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How To Choose A Credit Card Processor

Take, for instance, a 120-seat restaurant that does roughly $2 million a year in sales--80% of that on account. Shaving just 1.5 points off of those processing fees equates to savings of $24,000 a year.

In the case of Visa and MasterCard, when a credit card is swiped, the transaction gets relayed--via an intermediary--to the credit card company, which then sluices the funds to the merchant's bank account. That middleman charges the merchant a fee--2% to 5% of the sale--for the hookup; meanwhile, the processor pays a fee to the credit card company.

Fees. Generally speaking, a base rate of 2% on each bill is pretty good. Unfortunately, there is no one resource for comparing processing prices--and the fee structures are opaque at best. While third parties typically offer cheaper rates than banks, there are plenty of caveats.

Case in point: "nonqualified" rates on certain types of transactions. Fees on phone orders (where the merchant types the number into the system rather than swiping the card) might cost in the 3% to 4% range, for instance. Some processors may deem a wide range of charges nonqualified. Make processors spell those out before giving them your business.

Remember, too, that the processor must pay a fee to Visa and MasterCard, which typically charge 1.59% for a normal credit card transaction. So, if a processor offers a super-low base rate of 1%, watch out: The company is likely making up for that loss by larding on other fees--or perhaps by bumping up the rates midway through your contract.

Of course, fees aren't the only consideration when choosing the right processor. Service and speed matter, too. Terms are negotiable (these guys want business), so knowledge is your best weapon. Here are some things you should be looking for.

Equipment. Credit card processing machines--which often come as part of point-of-sales systems--run between $600 and $1,800 apiece. (Sleeker systems involve software, too.) Vendors include Micros, Aloha and Squirrel, though some processing companies offer equipment as part of a package. Merchants also need a way to connect to the processor, via either a separate telephone line or the Internet.

Lag time. Another critical factor is the time it takes to get your mitts on customers' money. The lag can be anywhere from one to five days. Why the difference? Some processors have more efficient fraud-checking systems. Others try to eke out interest on the "float" (the reimbursement from the credit card companies) before depositing the funds into merchants' accounts. (That's why all processors must be sponsored by a bank insured by the Federal Deposit Insurance Corporation.) Obviously, the quicker you get the money, the better--and you may not have to pay more for faster service.

Then there are termination fees. Typical processing contracts are one to three years long, and getting out early could cost you a few hundred dollars. Any more than that is probably too steep. We don't have "termination fees"

No matter how transparent, contracts will likely have some confusing language. To get a better handle on things, ask to see a typical monthly statement itemizing every transaction and its related fees.

Extras. Rather than deducting fees at the point of each transaction, some processors will bundle them and deduct the cumulative amount at the end of the month, streamlining your bookkeeping and leaving you with a little more cash on hand. Another potential perk: gift-certificate processing, which might cost another 25 to 50 cents per transaction. Not all processors will offer such extras, but it's worth asking.

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