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

7/30/2019 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.

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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 cancellationfees?

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


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Introduction

You've decided to go into business and accept credit cards and youneed 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, ordo a little research, and some sales person from your bank comes into yourstore and tells you what you are supposed to do. You figure he is honest, asafter 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 thecontract that they will charge you a cancellation fee. You will need a machine totake cards, and you need equipment that will cost $30 - $100 per month for 4years. They don't tell you that it will be a lease, and is non-cancellable. Maybethey will tell you the equipment comes with the deal and don't mention thatthere is a lease. They guarantee you the best rates, and assure you that thereare no lower rates in the marketplace. They don't mention how charges arecomputed or that there will be annual fees, or up charges for something calledreward cards and corporate cards, or service fees, or compliance fees, or a


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million other fees.

You are busy, trying to make a living, and the sales person looks OK, andseems to be a good person, so you sign all the paperwork, and in a few daysyou 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 quiteright. The fees seem a little high. The statement is almost impossible todecipher - there are all kinds of fees, different percentage rates, statement fees,service fees, PCI fees, debit fees, transaction fees, and there is almost no wayto figure out what you are really paying. Your sales are going into your bankaccount, 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 theydon'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 tellyou your sales person has left the company. You tell customer service that youhave reviewed your paperwork and you definitely were not told about any leasefor equipment, and your rates are not right. You want to cancel. They tell youthat cancellation is certainly an option in the merchant services agreement, butnot for the equipment lease. You will have to call a different company to discussthat with them. As to your merchant services contract, the lease cancellation willbe $295, or maybe $495, or maybe your monthly fees times 12, and in yourcase, that would be $3000. You are shocked.

You call the equipment lease company and you tell them you want tocancel. You saw on the Internet that you can buy a machine for $350. They tellyou sorry, that your lease is non-cancellable and you need to keep paying forthe next four years. You threaten them, they tell you there is nothing they cando. 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 unscrupulousmerchant processors.

Why you should take cards


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It is estimated that more than 60 percent of all retail transactions are madeusing a credit or debit card. And, surveys have shown that consumers havemore confidence in businesses that accept credit cards. With all the rewardcards and special promotions consumers receive to have credit cards, they aremore 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'sworld, this is becoming the exception. A lot of restaurants avoid credit cards, asthey have traditionally been a cash business. I've seen restaurant owners go sofar as putting an ATM in their lobby to avoid taking credit cards. The problem isthat the customer gets hit with high fees just to have the privilege of paying incash. Why not just raise your prices sufficient to cover your credit cardtransaction costs?

Individuals using credit cards are also financing their transaction, so theiraverage ticket price tends to be higher, and therefore merchant sales should behigher.

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 littlemachine, swipe the card, and in a matter of seconds the transaction is approvedor denied. Generally, in a couple of days, you have your funds in your bankaccount. 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 areformally known as the 'cardholder'. Based on their credit history andbuying habits, they have a card with a high or low limit. Most of us arecardholders.

2. Merchant Anyone who accepts credit cards. With the rise in mobile andwireless payments, you don't even need a fixed location anymore.

3. Acquiring Bank (Merchant Bank) - This is a bank that is a member ofthe Visa/Mastercard network. They sell credit card processing services tomerchants, and deposit the money from credit card sales into the


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merchant's bank account. Merchant processors contract with these banksto sell the bank's services to businesses.

4. Issuing Bank - This is a bank, also a member of the Visa/Mastercardnetwork, that issues cards to cardholder. They pay the acquiring bank,who pays the merchant.

5. Card Associations (Visa and Mastercard) They maintain the electronicnetworks, and act as a clearing house for all the transactions outlinedabove.

6. Third party credit card processors - There is another major party andthat is third party credit card processors. They go by names such asGlobal Payments, First Data, NPC, and are hired by banks to run thecomputer 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 thecustomer's information. The processor or bank sends the information to theissuing bank. The issuing bank then sends an approval or decline, based on thecustomer's balance, etc. Once approved, an authorization number is issued tothe processor or bank and stored in the credit card equipment. These will belater 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 pickup the yellow pages to look for a processor, because it is likely you're gettingseveral 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!


