You're Being Ripped Off by Your Credit Card Processor!

COPYRIGHT 2012 by Michael I. Porter. You're Getting Ripped Off by your Credit Card Processor. All Rights Reserved.
COPYRIGHT 2012 by Michael I. Porter. All rights reserved.
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Table of Contents
Introduction Rip Off Number 1 - Do they have a Contract and do they have cancellation fees? Rip Off Number 2 - Do they sell or lease equipment? Rip Off Number 3 - Fees, Fees, and more Fees! Rip Off Number 4 - Your Statement Rip Off Number 5 - Do You Have the Right Account? Rip Off Number 6 - Keep Your Account in Good Standing and Charge-backs Rip Off Number 7 - American Express Rip Off Number 8 - Closing Your Account Miscellaneous Considerations Conclusion
Introduction
ou've decided to go into business and accept credit cards and you
need to find someone to set up your account. You are not sure what the rules are, or what the charges are supposed to be, but maybe you talk to a friend, or do a little research, and some sales person from your bank comes into your store and tells you what you are supposed to do. You figure he is honest, as after all, this is a major financial part of your business. The sales person says to get the best rates, you should sign a contract, maybe 2 or 3 years. They don't bother telling you that if you decide to cancel the contract that they will charge you a cancellation fee. You will need a machine to take cards, and you need equipment that will cost $30 - $100 per month for 4 years. They don't tell you that it will be a lease, and is non-cancellable. Maybe they will tell you the equipment comes with the deal and don't mention that there is a lease. They guarantee you the best rates, and assure you that there are no lower rates in the marketplace. They don't mention how charges are computed or that there will be annual fees, or up charges for something called reward cards and corporate cards, or service fees, or compliance fees, or a
million other fees. You are busy, trying to make a living, and the sales person looks OK, and seems to be a good person, so you sign all the paperwork, and in a few days you get your machine and start taking credit cards. Wow - you're in business! About a month or so later you get your statement. Things don't seem quite right. The fees seem a little high. The statement is almost impossible to decipher - there are all kinds of fees, different percentage rates, statement fees, service fees, PCI fees, debit fees, transaction fees, and there is almost no way to figure out what you are really paying. Your sales are going into your bank account, but how do you know you are getting a good deal with all these fees? So you decide to call your sales person. You leave a message as they don't answer. A couple of days later you call again and again and you get no response. You call the bank and they seem so nice on the phone and they tell you your sales person has left the company. You tell customer service that you have reviewed your paperwork and you definitely were not told about any lease for equipment, and your rates are not right. You want to cancel. They tell you that cancellation is certainly an option in the merchant services agreement, but not for the equipment lease. You will have to call a different company to discuss that with them. As to your merchant services contract, the lease cancellation will be $295, or maybe $495, or maybe your monthly fees times 12, and in your case, that would be $3000. You are shocked. You call the equipment lease company and you tell them you want to cancel. You saw on the Internet that you can buy a machine for $350. They tell you sorry, that your lease is non-cancellable and you need to keep paying for the next four years. You threaten them, they tell you there is nothing they can do. You hang up angry and wondering what the hell went wrong. Welcome to the wonderful world of merchant processing. In the following pages, we will discuss what you should avoid, what you can and cannot negotiate, and how to protect your company from unscrupulous merchant processors. Why you should take cards
It is estimated that more than 60 percent of all retail transactions are made using a credit or debit card. And, surveys have shown that consumers have more confidence in businesses that accept credit cards. With all the reward cards and special promotions consumers receive to have credit cards, they are more popular than ever. How many times have you gone to a convenient store and seen someone pull out a debit card for a $0.99 transaction? Cards are convenient and make it easy for consumers to make purchases. There are merchants who absolutely refuse to take credit cards, but in today's world, this is becoming the exception. A lot of restaurants avoid credit cards, as they have traditionally been a cash business. I've seen restaurant owners go so far as putting an ATM in their lobby to avoid taking credit cards. The problem is that the customer gets hit with high fees just to have the privilege of paying in cash. Why not just raise your prices sufficient to cover your credit card transaction costs? Individuals using credit cards are also financing their transaction, so their average ticket price tends to be higher, and therefore merchant sales should be higher. The trends are clear - you should probably accept credit cards. How does the system work? Just think about how marvelous the whole credit card system works. Someone comes into your store and hands you a credit card. You go to a little machine, swipe the card, and in a matter of seconds the transaction is approved or denied. Generally, in a couple of days, you have your funds in your bank account. There is a lot going on behind the scenes, so lets look at all the parties. 1. Customer - If they use a credit card when they buy something, they are formally known as the 'cardholder'. Based on their credit history and buying habits, they have a card with a high or low limit. Most of us are cardholders. 2. Merchant Anyone who accepts credit cards. With the rise in mobile and wireless payments, you don't even need a fixed location anymore. 3. Acquiring Bank (Merchant Bank) - This is a bank that is a member of the Visa/Mastercard network. They sell credit card processing services to merchants, and deposit the money from credit card sales into the
merchant's bank account. Merchant processors contract with these banks to sell the bank's services to businesses. 4. Issuing Bank - This is a bank, also a member of the Visa/Mastercard network, that issues cards to cardholder. They pay the acquiring bank, who pays the merchant. 5. Card Associations (Visa and Mastercard) They maintain the electronic networks, and act as a clearing house for all the transactions outlined above. 6. Third party credit card processors - There is another major party and that is third party credit card processors. They go by names such as Global Payments, First Data, NPC, and are hired by banks to run the computer networks which actually carry out the credit card transactions. You might see their names on your statement. So what happens when your customer swipes a credit card? The terminal contacts the acquiring bank or processor, with all the customer's information. The processor or bank sends the information to the issuing bank. The issuing bank then sends an approval or decline, based on the customer's balance, etc. Once approved, an authorization number is issued to the processor or bank and stored in the credit card equipment. These will be later batched out. All this happens in just a few seconds! You have decided to take credit cards!
OK. You've decided to take credit cards. You probably don't have to pick
up the yellow pages to look for a processor, because it is likely you're getting several calls a month to sign up with some company claiming the lowest rates. You can search on the Internet, but every deal sounds better than the last deal. So how do you pick which company to talk to? Just ask them if they do any of the following rip offs!
1: Do they have a Contract and do they have cancellation fees?

