As we all move away from cash, it’s more and more important for businesses to accept card payments.
However, as we all know, card payments come with new charges as you have to pay a company to facilitate the transaction.
Strangely, though, most business owners never think about their payment processing deal and will happily pay whatever bill their provider issues without thinking wondering whether it’s competitive.
(Since you’re reading this article, I’m guessing you don’t fall into that category!)
In this article, I’ll explain what businesses have to pay in order to accept card payments and then discuss how to find and buy the most competitive merchant service deals.
Let’s get started.
What fees/charges will you pay?
Merchant service pricing tends to be fairly complex, which makes it tricky for merchants to know what they are actually spending each month.
In this section, I’ll take a quick look at the main payment processing charges and fees you will pay.
(For a more in-depth look at processing fees, check out this article.)
- Merchant Service Charge: The charge on every credit or debit transaction you accept. Typically around 0.25-0.35% for debit cards, 0.7-0.9% for credit cards and 1.6-1.8% for commercial credit cards. A premium can apply if the card is issued outwith the EU, if the cardholder is not present or if the payment is made online.
- Terminal Hire: The rental charge for your chip and PIN machine. Typically £14-16 for a fixed countertop terminal, £17-21 for a portable terminal and £20-24 for a mobile terminal.
- Payment Gateway: If you take cards online or over the phone, you will need a payment gateway, which plays the same role of the terminal. Typically between 6-10p per transaction. There’s usually a fixed fee of around £20 per month but that often gives you your first 300 transactions for free.
- Authorisation Fees: An additional charge for every authorisation on every transaction to test the payment method. Typically around 1-3p per transaction.
- Minimum Monthly Service Charge (MMSC): A charge levied if your transactions fall below a certain level. If your other fees come to more than the minimum monthly service charge, you aren’t charged the MMSC. Typically set at £10-20 per month.
- Set Up Fees: A (sometimes avoidable) one-off fixed fee for the installation of new merchant facilities. Typically around £50-150.
- Chargeback Fees: An administrative fee charged every time a cardholder requests a chargeback. Typically around £10-20 per instance.
- PCI Compliance Fee: An admin fee for completion of your annual PCI Self Certification Questionnaire and compliance certificate. Typically around £2-5 per outlet per month.
So those are the basic costs of processing card payments. How much you actually spend will obviously depend on lots of things, for example, your turnover, the number of terminals you have, the type of card your customers use and whether you trade online or in-store.
In a later section, I’ll run through an example bill for a business to give you an idea of how much you could be paying.
But first we have to deal with the hot topic of the day: Surcharging.
Can you surcharge your customers?
Surcharging is (or, at least, it was) a tricky subject to discuss. On one hand, it seems fair that if card payments cause an extra cost, card-paying customers should pay that extra cost. It also seems fair that only the customers paying by card should pay it.
And that’s what a surcharge was. A small fee to cover the cost of processing card payments that was only charged to the customers paying by card.
Unfortunately, large companies (interestingly, the ones with the lowest payment processing costs) used surcharges as an excuse to profiteer from their customers. The travel industry was the worst example with large companies often tacking on eye-watering 5% surcharges for paying with a credit or debit card. In reality, they were likely paying under 1% to process the payment.
The situation got so bad that the EU introduced new legislation (active from 13th January 2018) that banned all credit and debit surcharging for consumer cards. Commercial cards are not covered by the legislation and can still be surcharged but only to the extent of previous legislation, i.e. they can only be charged what it costs to process the payment.
Nowadays, businesses are no longer allowed to charge customers for using a credit or debit card and must either absorb the costs or include them in the headline cost of goods or services. Again, this does not include commercial cards.
With the ban on surcharging, it’s more important than ever to ensure your card payment services are competitive, which brings us onto…
What is the best card machine for small business?
Unfortunately, there’s no simple answer to this question. The best card machine for one business may be entirely wrong for another.