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RIP-OFF NUMBER 1:Do they have a Contract and dothey have cancellation fees?

If you were to do a survey on how many newmerchants sign a contract

with their merchant processor, the answer would probably be one hundredpercent. Most merchants don't know how much negotiation room they actuallyhave with their provider.

A sales person will typically call on the merchant and make various claimsof low fees and other benefits. The merchant gets excited and is looking forwardto taking cards and saving some money. The issue of the contract term is notalways 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 smallprint which would take you or a lawyer hours to read.

Why would the company want you to sign a contract?


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The sales person is going to tell you that a contract is a commitment onboth parties to deal with each other fairly, that it protects the merchant with lowfees, and protects the merchant processor for the investment they are making ina new account. Maybe they have waived a particular fee, or offered discountedequipment. 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 sothey make a profit. If they are going to give you low rates, and look out for yourinterests, why do they need a contract? These contracts allow them to raise theirfees, 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 yougood 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 deeprecesses of a multi-page contract and are often not even addressed with themerchant. They are often a complete surprise to merchants until they try to getout of a contract.

Cancellation fees run from $195 to thousands of dollars. Yes, thousands ofdollars. The worst clauses will say that the cancellation fee is equal to one-halfof the fees they collect in an average month, times 12. So if your business hasbeen 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 $800a month in fees. Their cancellation fee was $4800! Some clauses are evenbased on lost profits! How high can that number go?

If the merchant processor asks you to sign a contract but requires nocancellation fee, then the contract has little effect and can't hurt you. You canleave anytime without penalty. There are some contracts which explicitly statethat if another merchant processor will meet or beat your rates, and yourprocessor 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 UNLESSTHEY ARE MONTH TO MONTH, OR GIVE YOU AN OUT.


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YOU CAN SIGN CONTRACTS WITH NO CANCELLATION FEES.

Sometimes a sales person will lie to you about cancellation or terminationfees, so tell them that you want language added explicitly to the contract - monthto 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, manycompanies have started to not require contracts. Sometimes, if they have acontract, 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 anew processor. If there is no cancellation fee, most contracts say you can cancelafter 30 days notice. Cancelling a merchant account usually is a simple assending in a form to your processor.

It is often the case after the initial term of the contract has passed, thatthere will be a notice requirement. Beware the contract that automaticallyrenews 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 itautomatically renews for another three years because you did not read itcarefully, 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 isburied and not made explicit, the merchant processor can claim you owe acancellation fee, but if you don't pay it there is not much they can do. They mightwrite you a nasty letter or threaten to send you to collections, but they areultimately out of luck. Check with your lawyer. It might also be a good idea, ifyour state has this protection, to have your lawyer threaten legal action if theyattempt to hurt your credit.

You can pretty much get out of any cancellation fee if you are prepared tobattle your processor. Let's say you have a new processor and you want tocancel your old one, but they have a cancellation fee. Remember, when yousigned your contract, they got a check from you with your banking information.You signed paperwork which allowed them to deposit money in your accountfrom your customers, and to collect their fees. This is called ACH access. Thatauthority 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, notbank account B. So if you cancel and they try to collect a cancellation fee, theaccount they have access to will have been closed. They are out of luck.Second, you can remove their access to your account by revoking yourpermission. 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 bereversed if you allege it was unauthorized.

Both of these techniques do not make processors very happy, but it is myexperience that few if any processor will come after a merchant for failure to paycancellation fees.

A softer approach might be to just call the processor and tell them you arethinking about cancelling and that you want them to waive their cancellationfees. There are many factors which influence their decision the size of youraccount, how long you have been with them, etc.. If the front line person saysno, ask to speak to a supervisor.