RIP-OFF NUMBER
f you were to do a survey on how many new merchants sign a contract
with their merchant processor, the answer would probably be one hundred percent. Most merchants don't know how much negotiation room they actually have with their provider. A sales person will typically call on the merchant and make various claims of low fees and other benefits. The merchant gets excited and is looking forward to taking cards and saving some money. The issue of the contract term is not always discussed, and the sales person is often going to say to you sign here, and here, and here. Most agreements are filled with page after page of small print which would take you or a lawyer hours to read. Why would the company want you to sign a contract?
The sales person is going to tell you that a contract is a commitment on both parties to deal with each other fairly, that it protects the merchant with low fees, and protects the merchant processor for the investment they are making in a new account. Maybe they have waived a particular fee, or offered discounted equipment. Either way it is a commitment to work together for the agreed upon period. The main purpose of a contract is to protect the merchant processor so they make a profit. If they are going to give you low rates, and look out for your interests, why do they need a contract? These contracts allow them to raise their fees, despite what they may say, so obviously it is not to protect the merchant. Why can't a merchant processor be like all your other suppliers give you good service at reasonable prices, or they lose your business? The merchant processor enforces their contract through cancellation fees (also known as termination fees). These fees are usually buried in the deep recesses of a multi-page contract and are often not even addressed with the merchant. They are often a complete surprise to merchants until they try to get out of a contract. Cancellation fees run from $195 to thousands of dollars. Yes, thousands of dollars. The worst clauses will say that the cancellation fee is equal to one-half of the fees they collect in an average month, times 12. So if your business has been overpaying for several months or years, and you want to get out of a bad deal, you are screwed. The worst I saw was with a business paying about $800 a month in fees. Their cancellation fee was $4800! Some clauses are even based on lost profits! How high can that number go? If the merchant processor asks you to sign a contract but requires no cancellation fee, then the contract has little effect and can't hurt you. You can leave anytime without penalty. There are some contracts which explicitly state that if another merchant processor will meet or beat your rates, and your processor won't match them, then you have the right to leave without penalty. Again you are protected. So to avoid this problem:
DON'T SIGN CONTRACTS WITH CANCELLATION FEES UNLESS THEY ARE MONTH TO MONTH, OR GIVE YOU AN OUT.
YOU CAN SIGN CONTRACTS WITH NO CANCELLATION FEES.

