How to Deal With Credit Card Mumbo Jumbo

Owning a small business often means having to wear many different hats—marketer, accountant, building manager, and Web tech whiz, to name a few. But when it comes to figuring out what's behind credit card companies' charges for handling your customers' transactions—known as interchange fees—that can be one hat too many.

The Associated Press reports that some gas stations are rebelling against high interchange fees by not offering credit card service. The National Retail Federation says that interchange collections have increased from $16.6 billion in 2001 to a projected $48 billion this year.

Some small-business people think they are paying too much of that chunk. David Eldredge, controller for Wachusett Mountain resort in Worcester County, Mass., says he looked at the fees his business was paying for credit card service to devise ways to save money and found it daunting. "When you start thinking about the fees, it's crazy. I probably spent about 150 hours on this last year," he says. Many merchant account providers—who act as intermediaries between businesses and credit card companies—use three-tiered pricing, where the rate charged to the business depends on the type of card used by the customer.

Congress has been watching credit card fees as well. In June, Sen. Dick Durbin, an Illinois Democrat, introduced a bill dubbed the Credit Card Fair Fee Act. "American businesses and consumers are getting nickeled and dimed by the big banks, who end up making billions from these hidden fees," Durbin said. The bill would empower the Department of Justice and the Federal Trade Commission to investigate any fees that businesses say are "unfair" and judge whether credit card companies are abusing their market power in setting those fees. Michigan Democratic Rep. John Conyers has a similar bill in the House. It's not just Democrats getting riled up about the fees. Sen. Kit Bond, a Missouri Republican, has endorsed Durbin's bill. Bond said that "it troubles me that small businesses feel powerless in negotiating interchange fees."

But to some small-business advocates, this legislation is the wrong solution to the problem. "One way or another, it's government getting involved in setting prices," says Raymond Keating, chief economist for the Small Business and Entrepreneurship Council. "Businesses should be aware that it's a very dangerous precedent...that you turn to the government if you don't like prices, rather than looking for alternatives in the marketplace." One potential negative side effect, Keating predicts, is that credit card companies would offer fewer rewards and benefits if the federal government forced them to lower their fees.

How else can small businesses reduce the burden of credit card fees?

Find providers that offer "interchange plus": Merchant account providers' standard pricing can involve a lot of exceptions and complications. A much simpler form of pricing, formerly available only to larger companies, is now becoming more common for smaller businesses. "Interchange plus" is simply the rate plus a margin that goes to the provider, without any complicated tiers and exceptions. "There's more competition [among merchant account providers], so they are lowering their rates and interchange plus is becoming available to companies of all sizes," says Robb Lejuwaan, who runs a merchant account company called Cocard Synergy in Walnut Creek, Calif. Eldredge of Wachusett Mountain says that he's going to save $40,000 in a year by switching to an interchange-plus plan.

Look for hidden fees. When choosing a merchant account provider, ask detailed questions about fees they might charge you. For example, Rory Lynch, controller of Terra Valentine Winery in Napa Valley, Calif., says he was losing money on credit card processing that hadn't even gone through. "Let's say a hundred clients go online and try to buy something from us, and there are a hundred declinations due to bad credit cards," Lynch says. He found out he was paying for each of those transactions. Lynch solved the problem by finding a better contract with a different provider. "I learned about this structure that said you're not going to be charged for any unauthorized purchases." Another common fee is for terminating your contract.

Shop for service. One way to judge the quality of a merchant account provider is to talk to the person you'd be dealing with over the phone and see how accessible and articulate he or she will be in helping you with problems. "If you have a problem with a credit card, you want to be able to call someone to get it resolved quickly," Eldredge says. "But a lot of these credit card processing companies will hook you to sign up with a low rate, but good luck getting ahold of someone to help you with an issue."