Another approach to get around the cancellation clause is to leave youraccount open until your agreement expires. If your monthly minimum is $20 andyou have five months to go on your contract, your cost will be $100. If thecancellation 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 topay your cancellation fee. It will often depend on the amount of potential volumeyou are offering, but it is always worth asking. If they say they will do so if yousign a contract, don't make the same mistake twice! Also, get any commitmentto pay your fees in writing. Remember, they are reimbursing your fees, notsending 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 myopinion, this does not make any sense. If your processor was looking out foryour interests, why did they make you sign a contract and charge you acancellation fee in the first place?


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DON'T SIGN CONTRACTS WITH CANCELLATION FEES UNLESSTHEY 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 NUMBER2:Do they sell or leaseequipment?

The practice of leasing credit card equipment is probably one of thebiggest rip-offs in any financial industry. It is perfectly legal, but only a companywith zero interest in your financial welfare would get you into a lease.

Typically, the sales person recommends a lease to a merchant who hasnot adequately investigated their options. Anyone who has checked out theiroptions 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 bestway 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 andthat if you buy a machine it will probably be obsolete in a couple of years. That'sbaloney. 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 fivetimes 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 yearperiod, that is $1400 - $2400! You can buy credit card terminals for about $350or less new, and $200 used!

If you did not have the funds and you chose to lease, that's fine. But that isnot 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 toone-half of the total cost of the lease. If he can get one merchant a day into alease, 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 bythe 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 otherwords, they give you no discount for paying early. There is very little you can doto get out of one of these leases.

Fortunately, your obligation to pay for a lease, is separate than yourobligation to a merchant processor. Often the sales person will make it appearthey are the same company, but they are not. So you can cancel your merchantprocessor contract, though you will still be liable for your lease. Companies thatput you into equipment leases are usually the same companies that over chargeyou 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 newprocessor, though some companies have proprietary software that cannot bechanged. 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 withcancellation 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 signeda four year lease doesn't it just end in for years? Unfortunately, that is oftennot the case. First you get ripped off in signing a lease, then they get you againif you don't cancel properly. Often the lease will roll over to a month to monthagreement, and will continue to charge you until you cancel. I had one clientwho paid for a four year lease, but forgot about it, and continued to pay foranother five years on a month to month agreement. She paid $6000 for a $350machine!

It generally does not make sense to buy equipment if you can get free

equipment from a merchant processor. However, if you need additionalmachines at your place of business (most companies who give you freeequipment will only give you one free machine per agreement) you may want tobuy 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 themachine to work on their platform. Don't buy proprietary equipment as it worksonly on their platform.

If you choose to buy a used, or older machine, you should only buy amachine that can connect to the Internet and a telephone line. Older machinesusually do one or the other. An IP connection is much faster than a dial upconnection, so depending on your use, you may need a machine that has afaster processing speed. Older machines are often not PCIDSS (payment cardindustry data security standard) compliant, and many times processors will notreprogram these older machines. Older machines may also lack sufficientmemory for a certain processor's software.

Machines are typically reprogrammed over the phone in just a fewminutes. Some processors will want to charge you a fee for this service, but youshould 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 isgoing to make you sign a contract. Then the free equipment is really not free atall as you will be stuck with a processor for a certain number of years, and youwill 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 nextsection, but if the rates are high, this is where the processor is collecting for thefree equipment.

Under most agreements, you are not being given a free machine, but havethe right to use it as long as you are with the processor. When and if you leavethat company, you have to return the machine or you will be charged for it. Itmakes no sense to ever keep one of these machines.

Since you don't own the machine, if it breaks, the processor will usuallysend you a new one at no charge. Sometimes there is a shipping charge, or acharge if you have abused the machine, but that would be rare.

Supplies, which on newer machine are only the rolls of thermal paper, arenot usually supplied free of charge. Some processors provide free paper, butthey have to charge for it somewhere. Review the paperwork and decide whichprogram works best for you.