Sometimes a sales person will lie to you about cancellation or termination fees, so tell them that you want language added explicitly to the contract - month to month, an out for matching rates, and no cancellation fees. If they don't agree, don't sign. It is true that in the ever competitive world of merchant processing, many companies have started to not require contracts. Sometimes, if they have a contract, you can ask them to waive the contract and cancellation fee. Let's say you have already signed a contract, and you want to switch to a new processor. If there is no cancellation fee, most contracts say you can cancel after 30 days notice. Cancelling a merchant account usually is a simple as sending in a form to your processor. It is often the case after the initial term of the contract has passed, that there will be a notice requirement. Beware the contract that automatically renews for another term. I've seen contracts renew for one to three years. Imagine being in a bad contract for three years that you need to get out of, and it automatically renews for another three years because you did not read it carefully, and you have a $1200.00 cancellation fee. In many states, cancellation fees are unenforceable unless they are explicitly noticed on the cover page of the contract. So if the cancellation fee is buried and not made explicit, the merchant processor can claim you owe a cancellation fee, but if you don't pay it there is not much they can do. They might write you a nasty letter or threaten to send you to collections, but they are ultimately out of luck. Check with your lawyer. It might also be a good idea, if your state has this protection, to have your lawyer threaten legal action if they attempt to hurt your credit. You can pretty much get out of any cancellation fee if you are prepared to battle your processor. Let's say you have a new processor and you want to cancel your old one, but they have a cancellation fee. Remember, when you signed your contract, they got a check from you with your banking information. You signed paperwork which allowed them to deposit money in your account from your customers, and to collect their fees. This is called ACH access. That authority can be withdrawn. There are a couple of ways to do this. One is to
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change bank accounts. You gave then authority to access bank account A, not bank account B. So if you cancel and they try to collect a cancellation fee, the account they have access to will have been closed. They are out of luck. Second, you can remove their access to your account by revoking your permission. Under Regulation E of the banking laws, banks have to have a process to stop electronic checks, just like the process to stop paper checks. Check with your bank. If a termination fee has already been debited from your account, it can be reversed if you allege it was unauthorized. Both of these techniques do not make processors very happy, but it is my experience that few if any processor will come after a merchant for failure to pay cancellation fees. A softer approach might be to just call the processor and tell them you are thinking about cancelling and that you want them to waive their cancellation fees. There are many factors which influence their decision the size of your account, how long you have been with them, etc.. If the front line person says no, ask to speak to a supervisor. Another approach to get around the cancellation clause is to leave your account open until your agreement expires. If your monthly minimum is $20 and you have five months to go on your contract, your cost will be $100. If the cancellation fee is $250, it is cheaper to get a new account and not close your old account until it expires. An option that is used quite often, is that your new processor will agree to pay your cancellation fee. It will often depend on the amount of potential volume you are offering, but it is always worth asking. If they say they will do so if you sign a contract, don't make the same mistake twice! Also, get any commitment to pay your fees in writing. Remember, they are reimbursing your fees, not sending a check to your previous payment processor. Some merchants, in order to avoid cancellation fees, may be tempted to take a new offer to their existing processor, and ask them to match it. In my opinion, this does not make any sense. If your processor was looking out for your interests, why did they make you sign a contract and charge you a cancellation fee in the first place?
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DON'T SIGN CONTRACTS WITH CANCELLATION FEES UNLESS THEY ARE MONTH TO MONTH, OR GIVE YOU A KICK-OUT. YOU CAN SIGN CONTRACTS WITH NO CANCELLATION FEES.
There is NEVER an exception to these rules.
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RIP-OFF NUMBER
2:
Do they sell or lease equipment?
he practice of leasing credit card equipment is probably one of the
biggest rip-offs in any financial industry. It is perfectly legal, but only a company with zero interest in your financial welfare would get you into a lease. Typically, the sales person recommends a lease to a merchant who has not adequately investigated their options. Anyone who has checked out their options would never in a million years sign a lease. Sometimes the sales person will just lie and say you need to sign a lease, as that is how business is done in the industry. Others will say that it is the best way to preserve your cash flow as you don't have to buy a machine up front. Others will tell you that you can cancel your lease at any time no big deal. Others will just get you to sign the paperwork and you will not even know you
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are signing a lease. A big selling point for leases is that technology is changing all the time and that if you buy a machine it will probably be obsolete in a couple of years. That's baloney. The technology does not change that fast, and in addition, it is cheaper to buy a new machine every year than to sign a lease! When you sign a lease for a credit card terminal, you will usually pay five times the retail cost of a machine. A lease will typically run for four years, at $30$50 per month for just the machine, not including a pin pad. Over a four year period, that is $1400 - $2400! You can buy credit card terminals for about $350 or less new, and $200 used! If you did not have the funds and you chose to lease, that's fine. But that is not what happens. The sales person usually dupes the merchant to sign a lease. The sales person will typically get up front commission from one-third to one-half of the total cost of the lease. If he can get one merchant a day into a lease, it makes for a very profitable week. To add insult to injury, these lease agreements are very difficult to break. The agreements are very clear that they are non-cancellable, are guaranteed by the merchant personally, and that you have to pay for a full four years, or buy out the lease, at the same cost as if you had paid over four years! In other words, they give you no discount for paying early. There is very little you can do to get out of one of these leases. Fortunately, your obligation to pay for a lease, is separate than your obligation to a merchant processor. Often the sales person will make it appear they are the same company, but they are not. So you can cancel your merchant processor contract, though you will still be liable for your lease. Companies that put you into equipment leases are usually the same companies that over charge you on fees, and even if their fees are reasonable, you should leave that provider. Why add insult to injury? You can usually have your machine reprogrammed by your new processor, though some companies have proprietary software that cannot be changed. In that case, if you switch, you will have to get a new machine.
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Often if you switch processors, you will have to pay a cancellation fee. Usually it is worth the hassle, but review Rip Off #1 to strategies to deal with cancellation fees. If you are in an equipment lease, read it very carefully. Figure out what the notice requirements are to end the lease. Wait a minute, you might say, I signed a four year lease doesn't it just end in for years? Unfortunately, that is often not the case. First you get ripped off in signing a lease, then they get you again if you don't cancel properly. Often the lease will roll over to a month to month agreement, and will continue to charge you until you cancel. I had one client who paid for a four year lease, but forgot about it, and continued to pay for another five years on a month to month agreement. She paid $6000 for a $350 machine! It generally does not make sense to buy equipment if you can get free equipment from a merchant processor. However, if you need additional machines at your place of business (most companies who give you free equipment will only give you one free machine per agreement) you may want to buy another machine. Make sure you buy an open source machine like Verifone, or Hypercom. These machines allow any processor to build software that will allow the machine to work on their platform. Don't buy proprietary equipment as it works only on their platform. If you choose to buy a used, or older machine, you should only buy a machine that can connect to the Internet and a telephone line. Older machines usually do one or the other. An IP connection is much faster than a dial up connection, so depending on your use, you may need a machine that has a faster processing speed. Older machines are often not PCIDSS (payment card industry data security standard) compliant, and many times processors will not reprogram these older machines. Older machines may also lack sufficient memory for a certain processor's software. Machines are typically reprogrammed over the phone in just a few minutes. Some processors will want to charge you a fee for this service, but you should negotiate that away. The best alternative by far is to look for a processor who provides free
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equipment. Obviously, an offer of free equipment does not make sense if the processor is going to make you sign a contract. Then the free equipment is really not free at all as you will be stuck with a processor for a certain number of years, and you will be subject to a cancellation fee. So make sure there is no contract involved. Make sure that your rates are reasonable. We will discuss rates in the next section, but if the rates are high, this is where the processor is collecting for the free equipment. Under most agreements, you are not being given a free machine, but have the right to use it as long as you are with the processor. When and if you leave that company, you have to return the machine or you will be charged for it. It makes no sense to ever keep one of these machines. Since you don't own the machine, if it breaks, the processor will usually send you a new one at no charge. Sometimes there is a shipping charge, or a charge if you have abused the machine, but that would be rare. Supplies, which on newer machine are only the rolls of thermal paper, are not usually supplied free of charge. Some processors provide free paper, but they have to charge for it somewhere. Review the paperwork and decide which program works best for you. So why would a processor offer free equipment? From a marketing perspective, it takes away one of the major concerns merchants have to sign up the cost of the equipment. When a merchant finds out the equipment is free, they breathe a sigh of relief that they don't have to come up with the funds to buy a machine. Also, the processor is buying the equipment in bulk, at wholesale prices, so yes there is an investment, but it is less that it seems. If the processor is offering reasonable rates, then they are betting on you turning into a long term customer. In conjunction with a month to month contract, getting free equipment has virtually no risk. Again, if the processor ties it to a lengthy contract, walk away. ONLY SIGN WITH A MERCHANT PROCESSOR WHO OFFERS YOU FREE EQUIPMENT IN CONJUNCTION WITH A CONTRACT WITH NO CANCELLATION FEES, OR A KICK-OUT.
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RIP-OFF NUMBER
3:
Fees, Fees, and more Fees!

