How to Negotiate Lower Merchant Processing Rates

How to Negotiate Lower Merchant Processing Rates

Negotiation is About Bargaining Power

Negotiation expert, Chester Karrass, said that: “In business as in life, you don’t get what you deserve, you get what you negotiate.” Negotiation is about two parties coming together to reach an agreement on prospective business affairs, with the balance of influence being based on the level of bargaining power a particular side brings to the table.

As someone who has helped small business owners find and negotiate merchant agreements, I have seen firsthand the confusion they can create, and how it can be easy to overpay. Over nine million businesses in the US have a merchant account today, which comes in two different risk tiers consisting of Card Present (face-to-face) and Card Not Present (mail order, telephone transaction, etc.) merchant accounts. While every merchant would love to reduce down their processing rates to what they deem rock bottom pricing, it’s only truly the Card Present merchants who have a lot of bargaining power to achieve such competitive price rates, and this article will explain why.

The Card Brands, The Member Banks, and The MSPs

Briefly, let’s examine the major players involved in a credit card transaction. Visa/Mastercard (V/MC) are registered brands who regulate a group of member banks who use their trademarks in the marketplace. The member banks include (1) Card Issuing Banks who distribute credit cards to consumers and  (2) Sponsor Banks that partner with Merchant Service Providers (MSPs), who approve businesses for merchant accounts and processes credit card transactions through front-end/back-end networks. The V/MC card brands are paid membership dues from the member banks, while Issuing Banks are paid interchange which are baseline rates/fees set for every type of credit card transaction that a customer could potentially run at point of sale. MSPs are paid by marking up interchange and adding fees such as a monthly statement fee, while the Sponsor Banks are usually paid through bin fees from their partnerships with MSPs. From start to finish, here is how a $100 credit card transaction is completed:

  1. Billy is approved for a Visa Rewards Card with a $10,000 line of credit from an Issuing Bank. While on the other side of town, Joe, owner of Joe’s Meat Market, is approved for a merchant account by an MSP and receives a free landline terminal to process credit card transactions.
  2. Billy purchases $100 worth of groceries at Joe’s Meat Market using his Visa Rewards Card. When Joe swipes the card through the credit card terminal, the MSP sends the transaction to the Sponsor Bank, who then sends it to Visa, who then sends it to the Issuing Bank to verify that Billy has a remaining credit limit that’s large enough for the transaction being requested.
  3. Let’s say Billy’s credit limit is sufficient, the Issuing Bank would create an authorization code and send that code to Visa, who in turn sends the code to the Sponsor Bank, who then sends the code to the MSP via the credit card terminal, prompting Joe to see an “approval” notification.
  4. Joe would print out a receipt for Billy to sign, then batch out all of his credit card transactions at night via the terminal.  After the batch, the MSP will deposit the $100 transaction into Joe’s bank account within 48 hours and bill him at the end of the month for interchange, the mark-up of interchange, as well as other fees such as the monthly statement fee. Billy would be sent a bill within 30 days by his Issuing Bank.

Understand The Risk of Merchant Accounts

Now that you understand the players and the process, it’s time to understand your bargaining power in negotiating processing rates, which is totally based upon the level of risk you impose on your MSP.  Your merchant account is an unsecured line of credit provided by your MSP. For instance, in the example above, when Billy runs the $100 transaction at Joe’s Meat Market, Joe would rather have the $100 within 48 hours rather than waiting for Billy to receive his credit card statement and pay for the purchase (which could take a few months if he made monthly payments.). The risk involved is due to the fact that a customer can initiate a chargeback, which would require the merchant to refund the purchase amount of the transaction if he can’t successfully fight it. But if the MSP goes to deduct the refund from the merchant’s bank account and the merchant doesn’t have a high enough deposit balance, then the MSP would be responsible for paying for the refunded transaction.

Card Not Present Merchant Accounts are The Riskiest

Card Not Present merchant accounts are by far the riskiest for MSPs. These are merchant accounts where the merchant did not see the customer during the transaction, but instead handled the transaction through a mail-order form, over the telephone, or through the internet. These transactions are riskier due to having a higher probability of being charged back through the quality and/or fraud chargeback codes. The quality code is when the customer claims to have ordered something but never received it, while the fraud code is when the customer claims to have never authorized the purchase to begin with. You could also have the situation of friendly fraud, where a customer purchases an item, receives it, but deceptively initiates a chargeback claiming they never received it. Due to risks imposed by Card Not Present merchants, the MSP is less likely to negotiate rock-bottom pricing and has more bargaining power over the negotiation—even approving these types of merchant accounts in general requires a major risk tolerance.

Card Present Merchant Accounts Impose Little Risk

Merchants who see all of their customers face-to-face (give or take) impose little risk of a chargeback due to the card being present, along with the customer signing a receipt and providing a copy of their driver’s license most of the time. This lowers the risk of a chargeback, which most of the time allows these Card Present merchants to be “auto-approved” during the underwriting of their merchant accounts, whereas Card Not Present merchants take a little longer to underwrite.

Bringing It All Together

If you are a Card Present Merchant, you can use the information from this article to come to the table with great bargaining power and demand competitive pricing from your MSP. There are a couple pricing tiers that an MSP might offer you, but the best model to use is Interchange (IC) Plus Pricing. IC Plus Pricing gives you better negotiation control due to the higher levels of cost transparency. IC Plus Pricing is basically where the MSP will pass through all interchange rates/fees, then would add a markup of 10 – 40 basis points on top of interchange, in addition to other fees such as the statement fee.

John Tucker is Managing Member of 1st Capital Loans LLC, as well as an M.B.A. graduate and holder of three bachelor’s degrees in Accounting, Business Management and Journalism. Tucker has nearly 9 years of professional experience in Commercial Finance and B2B Sales. Connect with Tucker on LinkedIn by clicking here, or contact Tucker at or at 586-480-2140.

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