So why would a processor offer free equipment? From a marketingperspective, 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 tobuy a machine. Also, the processor is buying the equipment in bulk, atwholesale prices, so yes there is an investment, but it is less that it seems. If theprocessor is offering reasonable rates, then they are betting on you turning intoa 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 FREEEQUIPMENT IN CONJUNCTION WITH A CONTRACT WITH NOCANCELLATION FEES, OR A KICK-OUT.


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RIP-OFF NUMBER3:Fees, Fees, and more Fees!

In this book, we cannot possibly cover all aspects of merchant processingfees. 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 ofmarketing 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 receivedfree equipment, then the issues of fees is less relevant. If the merchantprocessor has offered you a reasonable deal to start out with, you have theupper hand in fee negotiations. If your statement seems high to you, just callyour representative and tell them you think your rates are too high and shouldbe 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 noone fee structure that is always right for every merchant. It depends on thebusiness, 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 whois flexible, offers different pricing plans, and is willing to work with you. Again, ifyou have a month to month agreement, with free equipment, you have leverageover the processor, and you can assume they are going to work with you onfees.

Effective Rate

Ultimately what matters is what is your effective rate? Your effective rateis the total fees divided by the total charges for that month. So if the totalcharges were $10,000 and you paid $200 in fees, then your effective rate is twopercent. A processor can quote lots of different rates, etc., but the bottom line isyour effective rate. As a merchant, your mission is to keep your effective rate aslow as possible.

Your effective rate is going to vary depending on what kind of store youhave. If you have a lot of debit transactions, you will tend to have a lowereffective rate versus a store that takes a lot of credit transactions, becauseVisa/Mastercard charges lower rates on debit versus credit. Of course itdepends on how your processor is determining its markup, but keep effectiverate 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 as1.59%, or 1.99%. This is called the merchant discount rate. A lot of times, amerchant will ask a sales person what their rate is, thinking that knowing therate will help them determine if that provider has the lowest fees. As notedearlier, 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 markupfor the merchant processor. The cost of the transaction is composed ofinterchange 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 typeof 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. Interchangeis composed of a discount rate and a transaction fee. The present Visainterchange 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 andVisa/Mastercard do not get any of the interchange fees. Now you might bethinking to yourself -wait just a minute. You're telling me that the card issuingbank 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 fromone financial institution, the retailers bank, to another, the cardholders financialinstitution, each time a Visa payment product is used. The primary role ofinterchange is to create an equitable balance of incentives between acardholders 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 butnecessary because retailers receive in return a number of processing and otherservices from their financial institutions, all or many of which are included in theirmerchant discount rate.

We believe that interchange is fundamental to the value Visa delivers to

retailers, financial institutions and cardholders alike. It assures that financialinstitutions 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 customerservice. It also ensures that retailers benefit from the system throughguaranteed payment, speed, efficiency and reliability that only electronic

payments can bring. By carefully balancing the economics among allparticipants, interchange encourages more retailers to accept Visa and banks toissue Visa to their cardholders.

See, it's a benefit! Just ask Visa.

So technically, retailers pay a discount rate to acquiring banks, but ofcourse, included in that fee are the interchange costs. Maybe you are thinkingthey should pay their own fees, and retailers should pay a small fee for theirprocessing 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 canassume there is a factual basis to higher and lower rates. Different type ofbusinesses get higher or lower rates.

The ugliest part of interchange rates are reward cards. Banks create a lotof reward card categories then they pass these costs onto the merchants. Thebanks get benefits by getting more customers who use the cards more often toget the points, or whatever. The banks would ague that all these awards areencouraging customers to use their cards more often and carry higher balances.

Consumers of the world are using credit cards more and more, and theywant to use those cards and run up balances which earn the banks fees, andthe 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 acquiringbanks.