To help you narrow down the choice, I’ve given you two questions you should ask yourself. These questions should help you eliminate some of the options that aren’t right for your business and set you on the path to the right purchase.
(Unfortunately, I don’t have the space to go into this topic in exhaustive detail. For a more in-depth discussion on how to find the perfect card machine, check out this article that I wrote last year. It’s very comprehensive and covers everything from support to mobility.)
- Do you have a fixed location? Static terminals are physically connected to POS systems and are your cheapest options. Then you’ve got portable terminals which communicate with POS systems via Bluetooth or Wi-Fi. And if you need to process transactions on the move, you’ve got mobile POS units that work with apps on your phone or tablet.
- How regularly do you process payments? Most card machines come with long-term rental agreements covering several years. They also usually have a minimum monthly service charge as I mentioned above. If you have a regular stream of customers, these are usually fine. However, if your business has irregular trading patterns, it’s worth considering pay-as-you-go options like iZettle and SumUp.
How much will I pay every month?
As I mentioned before, precisely how much you’ll pay every month is also a tricky question as it depends on the particular deal you bought, your monthly turnover and the breakdown of that turnover.
In a recent blog, I gave a quick case study, investigating how much a typical small business could expect to pay in processing fees every month. You can read the full article here.
For the case study, I invented a business called Alan’s Office Supplies. The business turns over £200,000 a year with an average transaction value of £100. Of the £200,000, £160,000 is taken by credit cards and £40,000 by debit cards.
With an average, ‘high street’ deal, here’s what that business could expect to pay:
- Merchant Service Charge (Credit at 1.3%): £173.33
- Merchant Service Charge (Debit at 0.7%): £23.33
- Terminal Hire: £20
- Authorisation Fees: £6.58
- Minimum Monthly Service Charge: Not charged.
- PCI Compliance Fee: £3.50
Making for a total monthly payment processing spend of £226.74, which is approximately 1.35% of Alan’s Office Supplies’ turnover.
I then ran the same business through Cardswitcher to generate a more competitive quote and managed to reduce the monthly payment to £124.90, which is just 0.75% of Alan’s Office Supplies’ turnover.
This is a saving of 45% worth over £1,200 per year.
How can you find the cheapest merchant services?
Okay, so now you know how important it is to find the right merchant services deal. Unfortunately, very few businesses will do enough research to really understand what’s on offer in the market.
And if you don’t know what’s on offer, it’s much more likely that you will make a bad buying decision, which will cost you significant sums of money over the duration of your contract.
In this section, I’ll look at how an SME can find the cheapest merchant services. If you want to learn more about different sales channels for merchant services, check out our in-depth blog post here.
Banks don’t actually own their own merchant service products. Instead, they partner with a card processor and resell their service. Barclaycard is the only exception to this rule in the UK.
Card processors love selling through a bank because it’s an easy win. You see, most businesses will turn to their bank for merchant services and tend to accept their pricing without question.
This allows the banks to ratchet up their fees and make a small fortune off their business customers. Worse still, the banks are given very little wiggle room by the card processors so can’t reduce their fees even if you push them on pricing.
Digital technology has made it simpler for consumers to buy directly from manufacturers or suppliers and cut out the expensive middlemen. And this should be the case with merchant services.
Unfortunately, it’s not.
Card processors know that any business owner who calls them has pretty much decided that they want to use their product. That means they can bump up the price without losing too much business. The price you get direct from a card processor isn’t quite as high as the bank rates but it’s certainly not competitive.
Price Comparison Websites
If you want to very best deal, you need to go with what’s called an Independent Sales Organisation (ISO). ISOs represent hundreds or thousands of merchants and negotiate collectively on behalf with card processors.
However, it’s not enough to pick an ISO at random. While ISOs are substantially cheaper than other sales channels, there will always be variation between their deals.
To find the best deal, you’ve got to search and compare what each ISO offers.
And that’s where Cardswitcher comes in. As the only specialist price comparison website for merchant services in the UK, we make sure that you find the best deals out there.