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Credit Card Tune-Up

Providing the convenience for your customers can lead to bigger sales, but do you know the costs?
Tuesday, May 1, 2007 - 00:00

Providing the convenience for your customers can lead to bigger sales, but do you know the costs?

Almost every automotive repair shop, quick lube, chain store and even fast food stores accept credit cards theses days. While the average small business owner realizes he must accept credit cards to be competitive, what he doesn't always factor in is the real cost of taking credit cards for payment.

Studies show businesses that accept credit cards have higher average ticket sales and more repeat business. Would you go to a fancy restaurant that only accepted cash or checks? Accepting credit cards is no longer a convenience; it's a necessity.


Credit card processing is a maze of rates, fees and costs, all of which add to the cost of accepting bank cards. The discount rate is only part of the overall cost. Depending on the total revenue generated by your business from credit cards, your company may not be able to get processing directly through a bank and will instead have to use a third-party provider that processes your credit card receipts and charges a fee. That processor also collects a fee for the credit card issuer, such as Visa and MasterCard (MC), as well as the bank that actually collects the money from the card issuer and pays it to you.

Everybody gets a piece of the pie. Fees and discount rates can be based on the length of time you have been in business, the business' financial condition, the type of business, the owner's credit rating, the average ticket size, the credit card volume requested and the total amount of sales per month from credit cards.

Every provider may have a different set of rules to follow. That's why it's important to read the fine print. But regardless of what type of company processes your transaction, your bank is in the loop as they are holding the deposits and issuing the charge-backs.

The lowest fee a merchant pays is the sales discount rate, or the "swipe rate." This fee is usually based on credit cards that are swiped through a card reader; more importantly, this fee is only applicable if the credit card does not offer some benefit to the customer, such as frequent-flyer mileage or cash-back.

Every other type of transaction is called a "downgrade." These rates show up as the mid-qualifying rate and non-qualifying rate. The mid-qualifying rate is the surcharge added to the lower qualifying rate. This can be as much as 4.5 percent on top of the lowest rate. The non-qualifying rate is an additional surcharge that can be accessed for accepting some business, corporate and consumer cards or failing to process a transaction within a predetermined amount of time as outlined in your service agreement.

In addition to these charges, there are transaction fees that can include per-item fees, per-inquiry fees, interchange fees, address verification fees, voice authorization fees, batch header fees, monthly access fees, monthly minimum fees, annual fees and statement fees. Cash cards and debit cards carry their own fees – usually lower – but with a similar rate structure.

When shopping for a better rate, take into account all of these charges. Most companies will wave the statement fee if you print your statements off the Internet. Take a look at your end-of-month statement, showing the fees and rates, and see how the fees are calculated. Each line item carries a different rate and charge.

While researching this article, I asked my own credit card processor to point out on my statement where it shows the total cost for the month. After 45 minutes of trying to explain all the charges, they were unable to show me a single line that had the total cost for taking credit cards that month.


You will need some type of credit card terminal to process transactions. These can be leased or purchased, and all require access to a telephone line or the Internet. Terminals can run from $150 for a simple card reader to $1,000 for a wireless terminal.

Leasing can be a great way to get started, but in the long run, buying your own equipment is more cost-effective. Don't be afraid to use the Internet to research your equipment purchase. The processor doesn't require you to buy or lease equipment from them, but most small business owners accept their offers out of convenience or lack of knowledge. All transactions will need some sort of printer, and some units can also process checks.

If you are planning on taking debit cards, get a personal identification number (PIN) entry pad unit. Merchants realize the lowest cost when customers enter their debit card PINs. These units can be purchased on the Internet, often for less than half what a processor charges.

The unit will need to be encrypted, but even this fee can be waived. The processor also may want to charge an application or set-up fee. These fees are negotiable, especially if you have an established track record of transactions and you are considering changing processors.


The easiest way to negotiate rates and fees is to have another company offer you a better rate in writing. I usually get all the rates and compare them to what I am currently paying to see how it works out. I have created a simple spreadsheet to plug in the rates and compare. See Figure 1.

If you are offered a better rate, go to your current provider and negotiate. You will be surprised how easy it is. In most cases, they will lower your rate if you have a written offer.

If you do decide to go with another company, negotiate the changeover and any connection fees. Be sure to check the fine print for a termination fee from your current service provider. All of these charges, which can run $200 to $300, can be waived if you ask for it. If you are just starting out in business with no established track record, you may not be able to get the processor to waive the application fee.

All service providers will have a set rate for accepting American Express and Discover credit cards, but that is only for them to process through their system. American Express and Discover fees can't be negotiated. They set the rate independently, and you either accept it or you don't take those cards. But remember what I said earlier: Taking those cards increases your chances of a sale.

Regardless of what the fee structure looks like, it's in your best interest to process as many transactions as possible at the lowest rate. That means not accepting credit cards that can't be swiped and avoiding the hand-keying in of card numbers that you take over the phone.

The same holds true for debit cards. Whenever I am presented with a cash or debit card, I ask my customers to enter their PIN numbers. I found that I was paying almost $350 a year in additional fees because I didn't have a PIN entry pad. I purchased one on the Internet for $125, and my processor encrypted it for free.

If you are lucky enough to negotiate a lower fee, read every statement carefully to be sure the new rate is in effect and the processor doesn't raise it three to six months later. If that happens, ask for another rate review and ask them to lower the rate again. In most cases they will.


Charge-backs are by far the biggest hassle when taking credit cards. Train your people on the proper way to accept credit cards. There are some basic rules to follow when accepting credit cards.

  • Make sure the person presenting the credit card for payment is the same person named on the card. If the back of the card is not signed, this could be a warning sign. Verify with another form of identification. Many people write "CHECK I.D." on the signature line of the card. They are inviting you to verify who they are. Ask to see their driver's license if you are unsure.
  • Always get a signature on the sales receipt.
  • Understand that the cardholder has ALL the rights; the merchant has none. You do get to tell your side of the story if a charge-back occurs but only after the company has taken the money back out of your account.
  • Document everything, from the initial customer authorization to the approval for any additional repairs.
  • Avoid taking credit card numbers over the telephone. I know lots of shops that do this; it's convenient and easy. But check with your processor to see if they will back you on this practice. My processor advises us to not accept numbers over the phone, regardless of what precautions you take. Having a faxed copy of the credit card on file is no help here even with a statement from the cardholder allowing you to charge his or her card. Only merchants that are set up to take card numbers over the phone have any rights here, so be forewarned.

Miss any of these steps and you will most likely lose. Most charge-backs happen because someone misunderstood the details of the contract. If the customer has a problem and never gives you a chance to correct it, the credit card company may side with you, provided you can prove you followed the steps outlined.

They will want to see the signed receipt, the invoice with a note that the customer authorized the repairs and any other correspondence you have. If you ignore the customer and they can prove you did, you will lose. Don't be surprised if you are hit with a charge-back fee or retrieval fee if a charge-back does occur.

If the company rules in the customer's favor, you have the right to dispute the ruling in most cases if you act within 60 days. If you suddenly find that there is some other piece of supporting evidence that you forgot to include in your first defense, this is your chance to include it. The downside is that the customer can do the same.

In closing, accepting credit cards for payment of services can have benefits; just be aware of the costs. Prepare employees by training them on what to watch out for. Fraud is rampant now with stolen identification, reprinted checks and stolen credit cards.

Merchants have to stay vigilant to protect themselves. Take the necessary precautions, and watch your sales grow.

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