Most merchants think Visa/Mastercard gets most of the fees, but that isnot true. Assessments and Dues are where Visa, Mastercard and Discovermake their money. Assessments and Dues are charged on every transaction,and your processor should outline these for you in your agreement. If they donot, find out what they are. If you processor can't tell you what they are, tell themto 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 upis not profit it must cover all the overhead of the processor, its sales force, itscomputer systems, etc. Every merchant processor will approach their charges indifferent ways, because there are many different pricing models depending ontheir marketing philosophy, the needs of the merchant, etc. This is why effectiverate is really the only way to compare rates. The mark-up is the only negotiablepart of your rates, as interchange and dues and assessments are set by thebanks and Visa/Mastercard.

Pricing Models

Their are several pricing models. The most common is tiered orbundled/bucket rates. In tiered pricing, the processor usually categorizes


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interchange fees into three pricing tiers called qualified, mid-qualified, and non-qualified. Qualified are usually regular credit cards, mid qualified are usuallyreward cards, and non-qualified refer to corporate or business cards. Qualifiedrates are the cheapest, then mid-qualified, then non-qualified. The tierallocations 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 arebundled into tiers, you usually don't know ahead of time what cards have beenbundled into each tier. (though some processors break this out on theirstatements) A merchant processor can charge a low teaser rate like 0.89% forqualified transactions, but only throw debit transactions into that tier. All othertransactions could go into a higher priced tier. So again, ultimately what mattersis the effective rate. An honest processor will allocate tiers according tointerchange charges. The industry is very competitive, so despite some

obfuscation in tier allocation, ultimately the rates are very competitive for aknowledgeable merchant. That is the key. The more you know, the more you willbe able to recognize the particular strategy of a merchant processor, and thennegotiate. You can always complain about certain cards being put into aparticular 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. Atypical 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 quotedusing the term basis point, a unit of measurement that is equal to 1/100 of onepercent. Expressed numerically as a decimal, that is 0.0001.

Another interchange-plus fee is what is called flat rate pricing. In thismodel, you pay interchange plus a monthly flat rate like $60.00. This can be veryfavorable for a merchant with increasing volumes because it caps the fees to theprocessor. If volumes decline, however, the flat fee on a percentage basis goesup.

Transaction fees

In addition to the basic processing model, the merchant processor willcharge a fixed rate per transaction. Transaction fees are usually a fixed numberlike $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 ifthe transaction fee is high, you will pay more than a tiered rate with a lowtransaction 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 forthe company with a bigger average ticket. So again, the more knowledgeableyou are, the more you are aware of the issues.

The merchant processor also has other fees they can charge likestatement fees, service fees, annual fees, pci compliance fees, pos-wats fees,FANF fees, debit service fees, avs fees, monthly minimums, batch fees, helpdesk 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 everymonth. It is typically around $25. The fees that you accrue during themonth will be credited against this minimum. Some processors give youcredit for your discount rate fees, while others give you credit for all yourfees. Rarely do you get credit for fixed fees. If you do not meet theminimum, 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 ischarged 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. Statementfees 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. Annualfees 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, butkeyed in.

8. Debit Service fees are usually associated with the fees charged by debitnetworks 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 areother considerations in analyzing fees. Does your business mostly swipe creditcards that are present at your store, or do you process transactions that aremostly called in to your store or are they done on the Internet?

If you are mostly processing cards which are present, you will pay lowerinterchange fees because these are transactions which have lower risk. Theperson 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 (mailorder, telephone order), or maybe Internet transactions, you will pay higherinterchange fees, and if you are using the Internet, you will have higher feesrelated to online transactions, including gateway fees. Gateway fees are fromcompanies that route your Internet transactions to the various networks. Cardsnot present transactions are considered more risky, and thus have more fraudassociated with them.

What is Cheapest?

So is interchange plus cheaper than a tiered rate? Usually, but it dependson the mix of transaction fees and other fees. It depends on a multitude offactors, but as long as you have a processor who will give you an initial low rateand will work with you without a contract, or a kick-out, you have the leverage tomake changes as you develop a history with that processor. You will have noreason 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 movebetween different approaches, assuming you a smart enough to bring them up.

