Most startup dance studios find that merchant processing — the business of accepting credit and debit cards — is confusing. And it’s no wonder! There can be multiple service providers involved in getting from your customer’s online or in-person effort to pay for your studio’s services with a credit or debit card to receiving those funds into your offers. Let’s demystify the process here and give you tips on how to get started accepting debit and credit cards at your dance studio.
Merchant Accounts 101
A merchant account is a kind of bank account. Its purpose is to enable your dance studio to accept payments by debit cards or credit cards.
Your merchant account establishes an agreement between you, the merchant, and the merchant account bank on how to handle the money you receive from your customers in the form of payment card transactions and details the fees you will be charged for the services.
How do I find a merchant account provider?
Any small business owner can go directly to a bank that services businesses for this. However, if you are using any of the major brands of dance school software, they will typically offer a preferred merchant account provider. “Preferred” can mean better rates and/or tight integration with the dance studio software itself, connecting transaction records to your customers’ accounts.
Then, you need a gateway…
A key component of any merchant account is its gateway — a kind of verification tool.
Think of the gateway as a door guard. Every time you run a card payment at your studio in person or online, the gateway effectively says, “Halt, who goes there?” making sure that the transaction should be allowed to pass through.
How does the gateway determine this? It identifies the cardholder and contacts the issuing bank to verify four measurements of card verification:
- Is the card active?
- Does the card have a sufficient available balance to make the payment?
- Has the card been reported stolen?
- Has the card expired?
If your customer’s card passes these tests, then the gateway confirms the credit request and lets it pass through to the next step.
Even after the card is accepted, the gateway service will typically hold the pending payments until midnight of the same day so that your merchant account provider can bundle up all of the day’s successful payments into a single batch to send to the merchant provider for funding. You’ll receive your deposit usually within 48 hours of accepting the payment.
Why do I have to pay fees to a merchant account provider?
The merchant account provider’s value to your transaction is threefold:
- It handles all of the risk in the transaction by funding your account — essentially floating you money as you process transactions. All your previous month’s fees are billed in the following month.
- It is ultimately responsible for making sure money is deposited into your account for all processed transactions.
- It ensures that all fees for each transaction are deducted from your account.
What credit card fees will I have to pay?
Fees for your credit card processing typically include:
- The fixed costs of your merchant account and gateway service
- The per-item costs of the merchant account and gateway
- Various card industry fees — also known as interchange fees — which are deducted from each payment you receive
Let’s look more closely at each of these.
Gateway fees
Gateway fees vary significantly from one provider to the next, so this is something you want to ask about when choosing your merchant account provider.
Some providers offer their gateway services at fixed monthly costs, others offer low monthly costs but with additional per-item fees.
For example, the gateway provider we use with ClassJuggler Dance has a low $15 monthly fee; many gateways charge as much as $25 or more per month. So it’s important to compare what you are paying for.
Merchant account fees
Pricing for merchant accounts has several different parts.
- Merchant account providers typically charges a monthly fixed fee between $10 and $20 for your statement and management.
- Providers may also charge PCI (Payment Card Industry) compliance fees, another $5 to $10 monthly.
- For each credit transaction, the provider also charges a per-item transaction fee, typically between 10 and 20 cents.
- And finally, each transaction has a calculated percentage fee applied to it. This is made up of:
- The interchange rate – the base cost Visa, Mastercard, Amex, and Discover sets for each type of credit card a customer may use.
- Plus the discount rate –the profit the merchant provider adds to each transaction.
Generally, the percentage rate for each transaction (comprised of the interchange and discount rates) is shown as a single percentage to simplify things.
But why do the per-transaction fees vary?
The per-transaction percentage fees on each transaction are usually based on the type of card your customer is using. There are hundreds of different types of credit and debit cards available to consumers, each with different features and different programs. The more programs or features a card supports, the more that you, the merchant, pay in fees when the customer uses that card to pay you for services or products.
For example, a plain vanilla Visa or MasterCard debit card may have a rate of 1.65%, while a fancy platinum rewards cash-back Visa credit card might have a rate of 2.90%.
In this example, for each $100 you process, between $1.65 and $2.90 are charged to you in percentage fees.
This is why it’s not simple to predict your exact monthly interchange fees; because you cannot predict what types of credit cards your customer will pay you with. A good estimate can be made, but the exact amount each month can differ – even with the same volume.
Add it all up and a typical $100 transaction using a standard credit card adds up to about $2-and-some-change. Here’s how:
And speaking of fees, rather than deducting fees on each transaction on your daily deposits, your provider typically accumulates all of the percentage and per-item fees for each transaction and then deducts them monthly from your bank account, along with any fixed fees. This means if you are paid $100 by one of your customers, you will see the full $100 deposited into your account, making monthly reconciling of your checking account much easier.
What merchant processing questions should I ask?
When you’re deciding on which dance studio software service to go with, you’ll no doubt have many questions about specific features. But if you plan to do any debit card or credit card transactions using the dance software service’s preferred provider, ask about these:
- Are the fees for the merchant provider fair for the market I am in?
Businesses in more affluent parts of the country will have somewhat higher fees. - Can I bring my own merchant account to your software platform?
Most providers require you to use their provider.
- How easy is it to apply and get set up for merchant services?
Dance software providers should be able to go from application to accepting payments in five days or less. - Do you provide in-house support for merchant processing transactions?
Only one dance studio software provider, at the time of this article, has in-house support for their merchant services (ClassJuggler). If you do find another provider that does provide in-house support, it can save you a lot of time and frustration whenever you have questions, need help, or have a problem.
Processing credit cards is surely not the reason you decided to open a dance school. But once your school has grown beyond 30 or so weekly students, the benefits of being able to accept debit or credit cards far outweighs the steps involved in getting it all set up. And the time you save dealing with payments, and the convenience for your customers tend to cover the cost of all your fees.
Learn more about ClassJuggler’s merchant processing tools here.