In this book, we cannot possibly cover all aspects of merchant processing fees. I will try to cover the basics and point out the main issues to become aware of about fees. There is tremendous confusion in this area, a lot of marketing hype, and a lot of misinformation on the Internet and elsewhere. The first point to remember, is that if you have avoided rip off #1 and #2, and not signed a contract with a cancellation fee, or a kick-out ,and received free equipment, then the issues of fees is less relevant. If the merchant processor has offered you a reasonable deal to start out with, you have the upper hand in fee negotiations. If your statement seems high to you, just call your representative and tell them you think your rates are too high and should be reviewed. If he says no, quit. It is unlikely he will say no, but instead will come out and review your statement as he does not want to lose your business. We are going to generally discuss various fee structures, but there is no one fee structure that is always right for every merchant. It depends on the business, its volume, the number of transactions it processes every month, and
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the processor. The processor has to make money, so you want a processor who is flexible, offers different pricing plans, and is willing to work with you. Again, if you have a month to month agreement, with free equipment, you have leverage over the processor, and you can assume they are going to work with you on fees. Effective Rate Ultimately what matters is what is your effective rate? Your effective rate is the total fees divided by the total charges for that month. So if the total charges were $10,000 and you paid $200 in fees, then your effective rate is two percent. A processor can quote lots of different rates, etc., but the bottom line is your effective rate. As a merchant, your mission is to keep your effective rate as low as possible. Your effective rate is going to vary depending on what kind of store you have. If you have a lot of debit transactions, you will tend to have a lower effective rate versus a store that takes a lot of credit transactions, because Visa/Mastercard charges lower rates on debit versus credit. Of course it depends on how your processor is determining its markup, but keep effective rate in mind as we go through this process. Let's discuss the components of the fees for credit card transactions. Typically, a merchant will receive a rate quote as a percentage, such as 1.59%, or 1.99%. This is called the merchant discount rate. A lot of times, a merchant will ask a sales person what their rate is, thinking that knowing the rate will help them determine if that provider has the lowest fees. As noted earlier, the effective rate is the true reflection of what a merchant is paying. The discount rate is composed of the cost of the transaction and a markup for the merchant processor. The cost of the transaction is composed of interchange and assessments and they are the same for all processors. Every merchant processor pays the same for interchange and assessments. Interchange rates are set by the issuing banks, and vary depending on the type of card - debit or credit, whether or not it is a reward card, your business type, whether the card was swiped or keyed in, and a lot of other factors. Interchange is composed of a discount rate and a transaction fee. The present Visa interchange fee for a swiped consumer credit card is 1.51% plus $0.10.
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The interchange fee goes to the issuing bank. The processor and Visa/Mastercard do not get any of the interchange fees. Now you might be thinking to yourself -wait just a minute. You're telling me that the card issuing bank is collecting up to a thirty percent interest rate from the holder of the card, and in addition they are collecting a fee from me, the merchant, to accept the card? Yes, but, well, not technically. Visa, on their website, under their explanation of interchange, says: Specifically, interchange is the small amount of money transferred from one financial institution, the retailers bank, to another, the cardholders financial institution, each time a Visa payment product is used. The primary role of interchange is to create an equitable balance of incentives between a cardholders financial institution which issues Visa cards to consumers and a retailers financial institution that enrolls retailers and processes Visa transactions for them. Retailers do not pay an interchange reimbursement fee; retailers pay a "merchant discount fee" to their financial institution. This distinction is subtle but necessary because retailers receive in return a number of processing and other services from their financial institutions, all or many of which are included in their merchant discount rate. We believe that interchange is fundamental to the value Visa delivers to retailers, financial institutions and cardholders alike. It assures that financial institutions invest in the Visa system and the benefits that all cardholders enjoy from fraud protection to car rental insurance to airline miles to 24/7 customer service. It also ensures that retailers benefit from the system through guaranteed payment, speed, efficiency and reliability that only electronic payments can bring. By carefully balancing the economics among all participants, interchange encourages more retailers to accept Visa and banks to issue Visa to their cardholders. See, it's a benefit! Just ask Visa. So technically, retailers pay a discount rate to acquiring banks, but of course, included in that fee are the interchange costs. Maybe you are thinking they should pay their own fees, and retailers should pay a small fee for their processing services. Good luck on making that argument to the banking system.
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There are many interchange rates, and they mainly vary based on risk. Lower fees for lower risk, and higher fees for higher risk transactions. Visa/Mastercard obviously have enormous histories of transactions, so you can assume there is a factual basis to higher and lower rates. Different type of businesses get higher or lower rates. The ugliest part of interchange rates are reward cards. Banks create a lot of reward card categories then they pass these costs onto the merchants. The banks get benefits by getting more customers who use the cards more often to get the points, or whatever. The banks would ague that all these awards are encouraging customers to use their cards more often and carry higher balances. Consumers of the world are using credit cards more and more, and they want to use those cards and run up balances which earn the banks fees, and the banks roll out rewards for the consumers to use their cards even more, and when they use that card, the merchant pays a fee and reimburses the acquiring banks. Most merchants think Visa/Mastercard gets most of the fees, but that is not true. Assessments and Dues are where Visa, Mastercard and Discover make their money. Assessments and Dues are charged on every transaction, and your processor should outline these for you in your agreement. If they do not, find out what they are. If you processor can't tell you what they are, tell them to take a hike. Assessments and Dues are the same for every processor, just like interchange. They are not a significant part of your processing costs. The processor marks up interchange and assessments and dues. Mark up is not profit it must cover all the overhead of the processor, its sales force, its computer systems, etc. Every merchant processor will approach their charges in different ways, because there are many different pricing models depending on their marketing philosophy, the needs of the merchant, etc. This is why effective rate is really the only way to compare rates. The mark-up is the only negotiable part of your rates, as interchange and dues and assessments are set by the banks and Visa/Mastercard. Pricing Models Their are several pricing models. The most common is tiered or bundled/bucket rates. In tiered pricing, the processor usually categorizes
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interchange fees into three pricing tiers called qualified, mid-qualified, and nonqualified. Qualified are usually regular credit cards, mid qualified are usually reward cards, and non-qualified refer to corporate or business cards. Qualified rates are the cheapest, then mid-qualified, then non-qualified. The tier allocations are roughly based on interchange rates, as interchange rates are higher for reward cards and higher still for business cards. The problem with tiered pricing is that because interchange fees are bundled into tiers, you usually don't know ahead of time what cards have been bundled into each tier. (though some processors break this out on their statements) A merchant processor can charge a low teaser rate like 0.89% for qualified transactions, but only throw debit transactions into that tier. All other transactions could go into a higher priced tier. So again, ultimately what matters is the effective rate. An honest processor will allocate tiers according to interchange charges. The industry is very competitive, so despite some obfuscation in tier allocation, ultimately the rates are very competitive for a knowledgeable merchant. That is the key. The more you know, the more you will be able to recognize the particular strategy of a merchant processor, and then negotiate. You can always complain about certain cards being put into a particular tier. Interchange plus or pass-through pricing is essentially cost-plus pricing. This is generally a cheaper form of pricing for a merchant, but not always. A typical interchange quote might be Interchange + 0.50%. This is just half a point above cost, or put anther way, 50 basis points. Interchange plus is often quoted using the term basis point, a unit of measurement that is equal to 1/100 of one percent. Expressed numerically as a decimal, that is 0.0001. Another interchange-plus fee is what is called flat rate pricing. In this model, you pay interchange plus a monthly flat rate like $60.00. This can be very favorable for a merchant with increasing volumes because it caps the fees to the processor. If volumes decline, however, the flat fee on a percentage basis goes up. Transaction fees In addition to the basic processing model, the merchant processor will charge a fixed rate per transaction. Transaction fees are usually a fixed number like $0.10 per transaction. This can change your costs dramatically if you have a
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lot of monthly transactions. You could have a low interchange plus rate, and if the transaction fee is high, you will pay more than a tiered rate with a low transaction fee. Average ticket size obviously impacts your transaction costs. Comparing two merchants with exactly the same rates, the one that has a lower ticket size, will have higher transaction costs but lower processing costs, and vice versa for the company with a bigger average ticket. So again, the more knowledgeable you are, the more you are aware of the issues. The merchant processor also has other fees they can charge like statement fees, service fees, annual fees, pci compliance fees, pos-wats fees, FANF fees, debit service fees, avs fees, monthly minimums, batch fees, help desk fees, and a host of other fees that are almost impossible to comprehend. You would obviously like to keep all set fees to a minimum, or eliminate them entirely. Let's review some of these fees. 1. Monthly minimum is a set fee that the processor expects to collect every month. It is typically around $25. The fees that you accrue during the month will be credited against this minimum. Some processors give you credit for your discount rate fees, while others give you credit for all your fees. Rarely do you get credit for fixed fees. If you do not meet the minimum, you will pay the difference between your fees and the minimum. Once you meet the minimum there are no additional fees. 2. POS-WATS are 'point of sales-wide area telephone service' fees. It is charged as an additional transaction fee. Usually $0.10. 3. Service fees are set monthly fees that guarantee the processor a minimum income on your account. Usually $10.00. 4. Statement fees are usually charged for paper statements rather than online statements. Usually $2.00 to $5.00. 5. Batch fees are fees charged for every time the merchant settles their account, which usually occurs nightly. Usually $0.10 to $0.35. 6. Annual fees are just an add on fee that a merchant charges because they can. 7. AVS(address verification) fee is charged when a card is not swiped, but keyed in. 8. Debit Service fees are usually associated with the fees charged by debit networks when you use a pin pad. 9. FANF (fixed acquirer network fee) is a monthly fee from Visa based on a
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businesses number of locations and type of card acceptance. 10. PCI fees refer to the Payment Card Industry(PCI)Data Security Standard. Visa/Mastercard don't charge a fee to ensure that merchants comply. Merchant processors often charge monthly fees to ensure compliance. Other Considerations In addition to discount rates, transaction fees and other fees, there are other considerations in analyzing fees. Does your business mostly swipe credit cards that are present at your store, or do you process transactions that are mostly called in to your store or are they done on the Internet? If you are mostly processing cards which are present, you will pay lower interchange fees because these are transactions which have lower risk. The person is there in the store and you have the card. Statistically, there are fewer charge-backs and fraud claims. If you are processing cards that are not present, often called MOTO (mail order, telephone order), or maybe Internet transactions, you will pay higher interchange fees, and if you are using the Internet, you will have higher fees related to online transactions, including gateway fees. Gateway fees are from companies that route your Internet transactions to the various networks. Cards not present transactions are considered more risky, and thus have more fraud associated with them. What is Cheapest? So is interchange plus cheaper than a tiered rate? Usually, but it depends on the mix of transaction fees and other fees. It depends on a multitude of factors, but as long as you have a processor who will give you an initial low rate and will work with you without a contract, or a kick-out, you have the leverage to make changes as you develop a history with that processor. You will have no reason to keep hopping around between processors fighting for lower rates, because your processor will be motivated to work with you and help you to lower your fees. Yes, they have to make money, but there is obviously room to move between different approaches, assuming you a smart enough to bring them up. When you see super low rates advertised on the Internet, there is usually a catch. Now you can tell what it is. Let's say a processor is advertising qualified
23
rates of 0.49%. Since you know the cost of a qualified visa credit transaction is 1.51$ + $0.10, you know it is unlikely that the processor is going into business to go out of business. So you can assume that they are only referring to debit transactions and nothing else. They have to put everything else into midqualified and higher rates. You are probably getting ripped off. However, if a processor dumps both credit and debit into the qualified category, then this is a more legitimate offer. Since there is a general rise in the number of debit transactions, the processor is betting that you will do as many debit as credit transactions. Debit cost less as you know, so overall they will do fine. So the key to getting great rates is to work with the right company and the right sales professional. You want a company that will work with you and is available for you when there are problems. Here are a few general rules: 1. The higher your monthly processing volume, the more important it is to negotiate an interchange-plus or flat rate pricing model. For new merchants, or volumes lower than $10,000, tiered systems can be just fine. 2. The higher your average ticket, the less concern you should have with the transaction fee. If you sell ten high ticket items a month with a $0.19 transaction fee, it is no big deal. If you sell 1000 low ticket items a month, that same $0.19 adds up quickly. 3. Always understand what other fees will attach to your account. 4. Understand whether fees are taken out daily or monthly. Monthly is preferable for accounting purposes. It is a lot easier to keep track of. 5. Always batch out every night. If you don't you will pay a higher processing fee when you finally batch out those transactions. Remember, batching out transfers money from your customer's accounts to you. 6. On keyed-in transactions, always use the AVS (address verification system). If you don't, there will be higher fees. We should probably address a few of the issues related to negotiating your rates. I will sometimes go into a merchant's shop, introduce myself and after some general discussion find the merchant is only interested in a rate quote. Just give me your best rate, he might say. I'll ask for a recent statement and he
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says that shouldn't be relevant, and he refuses to give me a statement. It is almost impossible to give a fair quote without understanding many things about the business, and most of the items are on that statement. Few merchants can answer those questions as they don't understand what they are paying in the first place. They don't know how many transactions they have a month, what the average purchase is, their volume, etc. Can your life insurance agent give you a rate quote without knowing your age and health status? A qualified merchant processor sales representative can be very helpful, and they are not necessarily the enemy if you are knowledgeable about the quoting process. Finally, many times I will talk to a merchant who refuses to leave a processor because they are satisfied. This usually means they have had no problems in the past. But what about rates? They always believe they are paying the lowest rates. When I often show them how much they are over paying, they are often confused, embarrassed, and incredulous. They wonder how it is possible that their nice company could be overcharging them. Don't be afraid to get a rate quote. As a merchant, your job is to pay the lowest possible fees. Banks almost never have the lowest rates. Since we are discussing fees, it might be a good idea to add a short discussion on how to read your statement. If you can read a statement, you can quickly find rip-offs by merchant processors.
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RIP-OFF NUMBER
4:
Your Statement
Many merchants do not read their monthly statements. They find it confusing and frustrating to understand what their costs are, so they just give up. I have been to many merchants, who, when they are asked to provide a statement, go to a pile of unopened envelopes. It is impossible to go into the process of analyzing all parts of a rate structure in this book. However, it is important to have a general knowledge of your merchant account. One of the problems is that merchant processors present their statements in many different formats. Some are very clear and simple many are purposely very complicated and confusing. You need to know whether you have tiered pricing. Look for words such as qualified (or qual, or Q), mid-qualified (or mqual, or midq, or MQ), or non qualified (or nqual, or NQ). Many times charges will be separated by card brands. You will see sections called 'summary of card fees', which are usually the qualified fees, and then 'surcharges', which applies to reward card fees. Interchange-plus statements will show the same rates across brands and across many different charges. They might be labeled as interchange, or processing fees. There is usually a lot of itemized detail on the many different
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interchange charges. See if you are paying a daily or monthly fee. You will see the words discount paid on those statement where fees are taken out daily. This is very confusing, as many merchants think they are getting a credit which is lowering their fees. Daily fee deduction is hard to reconcile and hurts cash flow. It is much better to pay a monthly fee. Statements all have sections which show your daily deposits called batches, or funding summary, or card deposits. Sometimes they will break them down by card type. Look for words like discount rate and item rate. This will tell you the two biggest components of a tiered rate. Then look for other fees. You should always be looking to lower your costs but it helps to know what they are. If you have followed my advice and do not have a contract, you can always call your sales representative and have them come in, review your statement, and suggest changes. I am always asked whether it is better to stay with your present processor and negotiate lower rates, or switch to a new processor. It depends. If you are being overcharged by a processor from the start, you signed a contract with them, or you leased equipment run away fast. There is no reason to work with a company that ripped you off from day one. If you have a month to month agreement, and have free equipment, your rates are always negotiable and the processor should always be willing to work with you. You are in control. Why switch if they are always willing to work with you? However, the new company may be willing to offer you new services that your present processor does not offer, like gift cards, an advertising program or other benefits you certainly should consider.
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RIP-OFF NUMBER
5:
Do You Have the Right Account?