When you see super low rates advertised on the Internet, there is usuallya catch. Now you can tell what it is. Let's say a processor is advertising qualified


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rates of 0.49%. Since you know the cost of a qualified visa credit transaction is1.51$ + $0.10, you know it is unlikely that the processor is going into business togo out of business. So you can assume that they are only referring to debittransactions and nothing else. They have to put everything else into mid-qualified and higher rates. You are probably getting ripped off.

However, if a processor dumps both credit and debit into the qualifiedcategory, then this is a more legitimate offer. Since there is a general rise in thenumber of debit transactions, the processor is betting that you will do as manydebit as credit transactions. Debit cost less as you know, so overall they will dofine.

So the key to getting great rates is to work with the right company and theright sales professional. You want a company that will work with you and isavailable for you when there are problems.

Here are a few general rules:

1. The higher your monthly processing volume, the more important it is tonegotiate an interchange-plus or flat rate pricing model. For newmerchants, or volumes lower than $10,000, tiered systems can be justfine.

2. The higher your average ticket, the less concern you should have with thetransaction 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 outtransfers money from your customer's accounts to you.

6. On keyed-in transactions, always use the AVS (address verificationsystem). If you don't, there will be higher fees.

We should probably address a few of the issues related to negotiating yourrates. I will sometimes go into a merchant's shop, introduce myself and aftersome 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 manythings about the business, and most of the items are on that statement. Fewmerchants 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 amonth, what the average purchase is, their volume, etc. Can your life insuranceagent give you a rate quote without knowing your age and health status? Aqualified merchant processor sales representative can be very helpful, and theyare not necessarily the enemy if you are knowledgeable about the quotingprocess.

Finally, many times I will talk to a merchant who refuses to leave aprocessor because they are satisfied. This usually means they have had noproblems 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 overpaying, they are often confused, embarrassed, and incredulous. They wonderhow it is possible that their nice company could be overcharging them. Don't beafraid to get a rate quote. As a merchant, your job is to pay the lowest possiblefees. Banks almost never have the lowest rates.

Since we are discussing fees, it might be a good idea to add a shortdiscussion on how to read your statement. If you can read a statement, you canquickly find rip-offs by merchant processors.


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RIP-OFF NUMBER4:Your StatementMany merchants do not read their monthly statements. They find it

confusing and frustrating to understand what their costs are, so they just giveup. I have been to many merchants, who, when they are asked to provide astatement, go to a pile of unopened envelopes.

It is impossible to go into the process of analyzing all parts of a ratestructure in this book. However, it is important to have a general knowledge ofyour merchant account. One of the problems is that merchant processorspresent their statements in many different formats. Some are very clear andsimple many are purposely very complicated and confusing.

You need to know whether you have tiered pricing. Look for words such asqualified (or qual, or Q), mid-qualified (or mqual, or midq, or MQ), or nonqualified (or nqual, or NQ). Many times charges will be separated by cardbrands. 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 andacross many different charges. They might be labeled as interchange, orprocessing 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 veryconfusing, 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 muchbetter to pay a monthly fee.

Statements all have sections which show your daily deposits calledbatches, or funding summary, or card deposits. Sometimes they will break themdown by card type.

Look for words like discount rate and item rate. This will tell you the twobiggest components of a tiered rate. Then look for other fees.

You should always be looking to lower your costs but it helps to knowwhat they are. If you have followed my advice and do not have a contract, youcan always call your sales representative and have them come in, review yourstatement, and suggest changes.

I am always asked whether it is better to stay with your present processorand negotiate lower rates, or switch to a new processor. It depends. If you arebeing overcharged by a processor from the start, you signed a contract withthem, 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, yourrates are always negotiable and the processor should always be willing to workwith you. You are in control. Why switch if they are always willing to work withyou? However, the new company may be willing to offer you new services thatyour present processor does not offer, like gift cards, an advertising program orother benefits you certainly should consider.


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RIP-OFF NUMBER5: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. Yoursalesperson may not care about you or your business, but knowledge is powerin the merchant processing business.

