The Perfect Percentage

Q: After 30 years as a nurse, I now have a gift shop! But I find myself with a few questions. For instance, what's a reasonable discount for family and friends who shop in my store?

A: I would be careful not to extend a discount to too many people — after all, after 30 years of nursing, you probably have lots of friends. In our shop, we limit deep discounts (wholesale plus 10 percent) to our staff and members of our immediate family, including adult siblings and their spouses and children. Friends might get special services such as free gift wrapping or a little extra gift with their purchase, but no discount.

We do this in part because we have a number of employees, and they may not recognize our friends or more distant relatives. Our employees get a generous staff discount, and we give them each two 20 percent off cards per year to give to their spouse, best friend, mother, etc. This makes the discounting fair to everyone on the staff.

We do not hand out any 20 percent cards to our own friends. But we could, especially if we wanted to make it easy for the staff to recognize that these individuals were entitled to a special discount. The back of these business card-size cards spells out some exclusions, such as sale merchandise and gift wrapping.

Q: We're shocked to see how much our store spends on credit card fees every month. We'd like to shop around for a new credit card processor, but we're confused about how to compare costs.

A:You're not alone in finding credit card processing fees hard to understand. Selecting the best processor can not only make a difference in the fee per transaction, which can vary between 1.5 and 5 percent, but also the level of service you receive.

Traditionally, banks offered retailers credit card processing as part of their bundled services. Today, however, most credit card processing is done through electronic payment service providers. Your bank likely has a relationship with one of these companies. However, you don't need to use that processor to have funds deposited directly into your account.

What should you look for in a processor? First, a good reputation — especially for service. Besides considering your bank's provider, ask retailers in your area what processors they use and what their experiences have been. A good company will have an emergency loaner program, and possibly a local service person.

The next factor is cost. Like credit card providers, processing companies can offer a low initial rate and raise it later. They also calculate rates in different ways, depending on whether the card is credit or debit, whether it is present, and whether debit cards are used with a personal identification number.

There are two basic types of processing charges. The first is the transaction fee charged for each credit/debit card sale. This includes a flat fee and an address verification fee that are the same no matter what the size of the sale, as well as a “discount rate” charge calculated as a percentage of the purchase total. Generally, the higher the volume of sales your business generates, the lower a discount rate you can negotiate.

However, the transaction fee can vary based on many factors, including whether the credit card is issued by MasterCard/Visa, American Express or Discover. Adding to the complexity is the fact that Visa and MasterCard now have 378 different categories of card. These include rewards cards and commercial cards, both carrying higher fees than regular consumer credit cards.

The second type of fee includes service charges such as support, batch, annual and monthly minimum fees. There may also be startup fees, or a monthly gateway fee that covers the cost of verifying the customer's information, judging the authenticity of the transaction, then declining or processing the payment.

In order to sort through these confusing charges, start by calculating the Net Effective Rate (NER) of the fees on your last few months' statements, and ask competing companies to show you how they would lower it. Mark Wellnitz, vice president of Wind River Financial, explains that the NER is reached by dividing all fees charged into your net credit card dollar volume (sales). The NER includes both your transaction fees and service charges, so it accurately represents what you are paying for credit card services.

Ask the processor for a complete list of rates and fees before they complete a statement analysis. And make sure you'll be charged on net sales, so you get back most of the fees for customer returns and credits.

Also, make sure that a new processor offers a system compatible with your POS, if you use one. Otherwise you'll need to purchase a special credit card data capture terminal. Leasing this equipment may help your cash flow, but it's almost always more expensive in the long run.

Security is also a major concern in selecting a processor, because your customers entrust you with valuable credit card data. If you accept credit cards on your website, you need to be especially certain that strong fraud protection measures are in place. Transaction and discount fees are usually higher on Internet sales because the card is not present, adding processing costs and more opportunity for fraud.

Once you decide on a processor, read the contract carefully. Many providers require a certain number of months or years, limiting your flexibility if you're unhappy with their service or fees. If there is a minimum term required, find out in advance what the penalties are for early termination.