Is Your Credit Card Processor Secretly Costing You a Fortune? Watch for These 5 Red Flags The lack of transparency in credit card processing can impact your profit margins — here are five things to watch for to decide if it's time to ditch your credit card processor.
By Robert L. Day Edited by Kara McIntyre
Key Takeaways
- Businesses often overlook excessive credit card processing fees which can drain finances — stay alert for warning signals.
- Understanding and monitoring your discount rate, effective rate, interchange fees and any fee increases is crucial to avoid unnecessary costs.
- Regular reports on interchange downgrades and transparent discussions with your processor can lead to significant savings.
Opinions expressed by Entrepreneur contributors are their own.
Credit card processors are essential partners for businesses, enabling seamless transactions for customers. But not all processors are created equal, and some may be quietly costing you more than they should. If you suspect your credit card processor might be hurting your bottom line, it may be time to reevaluate the relationship.
Here are five red flags that signal it might be time to break up with your credit card processor.
Related: How to Choose a Credit Card for Your Startup
1. Your discount rate is greater than five basis points or not disclosed
The discount rate is a critical component of your processing fees, representing the percentage charged on each transaction. If your processor's discount rate exceeds five basis points (0.05%) or isn't clearly disclosed, that's a major red flag.
Action step: If you don't see your discount rate, ask your processor to show it to you on your statement. Again, it should be 0.05% or less.
2. Your overall effective rate is greater than 2.5%
Your effective rate — the total fees you pay divided by your total processing volume — is a straightforward way to measure the cost of processing credit card payments. If your overall effective rate exceeds 2.5%, you're likely overpaying.
Processors often sneak in additional fees or hide fees. However, calculating your overall rate will allow you to see the true cost of processing.
Action step: Divide your processing fees into your total processing volume — this will give you your overall effective rate.
3. Your interchange fees are not fully disclosed
Interchange fees, set by card networks like Visa and Mastercard, are non-negotiable. However, processors are responsible for passing these fees directly to you without adding unnecessary markups. You could be losing money if your processor is padding the interchange rates. A way to tell is they won't fully disclose all the data required to validate their fees. You need to see 1) the interchange categories — such as Data Rate II. 2) the processing volume for each category and 3) the fees charged per category.
Action step: If you don't see all the above three items, you need to demand they change you to a statement that does. They need to make that change on your very next statement.
4. Your processing fees have increased by more than 10 basis points in the past year
Interchange fees have remained relatively stable over the past 15 years. For example:
- In 2009, Visa's highest rate was 2.95%, compared to 3.15% today.
- According to a Government Accountability Office (GAO) report, Mastercard's highest rate only increased from 3.25% to 3.3% over the same period.
If your overall processing fees have risen more than 10 basis points (0.10%) in the last year, the increase is likely coming from your processor — not the interchange rates. Processors often raise fees without justification, relying on the complexity of statements and balming interchange fee increases for the rate increase, even though they have barely moved.
Action step: Compare your overall current processing fees to those from a year ago. If you see a significant increase, ask your processor to show you on Visa and Mastercard's websites where the fees have increased. Unjustified fee hikes clearly indicate that it's time to look elsewhere.
5. You don't get reports on interchange downgrades or how to fix them
Interchange downgrades occur when a transaction doesn't meet the criteria for the lowest possible rate, resulting in higher fees. If your processor doesn't provide a detailed report on downgrades — including how many transactions were downgraded, how much money was lost and what steps to take to fix them — you're likely leaving money on the table.
Why it matters: Without this information, you're operating blind and unable to optimize your processing costs. A good processor should proactively help you minimize downgrades and maximize savings.
Action step: Request a downgrade report from your processor. If they can't provide one or offer actionable advice, find a partner who can.
Related: How to Leverage Credit Cards for Business Growth (the Right Way)
The bottom line
Your credit card processor should be a trusted partner, not a hidden cost center. If any of these red flags resonate, you owe it to your business to explore better options. Transparent, fair processors exist; switching could save your business thousands of dollars annually.
Breaking up isn't easy, but in this case, it could be one of the best decisions you make for your business. Take control of your processing fees, demand transparency, and ensure your processor works for you — not the other way around.
If you prefer to work it out rather than break it up, another option is to get your fees audited by a professional credit card processing auditing firm. For full transparency, I run weAudit.com, which helps businesses with these issues. However, other firms work in this space, and you should explore all your options and decide who and what works best for your needs.