There are two basic merchant account types card present and card notpresent. As the interchange rates are quite a bit different for each, it is importantthat your account be set up properly right form the beginning, so you canminimize 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 lowfee in that category, you are going to overpay.

Card present is your typical retail merchant account. It means that most ofyour customers who pay with a credit card are present in your store, and youswipe their card. This is a low risk and low fee transaction. When you have thisaccount, 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 ishigher too. If you have just a few transactions which are called in it won't be abig deal. But if your volume is large, you may want to open a second account foreach type of transaction. You can negotiate the lowest rates on each account.

Card-not-present merchant accounts refer to accounts where you expectthat most of your transactions will be where the card is not present. These arealso know as keyed-in transactions. Interchange rates are higher as there ishigher risk to the transaction, and you will pay higher fees. These accounts areused in gym memberships, Internet e-commerce transactions, mail orderaccounts (MOTO mail order/telephone order). If this is the case you cannegotiate lower rates up front. Usually in consideration for better rates, you willpay the same rates for swiped cards. If you do a lot of swiped and keyed-intransactions, you may want to have two accounts, as above.

Another issue which relates to the type of account you have also relates tofees. For instance, when you process keyed-in transactions, or Internettransactions, you need to know what will steps you need to take to minimizeyour transaction costs. For instance, if you don't follow address verification rules,you will overpay.


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RIP-OFF NUMBER6:Keeping Your Account in GoodStanding and Charge-backs

If a merchant processor notes unusual activity in your account, they willoften just close your account, freeze your funds, or block a sale. The reason forthis seemingly irrational behavior is that the processor has extended you crediton your account subject to certain parameters that you set up when you madeyour application.

For instance, if you are a gym, and most of your customers pay $50.00 amonth for gym membership, and then you all of a sudden attempt to place acharge 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 gymequipment business is different than a gym, so unfortunately, in order to protectthemselves, 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 nowyou 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 yourbusiness.

There are other ways for your account to be closed or flagged. Unusualactivity whatever that means, processing transactions for other merchants,

and unusually high volume. The problem is that the processor will close or blockyour account instead of calling you to get an update. They are looking out fortheir 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 fromthe customer's account and before the acquiring bank is reimbursed. So,

justifiably, they are protective of their money. The problem is that they have atendency to treat all merchants like criminals, even though you have just madean innocent mistake.

The other problem is that the processor will often not even call you to tellyou there is a problem. If you made a mistake, and they called you and said weneed a copy of the invoice, or some other back-up material, you might be a littlepeeved, but you would probably understand. They usually, however, close orblock your account, and then when you call them, they tell you what to do to fixthe 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. Gettingon this list can effectively terminate your ability to process credit cards, as it isshared among all merchant processors.

The most common reason to get on the MATCH list is due to an unpaidcharge-back. Once the charge-back is resolved, you will usually get off. Whenthe acquiring back who put you on the list is made whole, they have no reasonnot to take you off again.

To keep your account in good standing, understand the rules. Make sureyour account is set up properly from the beginning, and that you understandyour merchant processor's expectations. Otherwise, you could get slammedwhen you least expect it. Conduct your business with integrity. Don't be afraid tocontact 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. Mostcustomers are honest, as are most merchants. Anything can happen, however. Imet a merchant who sold electronic gear. He had an online site, and sold some

electronic equipment worth about $10,000. He collected all the properinformation for the sale, the customer's address by using the AddressVerification 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-backbecause the card was stolen. So he was out the merchandise, and out themoney. He set up a payment plan to the acquiring bank, and was put on theMATCH 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, insteadof it being a stolen card? The system allows for easy extortion from acardholder, who just wants to steal merchandise. The banks will issue a charge-back almost immediately, even when the cardholder may be a crook and haveno proof supporting their claim. Now the merchant is presumed guilty and has todefend the claim!

When a charge-back is issued, you will receive a notice from theprocessor, 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 charge-back can be initiated. American Express does not. The merchant then has todecide to either grant or deny a refund. If he decides to deny a refund, then thewhole situation will be reviewed, and ties go to the customer.

