March 13th, 2013

How LuxSci is Saving Lots of Money on Credit Card Processing

Most businesses have to accept credit cards for payment — its convenient for the business and for the consumer and consumers demand it.  However, as all business owners know, it comes at a cost.

Depending on your business, you may have to give up 2% to 6% or more of the money that you customers pay to you to your credit card processor as a “thank you” for allowing you to accept the credit card payment.  On a payment of $100, the business may only get $95.  If your margins are small, the loss of a few percent of you gross payments can be very significant!  This is exactly why gas stations offer a better price if you pay cash … they pass on some of the saving they get by not having this overhead to you, the consumer.

A business still has to accept credit cards, the goal is to minimize the impact of the processing on your bottom line.  LuxSci has found a way to do that, and is now saving more than $3,000/mo as a result … we don’t mind getting more than $36,000/year more in revenue and we have used that to help fund improvements in our company.

What is in your credit card processing fee?

The fees that you pay to your credit card processing company come in two general sorts: monthly fixed fees, and per-transaction fees.  The monthly fees include things like paying for statements, PCI compliance, and gateway services.  The per-transaction fees amount to a percentage of the dollar amount of the transaction plus a few cents fixed amount fee.  E.g. 5% of the amount plus $0.35 for every transaction.

Credit card processing companies generally make money on every type of fee.  The monthly fees are usually not very significant, especially if you are accepting a lot payments. You will see these vary by 10s of dollars from one vendor to another.

The big cash cow is the transaction fee percentage.  The little cow is the $0.35 or whatever it is on each transaction.  The latter can be improved on in many cases, but not always.  The former is where most banks make gluts of money.

Why is the processing percentage rate so high?

First you must understand the companies that are involved:

  1. The consumer has a credit card from some credit card company, like Visa
  2. The merchant has a contract with someone to process his credit card swipes or online transactions (the credit card processor)
The credit card company charges a fee, called the “interchange rate” to the merchant when there is a swipe or other transaction.  This is one of the ways that the credit card companies make money.   Second, the credit card processor has to also make money, so they also add one some more charges to the transaction.
The merchant ends up losing out on (at least):
  1. The interchange percentage that goes to the credit card issuing company (VISA)
  2. Some additional percentage that goes to the credit card processor
  3. Some per-transaction fixed fee (e.g. that $0.35) that also goes to the credit card processor

There is a reason that the total processing percentage rate is so high.  This is due in a large part to the fact that there are hundreds of different types of credit cards out there that consumers may be using.  American Express, Visa Rewards Program X, MasterCard Cash Back Program Y, … etc.

  • Each credit card and processing method (e.g. swipe or Internet) combination has a different “interchange percentage rate”.
  • The credit card processing company wants your contract to be simple, so they want to sell you a contract with a fixed processing rate (or a few fixed rates … one for VISA, one for MasterCard Debit, one for AmEx, etc.).
  • In reality, in each of these categories, there are 10s or 100s of different cards and interchange rates.  If your rate is fixed at 5%, then the credit card processing company makes a profit on that 5% minus the actual interchange rate.
  • So, my inflating the percentage that they charge to you so that they make money on any transaction, they end up making a lot of money on most transactions.

This is what noone knows — that the rates are generally inflated in this way.  Additionally, credit card processing companies are usually larger corporations with a lot of overhead and other programs, and the fees from processing cards funds the overhead and other projects.

Also, Visa and MasterCard update their interchange prices every 6 months.  As a result, credit card processing companies will increase your flat percentages on you over time to compensate.  So, your rate will creep up….

How to get the Processing Percentage Rate down?

LuxSci could not do this ourselves, it is not our specialty.  What we did, however, is find a new credit card processing company called Credit Card Services (CCS). They got our rate (and all of their customer’s rates) down via two powerful methods.

1. Interchange Plus Pricing

They have changed the pricing model for credit card processing.  Instead of giving the merchant a very simple percentage, which benefits the processor, they charge the merchant the actual “interchange” rate plus a fixed percentage, e.g. 0.30%.

So, instead of every transaction costing the merchant 5%, every transaction will  cost a different percentage that is a function of what card the customer used.  However, most or all of these percentages charged will be much less than the merchant was paying before.  So, the average percentage charged to the merchant will go down … often significantly.

This is how LuxSci is saving so much money and how we will save even more as we continue to grow.

2. Small with Low Overhead

CCS is a small private company without any significant corporate overhead.  The structure is lean and the business model is to offer the same pricing to everyone that they would and could to family and friends.  With low overhead and no corporate shareholders demanding profit maximization, they can provide pricing that is beneficial to the customer and enable customer lockin.  This generates good will, many referrals, and an excellent revenue stream.

Ya, but can this be trusted?

LuxSci’s first questions when entering into discussions with CCS were:

  1. How reliable is the service?  We get a lot of money through credit cards and can’t afford a single glitch!
  2. Can the service scale?
  3. How much work will it be to switch?

Obviously, if it was a lot of work, required us to change the way we do things, or maybe might fail … it would not be worth the risk and the time for any kind of savings.  You don’t skimp when it comes to accounts receivable!

It turns out that all the answers were really, surprisingly good.

  1. Credit cards are processed through FirstData, one of the biggest credit card processing platforms in the world.  CCS is a partner/reseller of FirstData that has the power to sit its own prices and support its own customers.  LuxSci was actually already using FirstData before we switched to CCS, through some other reseller — Citicorp.  Most credit card processing companies are merely resellers of one of the few big ones like FirstData, so this is apparently completely normal.  CCS gets to be a small company with big company reliability.
  2. Yup – since it all goes through FirstData, we could have as many credit card transactions as Starbucks, no problem.
  3. Since LuxSci takes all credit cards online, all we had to do was call up our Credit Card gateway,, and ask them to change 2 numbers in their system … and we were done (its easy to begin with and CCS is a partner of, making things even simpler).  No software or configuration changes anywhere on our side.

For merchants that have point of sale equipment, they do have to “reprogram” these by entering new codes; however, this is generally pretty easy.  I have heard that CCS can even do this in bulk for larger organizations, so they don’t have to do it themselves.

So, How is it Going?

LuxSci has been using CCS now for about 5 months.  Obviously, we are saving money.  We have also noticed that:

  • Our statements are clearer and simpler
  • Money gets flushed into our bank account more quickly
  • If we have any questions, we can call and talk to someone who knows our account and can help us right away.
  • CCS often gives us ideas on how we can optimize other related areas of our business… not necessarily in ways that directly benefit them, but in ways that help us and make us happy to have them on board.

CCS is now a LuxSci Partner

A significant number of LuxSci’s customers are businesses accepting credit cards.  In addition to solid email or other solutions that we can provide, credit card processing and profit margin are of course key to their livelihood.

LuxSci has partnered with Credit Card Services so that we can let our customers and friends know about and benefit from their unique solution.  As a result of this partnership, new CCS customers that sign up as a result of LuxSci will get 10% off the fees that CCS charges them … making the lower rates even better.

If you are interested in seeing if CCS can improve your business’ profit margin, we have an online form that you can fill out. It will send your information securely to CCS using LuxSci SecureForm; they will review your current processing costs and let you know how much you can save if you switched.  LuxSci itself also guarantees that if you take the time to submit your information to them and to through the relatively simple review process, that we will give you $100 if it turns out that they cannot improve your expected processing percentage rate per credit card swipe.

Credit Card Services Getting Started Form

After talking to many companies about this, its really a no-brainer if you can cut your credit card processing costs with little effort.

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