If you have the wrong account set-up, then your fees are certain to be out of whack for your business. It is important that you know your options. Your salesperson may not care about you or your business, but knowledge is power in the merchant processing business. There are two basic merchant account types card present and card not present. As the interchange rates are quite a bit different for each, it is important that your account be set up properly right form the beginning, so you can minimize your costs. For example, you may have a very low card present fee, but if all your transactions are card not present, and you did not negotiate a low fee in that category, you are going to overpay. Card present is your typical retail merchant account. It means that most of your customers who pay with a credit card are present in your store, and you swipe their card. This is a low risk and low fee transaction. When you have this account, and a customer calls in an order, and you manually enter the
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information, you will pay a higher fee, usually a non-qualified rate. Interchange is higher too. If you have just a few transactions which are called in it won't be a big deal. But if your volume is large, you may want to open a second account for each type of transaction. You can negotiate the lowest rates on each account. Card-not-present merchant accounts refer to accounts where you expect that most of your transactions will be where the card is not present. These are also know as keyed-in transactions. Interchange rates are higher as there is higher risk to the transaction, and you will pay higher fees. These accounts are used in gym memberships, Internet e-commerce transactions, mail order accounts (MOTO mail order/telephone order). If this is the case you can negotiate lower rates up front. Usually in consideration for better rates, you will pay the same rates for swiped cards. If you do a lot of swiped and keyed-in transactions, you may want to have two accounts, as above. Another issue which relates to the type of account you have also relates to fees. For instance, when you process keyed-in transactions, or Internet transactions, you need to know what will steps you need to take to minimize your transaction costs. For instance, if you don't follow address verification rules, you will overpay.
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6: Keeping Your Account in Good Standing and Charge-backs