The best defense, is a good offense. Make sure you have a plan whichyou follow in large credit card transactions to protect yourself. Have the originalsigned credit card receipt. Have an invoice, which is signed by the customer,

indicating satisfaction with the sale, and receipt of the merchandise. Get deliveryconfirmations. Get proper ID when you can, telephone numbers, and make thecustomer come into the store when possible. Have a clear refund policy. Largee-commerce merchants like Amazon have very sophisticated fraud protectionsoftware programs which monitor their transactions. The average small


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merchant can't afford such programs. Save your paperwork, as a customer has180 days to issue a charge-back claim.

To add insult to injury, some merchant processors will charge you aretrieval 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 thename of your business that appears on the customer's statement, different thanyour trade name? If your corporate name is a strange sounding one, and totallyunlike your trade name, a customer may have no idea who you are and claim acharge-back.


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RIP-OFF NUMBER7:American Express

American Express (AMEX) charges much higher fees thanVisa/Mastercard.

American Express issues merchant accounts directly to merchants, andcards directly to consumers. They operate what is called a closed-loop system.They own and completely control their network. Visa/Mastercard is an opennetwork, and thus there are competing interests between acquiring and issuingbanks, and Visa/Mastercard, which force lower rates. American Express cancharge 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 adiscount rate and no transaction fees. They do charge higher fees for keyed intransactions versus swiped.

In addition to charging high discount rates, AMEX transactions take muchlonger to settle. Visa/Mastercard typically settle in 24-48 hours, which meansyou 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 reasonis that depending on your business, you may not have a choice. 70% of AMEXvolume is in the restaurant, tourism, and entertainment industries. People usetheir card because they get points for travel, etc., so high ticket item merchantscan 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 toaccept the card.

You can open an AMEX account directly, or ask your processor to do so. Ifyou 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 merchantprocessors. It speeds up settlement times and incorporates AMEX data into yourregular 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 thisprogram.


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RIP-OFF NUMBER8:

Closing Your AccountMerchants 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 orclosed, or maybe your present processor has raised their rates.

Here is where you have to be very careful because it is a processor's lastopportunity 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, ornotice requirements?

2. Have you batched out any pending charges? You want to make sure allyour money is in your bank account before you cancel.

3. Cancellations should be done in writing. Call the processor to make surethey received notice.

4. Don't make a cancellation effective until the processor has taken out ofyour account the final fees you owe on your transactions.

5. You may want to block your account or close your existing account if youexpect a processor to rip you off. I have seen examples where a merchanthad 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 theprocessor 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 toVisa/Mastercard rules. Here is a quick review:

1. You can set a minimum purchase to use a credit card, but it must be $10or 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 cashtransactions.

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 andsigns 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 nottake debit cards. He thinks that if he has a pin pad, this means he is taking debitcards, and without one he is not. This is not true.The difference in thetransaction is that a signature debit goes through the Visa/Mastercard networkand is subject to interchange fees, instead of the Pin Debit network and besubject to debit network fees.

Many merchants and consumers do not understand the differencebetween a debit and credit transaction. Many customers think debit transactions

are safer as far as security is concerned, or somehow cheaper for them. This isnot true. The difference between the two transactions depends on severalfactors, but as a general rule, the costs are similar unless you are doing largedebit 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 notreally. But you should know enough now to stay out of trouble. The main point isto 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 accountwith no contract and free equipment, and low initial fees, you don't have much tolose, because you can always call your sales representative in to review yourrates.

Probably the most important factor is getting an agent you can trust. If heis knowledgeable, answers your questions, and avoids the rip off areas, then heis looking out for your interests. A good agent is not going to waste their timecoming out to see you, and then lying to you, in a situation where you are notsigning a contract or leasing equipment. There is no advantage.

If you need any additional information, please do not hesitate to contactme.

MICHAEL [email protected]

Documents

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