plus. Interchange is the underlying cost that payment processors have to pay to Visa, MasterCard, AmEx, and Discover for the transaction. The “plus” in interchange plus is the markup over cost that serves as the payment processor’s revenue.
The benefits to this model are that it’s very transparent, and usually the cheapest pricing model. The downsides are that the business gets passed the underlying cost on each and every transaction, which means there may be as many as 100 different rates paid in a given month, making accounting or financial modeling difficult.
The most common pricing model, which is a sort of hybrid between flat rate and interchange plus, is called tiered pricing. Under this model, all transactions are charged one of three (or sometimes four) different flat prices. In so doing, they get some of the benefits of flat pricing (more easily understandable and predictable prices) and some of the benefits of interchange plus (getting a more transparent breakdown of the underlying cost).
Depending on which of these pricing models most appeals to you, your options will narrow down even further. Most high-risk payment processors only offer tiered pricing, so that makes the choice easy. All structures are generally available for low-risk businesses, and most low-risk processors tend to offer one pricing model to their customers, so you can ask the processor which pricing structure they use to help you decide.
4. Be aware of deceptive marketing tactics
Like any industry, merchant payment processing is littered with distracting and deceptive marketing messages that can trap unsuspecting retail business owners.
Therefore, when choosing a merchant account provider, be on the lookout for the following:
Low processing fee rates:
The first common tactic to be on the lookout for is artificially low processing fee rates.
If the rates seem too good to be true, (e.g. 1.25 percent for all transactions) then you can rest assured that there are substantial hidden fees in the fine print.
Leasing instead of purchasing:
Another mistake many new retail merchants make is leasing instead of purchasing credit card terminals.
It is generally preferable to purchase one of these terminals for your business outright. The initial one-time cost per terminal is an average of $300, but a leasing option can cost as much as $3,000 with some providers.
Obviously, the analysis is different if you’re going to use an expensive point-of-sale system that may cost well into the thousands. But for your standard business, a one-time cash-flow hit is, in the long term, far cheaper than an ongoing lease.
Which credit card processor is right for you?
Selecting the right credit card processor for your retail businesses is the sort of seemingly mundane and insignificant decision that many retail business owners will simply overlook, or just delegate to their local banker.
But taking the time to select a credit card processor that is focused on serving your risk level, providing the pricing model you prefer, the additional features that your business will benefit from, and which does not engage in deceptive marketing can save your business thousands of dollars over the years and ensure that accepting credit and debit cards is seamless and painless.