In this edition of our “Need to Know” series for small business owners, Sarah Hopen looks at (and through) the glossy picture painted by banks and other Merchant Service Providers to help you ask the  right questions.

After car manufacturers and Coca-cola, Merchant Service Providers are one of the worst purveyors of Lifestyle Porn.  Or maybe they’re among the best…guess it’s all in how you look at it.

What is a Merchant Service Provider? MSPs provide the suite of tools used by business owners to receive and process payments – point of sale machines (debit and credit card machines), virtual terminals, payment gateway providers, and other payment tools.  Is it possible to run a business without accepting credit cards, debit cards or online payments? It’s definitely possible, but the outcomes are likely not desirable. Retail operations most certainly lose customers when they don’t take plastic. 

Just take a look at these happy folks from the Merchant Services section of the Paypal website.

Chillaxin' at the office

Small business owners are always looking for ways to increase cashflow to their business and ways to speed up that process. As we know from our many creative business clients at STAR Company, entrepreneurs work incredibly hard and they welcome tools that might make their lives a bit easier

Banks and financial services providers are very aware of this too.   Their ad campaigns feature happy-go-lucky small business owners bringing in money worry-free –  thanks to  ‘inexpensive’, easy-to use, merchant services.

Who doesn't love to work at night in a dark warehouse?!?

 But…here’s the thing about merchant services:

1.     Convenience comes at a price.

The cost of accepting credit and debit in a retail operation is high. On the low end, Merchant Service Providers take 1.9% of a sale. On the high end it can reach 3.8%. In addition, there is usually a monthly “account fee” of approximately $30 for point of sale systems as well as “rental fees” – again, usually about $25.

If you have a retail operation that brings in about $35,000 in sales per month, you are likely paying close to $900 in fees to your MSP per month, or $10,800 per year, to accept  credit and debit payments in your business..

 If you are a service provider that accepts online payments via Paypal and you are doing about $10,000 of business per month, you are likely paying Paypal somewhere between $280 and $300 per month, or $3600 per year to process your payments.

That’s a sizeable chunk of change…out of your business and your profits.

2. Hassle free?

Not really. The big selling point put forward by MSPs is that taking credit cards and online payments encourages customers to spend more money while you work less to receive those payments. But the time and resources required to translate the reports that you receive from MSPs, and track your income is significant. In addition the support provided by companies such as Chase Paymentech and Paypal is negligible, especially when considered next to the amount paid in user fees.

Paypal made $2.4 billion dollars in profit in 2010. Ebay purchased Paypal in 2011 and increased it’s earnings by 20% to bring in $10.6 billion dollars in profit. TD Bank made $5.89 billion in profit in 2011. CIBC made $3.1 billion.

I think you get the point.

Why do small business, pay such an enormous prices for their merchant services?

Is it fair? Why do we as consumers accept these high fees? And why do we put up with such poor customer service and user interfaces? Can we expect more? And who will step forward to provide it?

You don’t necessarily need to camp out in front of Chase headquarters, but if you are a business owner, make sure that the next time you negotiate your contract with your Merchant Service Provider, you shop around.

Here’s what you can do:

Ask for a better rate.

Tell them you will switch providers if you don’t get a better deal.

Then tell all your friends.

Demand that more of that hard earned money stay in your pocket!