RIP-OFF NUMBER If a merchant processor notes unusual activity in your account, they will often just close your account, freeze your funds, or block a sale. The reason for this seemingly irrational behavior is that the processor has extended you credit on your account subject to certain parameters that you set up when you made your application. For instance, if you are a gym, and most of your customers pay $50.00 a month for gym membership, and then you all of a sudden attempt to place a charge for $2000, a lot of bells and whistles will go off down at merchant central. They will be happy to accept the charge, but you didn't bother to tell them that you went into the gym equipment business. The underwriting criteria for a gym equipment business is different than a gym, so unfortunately, in order to protect themselves, they don't bother to call you, or explain the situation to you. Instead, they have a tendency to freak out, and close or block your account, and now you have thousands of dollars tied up and you can't get to your money. You are
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now treated like a crook, and all you were doing was trying to expand your business. There are other ways for your account to be closed or flagged. Unusual activity whatever that means, processing transactions for other merchants, and unusually high volume. The problem is that the processor will close or block your account instead of calling you to get an update. They are looking out for their interests not yours. Opening a merchant processing account is actually getting a line of credit. The merchant receives their funds, before the funds are actually removed from the customer's account and before the acquiring bank is reimbursed. So, justifiably, they are protective of their money. The problem is that they have a tendency to treat all merchants like criminals, even though you have just made an innocent mistake. The other problem is that the processor will often not even call you to tell you there is a problem. If you made a mistake, and they called you and said we need a copy of the invoice, or some other back-up material, you might be a little peeved, but you would probably understand. They usually, however, close or block your account, and then when you call them, they tell you what to do to fix the problem. If something happens once or twice, there should not be a problem. If, however, you continue to violate the rules, you could land on the MATCH file. The MATCH file is defined as the Merchant Alert to Control High-Risk. Getting on this list can effectively terminate your ability to process credit cards, as it is shared among all merchant processors. The most common reason to get on the MATCH list is due to an unpaid charge-back. Once the charge-back is resolved, you will usually get off. When the acquiring back who put you on the list is made whole, they have no reason not to take you off again. To keep your account in good standing, understand the rules. Make sure your account is set up properly from the beginning, and that you understand your merchant processor's expectations. Otherwise, you could get slammed when you least expect it. Conduct your business with integrity. Don't be afraid to contact your processor ahead of time to notify them of a pending issue, so you
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can get pre-approval. Charge-backs should not be a major problem for most merchants. Most customers are honest, as are most merchants. Anything can happen, however. I met a merchant who sold electronic gear. He had an online site, and sold some electronic equipment worth about $10,000. He collected all the proper information for the sale, the customer's address by using the Address Verification System(AVS) and the CVV2 code (on back of the Visa card), etc., the charge went through and he shipped the merchandise. Three days later, after he received the funds from his processor, it became a charge-back because the card was stolen. So he was out the merchandise, and out the money. He set up a payment plan to the acquiring bank, and was put on the MATCH list. This was obviously a fraud, and there may have been little the merchant could have done. What if the cardholder had ordered the merchandise, instead of it being a stolen card? The system allows for easy extortion from a cardholder, who just wants to steal merchandise. The banks will issue a chargeback almost immediately, even when the cardholder may be a crook and have no proof supporting their claim. Now the merchant is presumed guilty and has to defend the claim! When a charge-back is issued, you will receive a notice from the processor, and will be given a period of time to resolve the situation, or contest it. Visa and Mastercard require that the product be returned before a chargeback can be initiated. American Express does not. The merchant then has to decide to either grant or deny a refund. If he decides to deny a refund, then the whole situation will be reviewed, and ties go to the customer. The best defense, is a good offense. Make sure you have a plan which you follow in large credit card transactions to protect yourself. Have the original signed credit card receipt. Have an invoice, which is signed by the customer, indicating satisfaction with the sale, and receipt of the merchandise. Get delivery confirmations. Get proper ID when you can, telephone numbers, and make the customer come into the store when possible. Have a clear refund policy. Large e-commerce merchants like Amazon have very sophisticated fraud protection software programs which monitor their transactions. The average small
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merchant can't afford such programs. Save your paperwork, as a customer has 180 days to issue a charge-back claim. To add insult to injury, some merchant processors will charge you a retrieval fee to handle your claim, on top of a charge-back fee. So it is always better to try and resolve the dispute directly with the customer when you can. A lot of times, charge-backs are due to easily correctable problems. Is the name of your business that appears on the customer's statement, different than your trade name? If your corporate name is a strange sounding one, and totally unlike your trade name, a customer may have no idea who you are and claim a charge-back.
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RIP-OFF NUMBER
7:
American Express
American Express (AMEX) charges much higher fees than Visa/Mastercard. American Express issues merchant accounts directly to merchants, and cards directly to consumers. They operate what is called a closed-loop system. They own and completely control their network. Visa/Mastercard is an open network, and thus there are competing interests between acquiring and issuing banks, and Visa/Mastercard, which force lower rates. American Express can charge whatever they like, and thus there are higher fees all around. Discover, is kind of a hybrid network, as they piggy-back on Visa/Mastercard. Most processors will charge a fee to handle American Express (AMEX) transactions. AMEX has a fairly simple rate structure, and it usually is just a discount rate and no transaction fees. They do charge higher fees for keyed in transactions versus swiped. In addition to charging high discount rates, AMEX transactions take much longer to settle. Visa/Mastercard typically settle in 24-48 hours, which means you get your money from the sale in 1 to 2 days. With AMEX, you don't get your money for 3-7 days. AMEX also charges a monthly statement fee form $4.95 to $7.95 a month, though they will sometimes waive this fee. Why would anyone agree to accept AMEX? Everyone gripes about rates, but here, not only do they charge high rates, you don't get your money for
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several days. They are bad for your bottom line and your cash flow. The reason is that depending on your business, you may not have a choice. 70% of AMEX volume is in the restaurant, tourism, and entertainment industries. People use their card because they get points for travel, etc., so high ticket item merchants can expect to see a lot of AMEX cards. High income zip codes also use AMEX more often. So if you don't want to alienate your customer base, you have to accept the card. You can open an AMEX account directly, or ask your processor to do so. If you have an existing account, you will have to transfer it to a new processor. You will typically get a separate AMEX statement. There is a program called OnePoint that is offered by AMEX to merchant processors. It speeds up settlement times and incorporates AMEX data into your regular statement. Discount fees are still the same, however. If you do accept a lot of AMEX, it might be beneficial to look for a merchant provider who has this program.
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RIP-OFF NUMBER
8:
Closing Your Account

