Many small business owners complain about the high cost of credit card processing, and with good reason.

Just a few years ago, business owners had the choice of accepting credit cards or sticking with cash and check because most consumers carried these other methods of payment.

However, recent changes in consumer spending habits have made credit card processing a requirement for any business looking to compete in today’s market.

To understand how one can save on credit card processing, you must first understand how the typical merchant services agreement is put together and the fees associated with them.

Tiered or Bucket Pricing

Most credit card processing contracts are written as tiered or bucket pricing models. What this means for a small business owner is that each credit card they run will be charged according to a predetermined tier (or bucket). These tiers are typically referred to as qualified, mid-qualified, and non-qualified. The rate associated with each tier gets higher as you move your way through the list.

Qualified – Best Rate

Mid-Qualified – Middle Rate

Non-Qualified – Worst Rate

There are over 400 different types of credit cards, and every credit card processing company assigns each card to one of the above categories. That means there are roughly 100-200 types of cards being charged in each bucket.

The vast majority of cards these days have some sort of rewards attached to them. It may be airline miles, hotel points, cash back, you name it.

When rewards cards are run through the credit card processing machine they are almost always classified as mid-qualified or non-qualified, which according to the list above have higher rates. So next time you are cashing in your airline miles, just remember that it was the businesses you bought things from that paid for your trip.

The problem with the whole arrangement is that most of the time a business owner does not even know about the higher tiers. In fact, when they were originally quoted for the contract, the sales rep probably discussed the lowest bucket and failed to mention the other two. The real problem is that almost 80% of all credit card processing is done so at the highest two tiers.

Save Money on Credit Card Processing

There is a simple method when setting up a credit card processing account that can allow a business owner to save a bundle of money on their transaction fees. It is a billing structure called Interchange Pass-Through. But be warned, very few sales reps will bring it up and many will try to make it sound difficult to understand and costly because they will make a lot less money off of your account.

Interchange Pass-Through

Interchange pass-through is a credit card processing method that until recently was only available for large merchants doing a lot of transactions. What it does is gives credit card processing rates at wholesale pricing. Instead of putting each of the 400 types of credit cards into three buckets, it gives the business owner the exact wholesale rate set by Visa and MasterCard for each specific type of card.

Since most sales reps will steer clear of interchange pass-through when writing a credit card processing contract, it is important to bring it up yourself and not be shy when they try and change the subject. The truth is that it is the same type of credit card processing big companies like Walmart and Amazon use, so it is obviously the lowest cost.

credit card processing Credit Card Processing Fees

Another area that credit card processing companies will gouge business owners for money is in the fees section of the contract. Very few credit card processing agreements will come without a laundry list of fees, and it is important for every business owner thinking of entering into one of these agreements to fully understand each one and ask questions if they are unsure.

The truth with credit card processing fees is that most of them are bogus and designed strictly for making more money off of the business owner. Of course there are a few that will be standard, such as a PCI compliance fee, but the vast majority that are originally presented are either added on by the sales rep as a way to make extra money or completely negotiable.

When addressing the fees added to a credit card processing agreement, look at each one individually and ask the sales rep what it is for. Let them explain it and then tell them you have received multiple offers that did not include that fee. Be prepared because they are good at overcoming your objections, but if you keep in mind that most of these fees are just added to credit card processing agreements for profit, it will help you defend your position and keep from paying them.

Contract Commitment and Cancellation Fees

Most credit card processing agreements will also include some form of time commitment. It may be a one year contract or even as long as five years. They typically will range from one to three, but the sales rep often has the power to try and get whatever they can out of the business owner.

It is true that some credit card processing firms require a contract, but most of them do not and therefore you can negotiate that out. They are designed to protect the sales rep in case you cancel your account before they have earned a healthy commission on you.

The final piece of the contract, which is usually attached to a term commitment, is the cancellation fee. These are not generally written by the credit card processing firm, but rather the sales rep. As mentioned above, the commitment term is designed to ensure the sales rep makes their commission off the small business owner, and the cancellation fee is usually 100% profit just in case the business owner does in fact cancel their contract.

When negotiating the contract term as well as the cancellation fee, it is usually wise to discuss them both together. Since most of the time it is only extra profit for the sales rep, they should be willing to budge because a sale is better than nothing.

Eric Stauffer Eric Stauffer is a consultant for small businesses and reviews merchant services companies for bad business practices. His organization keeps a close eye on the industry and helps to blow the whistle on companies involved in unethical credit card processing.