Selecting the right merchant processing service is one of the most critical decisions a business owner can make. The ability to accept payments efficiently impacts both your operations and your bottom line. Unfortunately, many business owners make costly merchant processing mistakes when choosing their merchant processing service, leading to higher fees, security risks, and unsatisfactory customer service. In this article, we’ll explore five common merchant processing mistakes and how to avoid them, so you can make an informed decision that benefits your business.

1. Not Comparing Rates and Fees

Mistake: Many business owners rush into signing up with a merchant processor without taking the time to compare rates and fees. In an industry where fractions of a percent can add up, this oversight can result in significant long-term costs.

Why It Matters: Merchant processors typically charge several types of fees, such as:

  • Transaction Fees: A percentage of each sale, usually between 1% and 4%.
  • Monthly Fees: Flat fees for using the service, often overlooked by businesses that expect low sales volume.
  • Chargeback Fees: Fees for handling disputed transactions or customer refunds, which can become a recurring cost.
  • Setup Fees: Initial costs for integrating the processor with your existing systems.

These fees can vary greatly depending on the provider and the pricing model (which we’ll discuss later). For instance, a 0.5% difference in transaction fees on annual sales of $500,000 could mean an extra $2,500 in fees over the course of the year—funds that could be better spent on growth.

Solution: Make a list of potential processors and ask each one to provide a full breakdown of fees. Don’t just focus on the headline transaction fee—ask about hidden fees, chargeback rates, and any monthly or setup fees. You can even use online calculators to estimate the total cost of different processors over a year based on your transaction volume.

Example:

A retail store generating $100,000 in annual sales opted for a processor with a seemingly low 2.5% transaction fee, but later discovered they were being charged an additional $50 per month in hidden fees. This added an unexpected $600 to their annual costs.

2. Overlooking Contract Terms

Mistake: Not reading or fully understanding the contract terms is a common error. Many businesses are eager to start processing payments and overlook details like early termination fees, contract length, and auto-renewal clauses.

Why It Matters: Signing a long-term contract without fully understanding the implications can trap your business in an unfavorable agreement for years. Early termination fees can be as high as $500 or more, and auto-renewal clauses could extend the contract without notice, making it hard to switch providers when better options become available.

In some cases, these contracts may also include exclusivity clauses, preventing you from using another processor or switching POS systems. This can be particularly problematic for growing businesses that may want to switch to more advanced payment systems in the future.

Solution: Before signing any contract, make sure you understand:

  • The Contract Length: How long are you committing to the processor? Is there a penalty for early termination?
  • Termination Clauses: What fees or penalties apply if you want to cancel the contract early?
  • Renewal Clauses: Does the contract auto-renew, and under what conditions?
  • Exclusivity Clauses: Are you locked into using only this processor?

If the contract terms are not in your favor, negotiate. Some processors may be willing to adjust the terms, or you can choose a provider that offers more flexible agreements, such as month-to-month contracts.

Example:

A small bakery signed a 3-year contract with a processor but later found a more affordable option. When they tried to switch, they faced a $1,000 early termination fee, effectively locking them into the original agreement.

3. Choosing the Wrong Pricing Model

Mistake: Many business owners don’t fully understand the pricing models available for merchant processing and end up choosing a plan that doesn’t suit their transaction volume or business type.

Why It Matters: Choosing the wrong pricing model can result in unnecessarily high fees. There are three main pricing models, each with its own advantages and disadvantages:

  • Flat-Rate Pricing: A single fee is applied to all transactions. This is easy to understand and predictable but can be more expensive for high-volume businesses.
  • Interchange-Plus Pricing: You pay the actual interchange rate (set by credit card companies) plus a small markup. This model offers transparency and can save money, but fees may vary depending on the type of card used.
  • Tiered Pricing: Different rates apply depending on the type of transaction (e.g., debit vs. credit, in-person vs. online). This model can be complex and often results in higher fees for businesses that process different types of payments.

Solution: Assess your business’s needs before choosing a pricing model. If you run a small business with lower transaction volumes, flat-rate pricing may offer predictability. On the other hand, larger businesses with high transaction volumes might benefit from interchange-plus pricing, as the lower fees can result in significant savings over time.

Example:

A restaurant owner selected flat-rate pricing for simplicity, but after experiencing a large volume of transactions, realized they would have saved thousands of dollars annually with interchange-plus pricing.

4. Neglecting Security and PCI Compliance

Mistake: Failing to prioritize security and ensuring that the processor is PCI DSS (Payment Card Industry Data Security Standard) compliant can expose your business to significant risks.

Why It Matters: A data breach or payment fraud can lead to costly fines, reputational damage, and the loss of customer trust. If your processor is not PCI compliant, your business could be held liable for any fraudulent activity or data theft that occurs.

In addition to PCI compliance, you should also evaluate the processor’s overall security measures, including encryption and tokenization. These technologies protect sensitive payment information and help prevent unauthorized access.

Solution: Always choose a processor that meets PCI DSS requirements and offers strong security features, such as tokenization, encryption, and fraud detection tools. Make sure they provide support for maintaining compliance and offer regular updates to keep your systems secure.

Example:

A small online retailer experienced a data breach that exposed customer payment information. Because they were not PCI compliant, they faced fines and legal fees that nearly put them out of business.

Read more : Understanding PCI DSS Compliance

5. Not Considering Customer Support and Service

Mistake: Overlooking the importance of reliable customer support can result in frustrating delays when issues arise. Payment systems are critical to your business, and downtime can lead to lost sales.

Why It Matters: Whether it’s a technical glitch, a problem with payment gateways, or an unexpected outage, issues with your payment processor need to be addressed quickly. If your processor’s support team is slow or unavailable, it can disrupt your operations and damage your customer relationships.

Solution: Choose a provider that offers 24/7 customer support with multiple contact options (phone, email, live chat). Test their customer service before signing up by asking specific questions and seeing how quickly and effectively they respond.

Example:

A retail store experienced an outage with their payment processor during the holiday rush. The processor’s limited customer support meant they were unable to resolve the issue for hours, resulting in thousands of dollars in lost sales.

Bonus: Questions to Ask Before Signing Up

To make the best decision, consider asking potential processors these critical questions:

  • What fees are included, and are there any hidden costs?
  • Do you support the payment methods my customers prefer (e.g., mobile payments, contactless, etc.)?
  • How do you handle chargebacks and disputes?
  • Is your service compatible with my current point-of-sale (POS) system?
  • What security measures are in place to protect my business and customers?
  • What is your average response time for customer support issues?

Conclusion

Merchant processing is a crucial part of running a successful business. By avoiding these five common merchant processing mistakes—failing to compare fees, overlooking contract terms, choosing the wrong pricing model, neglecting security, and underestimating customer support—you can select a provider that meets your business’s needs without the hidden costs or headaches.

Take your time to research, ask questions, and ensure that you understand the full scope of the agreement before signing. The right payment processing system can streamline your operations, improve customer satisfaction, and ultimately contribute to your business’s growth.

If you’re looking for more advice on choosing the right merchant processing solution, contact us today for a consultation!