Don’t Get Nicked by Credit Card Fees

Credit card processors are fighting hard for your business these days. They’re of a mind to deal to get or keep your business. Often it’s as easy as calling your current provider and asking for lower or fewer fees.

Credit cards are a mixed blessing. On one hand, they allow customers to buy merchandise they might otherwise pass up. But you can also be subject to substantial fees when you take credit cards, fees that will certainly reduce your profit margin on a sale and sometimes virtually wipe it out. There is some good news though: lately independent service providers have been willing to negotiate their fees.

The odds are in your favor. With all the consolidation in our industry, there are fewer dealers, and therefore fewer customers for the credit card processing firms. Those consolidations also mean bigger dealerships so you’ve become a bigger and more powerful customer. So meaningful is your business that many dealers are getting sales calls from competing processors.

We consulted recently with a firm that through acquisitions had eight locations. While management and accounting had been centralized, one location still maintained an independent relationship with a processor and was paying fees well in excess of the rest of the firm. The dealer is now saving substantial dollars by cancelling that lone agreement and bringing that outlying location into a centralized processing agreement. It’s just one example of a lot of good luck we’ve had negotiating with competing processors, including in some cases maintaining current relationships at reduced fees.

Here are a few ideas that have worked to deliver savings:

  • Buy instead of rent your card processing technology. You’ll recover the costs of the machine by eliminating the rental charges in a surprisingly small number of months.
  • Some providers charge low processing fees but make it up in other fees. Since they have been burdened with data security compliance costs, they are looking to recover those costs with compliance charges of their own to you. That’s just one fee among many and an indication that you should look not just at the rate but at your fee structure holistically.
  • Another commonly employed fee is an accounting charge for issuing 1099Ks. The IRS requires processors to do so; they would like you to pay for it. Many charge $5 to $10 monthly. This is doubly devilish as it costs them little or nothing to print and send you a 1099K. Combine that with the compliance fee and you’ve got additional costs of $20 or so monthly, a substantial cost that adds no value.
  • Guard against fee creep. Long-term relationships are comfortable but also an opportunity for a processor to gradually increase or add fees. We’ve seen some dealers paying 6 percent or more of their charges in processing fees. A more acceptable range is 2 to 3 percent.
  • A “cost-plus pricing” arrangement, which is based on a set price markup from current interchange processing rate, is almost always better than “tiered” pricing. Tiered allows for different rates for different types of charges and amounts. That can be confusing and the general rule is that if it is confusing it’s probably to the benefit of the processor. Cost-plus is typically reserved for large accounts, and today, more and more dealers are being looked at as just that.
  • Another item to keep your pencil sharpened for is the charge-back policy. Some firms are more aggressive than others, assessing high charge-back fees to build a reserve that effectively eliminates their risk.
  • Be cautious of high termination fees. Processors push for multi-year contracts, which can also contain automatic renewal and “evergreen” clauses. The only way out is paying a steep early termination fee, sometimes several hundred dollars. Or worse a contract that calls for liquidated damages at cancellation whereby the firm is entitled to collect the value of fees it would have collected over the life of the contract, which could be several thousand dollars. Your best bet is to keep your contracts to a year, and negotiate every year.
  • On the positive side of things, request online reporting and integration with your dealer management system. That can save a lot of time and we all know the relationship between time and money.

As with all vendor relationships, due diligence is necessary when contracting with a credit card processor. Look at all the fees and consider the total cost, all the charges holistically. Get several bids. Then negotiate, negotiate, negotiate.

About the Author(s)

Rex is a Principal of HBK CPAs & Consultants and directs the firm’s Dealership Group. He has worked extensively in the dealership industry since 1984 as a department manager, a general manager and an owner, as well as providing tax, accounting and operational consulting services exclusively to dealers as an independent CPA.

This experience includes working closely with hundreds of dealers from coast-to-coast since 1987 on creative tax planning and financial statements issues. He provides clients with a wide range of transaction work services, and consults for them in specialty areas such as operations, government regulatory compliance, valuations and M&A feasibility studies.

Rex is active in many professional associations. He is the current Chairman of the BDO Dealership Industry Group, contributes articles and commentary to dealership industry publications, is frequently called upon to speak to industry associations and conferences, provides expert testimony, and is regularly quoted by industry and the general media.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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