Small Business 101: What You May Not Know About Your Credit Card Processor

The industry of credit card processors is a vital component for the viability of any business, be it a giant corporate entity, or a small startup, but is perhaps the most important and dangerous for small businesses. Almost 50% of the total working population in the United States is comprised of small businesses. As of two years ago, these businesses generated nearly a trillion dollars in total revenues annually. The small business is of major importance to local economies and communities, and is a vital part of our national economy. This importance has created and is in turn driven by a common entrepreneurial spirit that has been part and parcel of American culture since the days of the Founding Fathers.

The American Dream is one of owning and running one’s own business. There are roughly 8 million businesses of this type in operation across the United States, and the one thing almost all of them have in common is that they accept credit card and debit card transactions. In an increasingly plastic-based economy, credit card processors allow small businesses to remain competitive in the face of giant, corporate entities.

Unfortunately, as important as these systems and providers are to small businesses, there are many processors out there who take advantage of the lack of protections that small businesses have in terms of accounting teams. They misrepresent rates, hide and inflate fees, and the costs for a small business can quickly spiral out of control. Strategies used by companies to mask and inflate fees include inflating interchange fees to hide fee markups; charging for valueless “security fees” which are, despite the processor’s claims, not mandated; charging arbitrary fees which are misleading and unnecessary; and charging thousands of dollars to change phone numbers upon a change of processing company—in essence, charging retailers thousands to protect themselves from scams.

Credit card payment systems are intricate and complex, and credit card processors act as a sort of intermediary between the business and the card issuer. It’s important for the small business to understand how these systems work in order to avoid the many pitfalls involved in dealing with credit card processors.

The most important thing to understand is the interchange fee, paid by the merchant and received primarily by the card issuer, with a secondary cost issued by Visa, MasterCard, or other networks. Finally, a tertiary charge goes to the payment processor, who as previously mentioned acts as the intermediary between the various parties.  While contracts vary wildly, approaching an agreement on an “interchange-plus” basis can provide greater transparency by separating out the various fees charged. This can enable merchants to spot unethical or even illegal charges and avoid them.

As with any complex system, education is the most important and first line of defense for retailers to avoid predatory companies. Do your research and homework, and be vigilant against predatory companies, and the small business owner can hook up with credit card processors who will put the client before the almighty dollar.