Merchants close accounts for a lot of reasons. Maybe you found a better rate or better service with another provider, maybe the business is being sold or closed, or maybe your present processor has raised their rates. Here is where you have to be very careful because it is a processor's last opportunity to rip you off. Here are the steps you need to take 1. First, read your contract if you have one. Are there cancellation fees, or notice requirements? 2. Have you batched out any pending charges? You want to make sure all your money is in your bank account before you cancel. 3. Cancellations should be done in writing. Call the processor to make sure they received notice. 4. Don't make a cancellation effective until the processor has taken out of your account the final fees you owe on your transactions. 5. You may want to block your account or close your existing account if you expect a processor to rip you off. I have seen examples where a merchant had no cancellation fees due and was well within his rights to cancel, but
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the processor hit him with a bunch of fees which he did not feel he owed. Once they took out the funds form his account, what could he do if the processor was 1000 miles away? Protect yourself. The merchant processing business is highly regulated, but when it comes to fees, there is a lack of any meaningful oversight.
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Miscellaneous Considerations
Visa/Mastercard/Discover Rules: Many merchants do not know what they can or cannot do with regard to Visa/Mastercard rules. Here is a quick review: 1. You can set a minimum purchase to use a credit card, but it must be $10 or less. 2. You can't set a minimum purchase on debit cards. 3. You can't differentiate between cards, imposing minimum purchase on one card but not another. 4. You can't differentiate between card brands. 5. You can now charge extra for credit card transactions versus cash transactions. Violation of these rules might get you a letter from one of the card brands, but it is unlikely there will be any other repercussions. Signature Debit versus Pin Debit A signature debit is when someone uses a debit card as a credit card and signs a receipt instead of using a pin pad to enter a pin number. I will often ask a merchant what percentage of his transactions are debit and he says he does not take debit cards. He thinks that if he has a pin pad, this means he is taking debit cards, and without one he is not. This is not true.The difference in the transaction is that a signature debit goes through the Visa/Mastercard network and is subject to interchange fees, instead of the Pin Debit network and be subject to debit network fees. Many merchants and consumers do not understand the difference between a debit and credit transaction. Many customers think debit transactions are safer as far as security is concerned, or somehow cheaper for them. This is not true. The difference between the two transactions depends on several factors, but as a general rule, the costs are similar unless you are doing large debit transactions.
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Don't let a merchant processor sell you on a pin pad if you don't need one.
Conclusion
There you go. You are now an expert on credit card processing! Well not really. But you should know enough now to stay out of trouble. The main point is to not sign a contract, avoid cancellation fees, and don't lease equipment. Although rates are important, if you have a company that offers you an account with no contract and free equipment, and low initial fees, you don't have much to lose, because you can always call your sales representative in to review your rates. Probably the most important factor is getting an agent you can trust. If he is knowledgeable, answers your questions, and avoids the rip off areas, then he is looking out for your interests. A good agent is not going to waste their time coming out to see you, and then lying to you, in a situation where you are not signing a contract or leasing equipment. There is no advantage. If you need any additional information, please do not hesitate to contact me. MICHAEL PORTER michael@merchantsafeguard.com
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You're Being Ripped Off by Your Credit Card Processor!

