If you’re like most business owners using Square, PayPal, or Stripe to accept credit cards, you are likely looking for ways to grow your business while also controlling your expenses. Accepting credit cards is one of the top 5 expenses a business has regardless of the credit card processor they choose.
Overspending on credit card processing can prevent you from being able to properly invest in technology and marketing solutions that will help you grow your business.
The Advantages & Disadvantages of Stripe, Square, and PayPal
Square, Stripe, and PayPal are great credit card processing solutions. The advantage of using one of these systems is very straightforward. Their modern sleek interfaces make them easy to use, their streamlined underwriting allows you to launch within minutes, and a flat 2.9% +.30 per transaction makes it easier to understand. This can be great for a new business owner that doesn’t to take a chance on working with the wrong credit card processor or if they don’t plan on sales exceeding $5,000 per month.
The downsides of working with one of these platforms are glaring for businesses exceeding $5,000 per month in sales. For businesses exceeding $5,000 in sales monthly, they will likely overspend to the tune of hundreds, if not thousands, of dollars per month depending on their size. They will pay a premium to accept credit & debit cards while still not maintaining control of their customer data or have live customer support.
A Real Example: eCommerce Merchant Using PaySuite
We recently set up an eCommerce merchant account for a local retailer using Shopify and wanted to share the results we are helping them get when it comes to controlling their payment processing expenses. As you can see below, this merchant had sales of $35,936.99 with total fees of $865.57. They also paid $41.56 for Authorize.net, so their true total cost of acceptance for the month was $907.13, bringing their effective rate to 2.52%.
Had this merchant been using Stripe, Square, or PayPal for their online payment processing, they would’ve paid 2.9% +.30 cents per transaction. Let’s dive deeper to see what the outcome would have been. Below you will see the true breakdown of how many transactions they processed for each card type (Visa, MasterCard, American Express, Discover, etc.).
When we compare this merchant to Stripe, Square, and PayPal pricing we see that they would’ve paid 2.9% on net sales of $35,936.99, which would have cost them $1,042.17. There would have also been a $.30 charge per transaction which would have cost them an additional $99.60, bringing their total cost to $1,141.77, an effective rate of 3.18%!
Using Square, PayPal, or Stripe would’ve cost this merchant an additional .66% or an additional $237.18 per month. The reason these platforms are more expensive for e-commerce merchants is that debit cards often cost the business less than 1%. Per the image above, this merchant accepts more debit cards than American Express credit cards and almost as much as MasterCard credit cards.
Why Debit Cards Are So Much Less Expensive
In this article, I talk about the impact of the Durbin Legislation on the cost of accepting debit cards and why businesses haven’t been able to capitalize on this major advantage. In the image below you can see the true cost of accepting debit cards and where Square, PayPal, and Stripe profit most on most of their merchants. With most debit cards having a true cost of .0005% and .22 cents per swipe, these providers earn a mark-up of 2.65% + .08 cents when you factor in other costs that must be paid to debit card issuers like Wells Fargo, US Bank, Chase, and other banks and card brands. The total interchange (fees paid to the debit card issuer) for $4,695.49 was only $17.73 or .38%. Even when the fees paid to Visa and the payment processor are factored in, their total costs for accepting Visa debit cards total $26.97 or .0057%. This is where the majority of Square, PayPal, and Stripe users can save a considerable amount of money. Being able to accept debit cards in your business for almost a half of one percent and being able to recapture one-half percent of your sales annually can help you redirect that additional capital to important areas in your business needed to grow.
Debit cards are inexpensive to process for two main reasons, the first reason is there is no risk in accepting debit cards. If the money is available, the transaction is approved. The other reason is there are no rewards attached to a debit card to incentive consumer use. Because there are no rewards attached, the interchange fees are very low. It is only expensive in an environment where your average sale is less than $15. This is where Square has traditionally lost money on its users which has caused them to add a transaction fee to their new POS solutions. If you recall, they used to charge a flat rate of 2.75% and now charge 2.6% + .10 cents per transaction for swiped and up to 3.5% + .15 for “card-on-file” transactions.
What You Can Do
Securing the right type of merchant account will allow you to streamline your credit card processing costs and will allow you to leverage your profitability to dominate other merchants that are using these payment providers.
The Square, Stripe, and PayPal merchants that are saving serious money on their credit card processing are switching to payment providers that pass through the true lower cost of accepting debit cards to them so they can run a more efficient business.
If you’d like to evaluate whether you’re using the right solution for your business, don’t hesitate to contact us on our website or request a custom quote.
We may be able to recapture a considerable amount of your revenue!