Strategies to Reduce Merchant Services Fees

Merchant processing is a pain point for all business owners. Nobody likes to see those 3-4% fees on their Profit and Loss report every month. At the end of the year, they accumulate to a large dollar amount that chips away at your practice’s profit. 

Credit card transactions account for an average of 70% to 80% of your practice’s receivables. Most practice owners just assume this is a cost of doing business, but there are strategies to reduce the amount of money you spend each year on credit card processing fees. 

That’s why for this week’s blog, Izhak Musli sat down with Sam Segal, an industry expert with Merchant All-In-One, for an objective discussion on how to reduce costs associated with merchant services fees. Here are Sam’s answers to these important questions.

What is a merchant services provider?

A merchant service provider (MSP) is any company that enables a business to accept credit/debit card payments as well as alternative payment methods other than cash or paper checks. MSPs usually offer a larger suite of services to accompany their payment processing, including business data, Point of Sale (POS) software, and payment gateways. MSPs are sometimes referred to as acquirers, processors, or merchant account providers. 

MSPs rely on huge processor companies that basically transfer the data from your POS software to the credit card company and back with an approval code to get paid from the customer. 

The processor company is key because every time you go through several middlemen, you basically end up paying higher fees unintentionally. So, it’s important to do research up front, know what to ask, and evaluate your options. You can also reconsider your current provider at any time and shop around to find another company that better suits your needs.

What steps are involved with credit card transaction flow?

There are 7 Steps of the Transaction Flow, and communication typically takes about three seconds for approval. Each step has its own cost. 

1. Customer pays for a service with a credit card.
2. Your practice captures credit card information.
3. Upon approval by the card-issuing bank, the practice’s account is credited, and the transaction is submitted for settlement.
4. Back-end processor pays the acquirer and debits the card-issuer account. The transaction is then sent to the issuer.
5. The acquirer funds your practice’s account.
6. The issuer posts the transaction to the customer’s account.
7. Customer receives a statement and pays the issuing bank. 

What factors should I consider when choosing an MSP?

As of 2022, there are nearly 1,300 Visa-registered independent sales organizations that sell credit card processing to practice owners. So, there are multiple factors to consider and much thought that should go into finding the best MSP. Ultimately, it comes down to which factors are the most important to your specific practice.

• Cost: Pricing is a crucial factor. It is not just the month-to-month software costs you need to take into consideration. You should also factor in upfront hardware costs. Or, if you are switching services, any potential early termination fees. A practice that selects its own bank as its merchant service provider is giving that bank more control and unnecessary data on their business. Your bank will traditionally be more expensive compared to independent sales organizations (ISOs)or direct processors. One factor to consider and be aware of is that some MSPs use third parties for some of their services, which increase your overall costs. So, make sure you ask about this when doing your due diligence. 
• Hardware: Some smaller practices may be able to get by using their phone as a POS system, but most will need to upgrade to a more advanced system. Depending on your MSP, you may be able to lease equipment to avoid hefty upfront fees. 
  Scalability: If possible, you should carefully consider an MSP that offers scalable options. If you start at a lower tier due to your current size and budget, your goal should be to be able to upgrade as your practice grows. As your employees get used to a specific system, it can be jarring to suddenly have to change systems because your old system did not have the capacity to grow with your practice. 
• Risk: Another difference between companies is their risk level tolerance. For example, some MSPs will allow your practice to process high-dollar services with minimum inquiries, while others will audit high-dollar sales, which can impact both your face-to-face transactions and your online sales. 
• Terms: Some companies might ask you to make a long-term commitment and sign for three years, while others might allow you to sign a month-to-month agreement and let you discontinue service if you are not happy. This can usually be negotiated.
• Ease of Use: Most practices want to have one MSP for all payment systems, such as online, face-to-face, and virtual terminals. Unless you or your employees can navigate complex interfaces or systems, you will want an app or service that is easy to use. You will also want to make sure your MSP has good customer service with a toll-free number on which you can speak with a real person if you need to deal with technical issues, review suspicious transactions, or dispute chargebacks. So please do your research and read reviews. 

How can I reduce MSP fees to save money?

It is a reality of business that you must accept credit cards. But you need to ask the right questions to reduce costs. Most practice owners accept that the credit card fees are part of the costs of doing business, and there is nothing you can do about them. 

The good news is there are some strategies to reduce your fees:

• Monitor your merchant services costs. With more and more patients preferring to pay with a credit card, the associated credit card cost is being absorbed or paid by the practice. 70-80% of a practice’s sales volume is in standard credit cards. 
• Understand your true costs of merchant services by calculating your effective rate. Determine your total fees and deductions you were charged from your most recent processing statement. Then divide this number by the total volume of card sales. This will give you your effective rate. This rate should be relatively consistent each month and not fluctuate significantly. Calculate this each month as you may find that your effective rate may not be the same as what you thought you were paying.

Example: Your total monthly sales in all credit card transactions is $25,000. Your total monthly costs including all fees is $750. Divide $25,000 by $750 and your effective rate of 3%. 

• If you suspect you are being overcharged and want to stay with your current MSP, you can call and ask to change your agreement.
• While many practice owners like the idea of flat fees for the predictability factor, it may not always be the best decision. There are about 320 types of Visas and MasterCards—all with the exact same interchange costs. The MSPs add their own margin of commission or fees on top of the interchange cost. The Interchange Plus is a simple and affordable merchant fee structure. This pricing model offers the best of all worlds. Interchange exchange rates are set by credit card associations. Although MSPs don’t have the power to change these rates, they do get to set the processing fees that get charged on top of the interchange rate. These processing fees can vary from card to card from 1.5% to 2.75% to ½% for a debit card. If you are paying a flat processing fee of 2.75% you are missing out on savings per card type used.
• Settle transactions within 24 hours. To qualify for the lowest interchange rate, transactions need to close within a specific time frame (typically 24 hours or less). The more efficiently you can settle your transactions, the lower your merchant fees will be. So, if you close the office and go home and forget to batch out, your authorizations stay in your payment collection device. You’ll end up paying an extra ½% if you go longer than 24 hours before you close out. 
• Send complete data when requesting credit card approval. Incomplete data that is missing a CVV code or missing a zip code or has an incomplete address may end up resulting in higher fees as the transaction is higher risk than a regular complete one. 
• Negotiate your non-processing fees. While interchange rates are outside of your MSP’s control, any other fees associated with your merchant account can potentially be negotiated. This includes everything from rental costs for equipment to monthly maintenance fees. 
• Offer a cash discount program to eliminate merchant service costs. If a patient still opts to use a credit card, Visa, MasterCard and American Express now allow practices to pass the credit card cost directly on to your patients after going through a certain approval process. So, if your average effective rate is 3% and your practice makes $1 million, that adds $30,000 a year of fees you are saving. This is pure profit. 
• If you are considering a cash discount program now is the time to do it. In April of 2022, Visa, MasterCard, Discover, and American Express are all increasing their fees. This will be the largest fee increase in the last few years that was delayed due to the pandemic. 

We invite you to schedule a discovery call today to learn how the Clarity Practice Performance System's business intelligence, training, educational and data analytics solution for aesthetic practices can optimize employee productivity and increase practice profitability through training, analytics and community.