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You're Being Ripped Off by Your Credit Card Processor!

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COPYRIGHT 2012 by Michael I. Porter. You're Getting Ripped Off by your Credit Card Processor. All Rights Reserved.

COPYRIGHT 2012 by Michael I. Porter. All rights reserved.

1: Do they have a Contract and do they have cancellation fees?

f you were to do a survey on how many new merchants sign a contract

YOU CAN SIGN CONTRACTS WITH NO CANCELLATION FEES.

Do they sell or lease equipment?

he practice of leasing credit card equipment is probably one of the

Fees, Fees, and more Fees!

Do You Have the Right Account?

6: Keeping Your Account in Good Standing and Charge-backs

Closing Your Account

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You&#39;re Being Ripped Off by Your Credit Card Processor!

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You&#39;re Being Ripped Off by Your Credit Card Processor!

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COPYRIGHT 2012 by Michael I. Porter. You're Getting Ripped Off by your Credit Card Processor. All Rights Reserved.

COPYRIGHT 2012 by Michael I. Porter. All rights reserved.

1: Do they have a Contract and do they have cancellation fees?

f you were to do a survey on how many new merchants sign a contract

YOU CAN SIGN CONTRACTS WITH NO CANCELLATION FEES.

Do they sell or lease equipment?

he practice of leasing credit card equipment is probably one of the

Fees, Fees, and more Fees!

Do You Have the Right Account?

6: Keeping Your Account in Good Standing and Charge-backs

Closing Your Account

Você também pode gostar

You're Being Ripped Off by Your Credit Card Processor!

You're Being Ripped Off by Your Credit Card Processor!