How to Cut Credit-Card Fees

When shoppers swipe their credit cards at Dollhouse Bettie, a vintage-lingerie purveyor on San Francisco's Haight Street, it used to cost the store 2.3% to 4.2% of every sale, depending on the type of card. Now the retailer pays 1.7% to 3.8%. Co-owner Michelle Athanasiades says the lower rates, along with a bunch of other fees she got her processer to drop, will save her business $4,000 this year.

Business owners have long grumbled about the cost of taking credit cards, and for the first time, Congress is considering regulating how the fees are set. But small shops like Dollhouse Bettie, which has annual revenue of over $350,000, can reduce how much they pay to accept credit cards, to a point, with some effort.

Merchants paid $62.7 billion in "swipe fees" in 2008, according to David Robertson, publisher of payment-industry Web newsletter The Nilson Report. That includes fees to card processers, networks like Visa (V) and MasterCard (MA), and the interchange fees set by the networks but paid to the banks that issue customers' cards. Interchange makes up the largest chunk, at nearly three-quarters of every Visa or MasterCard swipe fee.

Card processers outline these charges in baffling documents that many small-business owners don't take the time to crack. They may also levy an assortment of other fees. Companies that train a sharp eye on these costs and negotiate with their processer will find savings. "There is a lot of competition in the business, and competition offers the opportunity for merchants to really shop around and see what is the best deal or the best service they can get," says Jamie Savant, a partner at the Strawhecker Group, a payments-industry consultant. While only a handful of true processors actually route payments, they're served by thousands of merchant-level reps that compete for the retail accounts. (These reps must register with banks.) Savant says merchants should get detailed price quotes in writing from three different providers about 45 days before opening a new store or renewing an existing contract.

$50 a month to lease the machineAthanasiades didn't shop around for merchant processing when she opened her store in 2007. Dollhouse Bettie already had accounts at Wells Fargo (WFC), so she signed up for processing through the bank. She only reviewed the costs when Dollhouse Bettie's credit-card machine malfunctioned in March—which happened days before her two-year contract ended and fees were set to rise.

She noticed she was paying $50 a month to lease the machine for two years, more than double what it would have cost to buy one outright. Athanasiades went through the contract and recorded all the fees in a spreadsheet. She compared her processing costs with other merchant accounts online and got price quotes from other providers. Then she went back to Wells Fargo to negotiate. Here's what else she saved:

A $7.50 monthly statement fee. Athanasiades opted to get statements online instead of in the mail.

A $5 monthly service fee. She asked that this be dropped—and they dropped it.

A $40 compliance fee. The bank charged to certify that Dollhouse Bettie met certain security standards associated with taking credit cards. Athanasiades chose to do the paperwork herself.

A $45 "membership" fee. She's still not sure what this is: "It's just some crap that they tack on."

She also got much better rates on each swipe. The pricing varies by the type of card, but her lowest rate dropped from about 2.3% to 1.7%, and her highest rate went from 4.2% to 3.8%. The negotiation took about two weeks, at least six phone calls back and forth to Wells Fargo, and "a lot of number crunching on my own time," says Athanasiades.

The Byzantine fee structures make it hard for many merchants to evaluate their per-swipe costs and compare plans. "One thing processers do very well is make the statements very confusing," says Amy Fitch of Swipe-Rite, a four-person startup merchant-services group in Cedar Rapids, Iowa.

Standard contracts charge different fees depending on the type of card used, organized along tiers such as "qualified" cards, "mid-qualified," and "non-qualified." Rates that look favorable on paper may be more costly if most customers pay with non-qualified rewards cards, for example. Fitch says when she meets with prospective customers, she analyzes what type of cards pay for most of the merchant's sales.

"small-ticket" ratesFitch suggests that retailers calculate their entire cost of processing—including swipe fees, equipment costs, and any other charge—and divide it by their gross credit-card sales. If they're paying more than 2.5% (based on current rates), it's too much, she says.

Some retailers may be better off with plans known as "interchange-plus," a more transparent pricing structure that replaces multiple tiers with a simple markup, regardless of what type of cards customers use. Certain types of merchants—such as restaurants, convenience stores, and taxi cabs—may qualify for "small ticket" interchange rates if most of their sales are under $15. The plan offers better rates for businesses that do lots of small transactions. "A lot of processers won't tell you that," Fitch says.

Merchants can't negotiate every fee, of course. The interchange rates set by Visa and MasterCard won't budge. But on the myriad other costs associated with taking credit cards, even small retailers can question their processor and shop the competition. Says Athanasiades: "If you have some leverage, that's the best thing you can have on your side. Either give me a decent price, or I'm pulling my business."

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