Magazine Article | September 1, 2002

Cut Out The Payment Processing Fat

Source: Innovative Retail Technologies

Gold's Gym stopped third-party processors from eating away at its bottom line. By working directly with a payment processor, its processing rate decreased by 0.89%.

Integrated Solutions For Retailers, September 2002

Have you looked at your payment processing transaction charges lately? No, I mean really looked at them - transaction by transaction and fee by fee. Three years ago, when Jeff Skeen was CFO of an 11-location Gold's Gym franchise, a rate increase notice from his bank prompted him to educate himself on the dollars and cents of payment processing. What he discovered not only earned his chain lower rates and fees, but now as CIO of Gold's Gym International, the gym franchisor that includes more than 600 franchised locations around the world, Skeen has shared the benefits with about 120 gyms, so far. "When I was CFO of the the franchise, I got a notice from the bank that said Visa and MasterCard were going to raise our rates, which they did, but not as much as the bank said they would," Skeen said. Skeen thought an investigation into the payment processing food chain would take him a couple of weeks, but 60 days later he was amazed at what he discovered. "I kept digging, and each time I talked to someone, I learned about another fee," Skeen said. "I talked to one processor that told me its processing rate was 1.82%, but by the time I got done analyzing all the additional fees, it was 2.75%. When you are dealing with a large volume of credit card transactions, a less-than-1% difference can translate into a tremendous cost."

Skeen's goal was to eliminate his company's third-party processor (the bank) and get the company one level closer to Visa and MasterCard themselves. By working directly with a credit card processor like Global Payments (Atlanta), Gold's Gym could eliminate its bank. This not only lessened the number of fees the chain incurred, but it also provided a more direct route to resolve service issues.

Retailer Beware
It is a challenge for retailers to understand credit card payment processing because every package is different. Skeen learned that many retailers are lured into contracts based on appealing percentages, but they don't look at the total effective rates. "A retailer may be quoted 1.8% for credit card processing, but isn't informed about the additional penalties and fees that go with it," Skeen said. "For example, banks could double the penalties that are charged for non-qualified transactions [i.e. those that are not authorized with a signature]. Those extra fees, even if they occur only some of the time, can increase your overall rate."

Retailers should also watch for transaction fees. The processing percentage might be low, but if a bank is charging 30 cents per transaction and your transaction volume is high, you could be losing out. "Retailers should analyze their transactions. If they have 50 transactions with an average ticket price of $200 each, they should try to find the lowest percentage available. If they are transacting 200 sales at $2 each, they should focus on the transaction fees," Skeen said. Retailers should also include payment processing hardware costs in their evaluation. A company could provide low rates and fees, but require new hardware to achieve them.

Low Rates + Low Fees = Bottom-Line Savings
While Skeen was still CFO of an 11-location Gold's Gym franchise, he talked to seven different payment processors. After a 60-day evaluation, he determined that Global Payments could not only offer him the lowest rates and transaction cost, but Global Payments was also the most willing to educate him on the payment processing market. When Skeen compared the effective rates of the bank to Global Payments', the direct processor came out to be 0.89% less. The chain was also able to keep its current Tranz payment processing terminals from VeriFone with only minor reprogramming.

In 1999, Skeen negotiated its processing rates with Global Payments as an 11-store franchise - merely one franchise within the Gold's Gym enterprise. But when he and his partners raised enough capital to purchase Gold's Gym International, Skeen went back to Global Payments with a proposition. "We devised a matrix based on our projected growth. As we acquire more gyms and our transaction volume increases, our rates will go down across the board. Few processors were willing to do this for us," Skeen said. And with a growth goal of 100 new franchise locations a year, he hopes it will become a selling point for franchisees to process through Global Payments.

Gold's Gym offers its franchisees technology through a National Vendor Program; Global Payments is the recommended vendor for credit card processing. Those that have signed on with Global Payments are having great results. So far, about 120 gyms are benefiting from the processor. "One 14-location franchise saved $20,000 in transaction fees by using Global Payments," Skeen said. It has been a challenge to convince the franchises of the benefits they can receive by acting as a 600-store chain when it comes to payment processing. "Many times fees and rates appear as small amounts, so retailers don't make payment processing a priority. A retailer should realize the impact of even a 0.5% rate decrease because it is a simple change that goes right to the bottom line," Skeen said. And for retailers, that goes right into their pockets.