We’re going to start with the summary and work backwards for those of you who prefer the Cliffs Notes version:
So let’s summarize:
1. You may know and trust your bank or big company but you generally will not get the best deal.
2. There’s no right way of acquiring a machine. Just know why you’re doing whatever you’re doing to acquire it. But make sure it’s PCI compliant.
3. Shop around to see what tiered rate plans are offered and try to determine what kind of cards you’ll be accepting before you lock into a rate plan.
4. Look at the totality of the contract and don’t get caught up on any one part unless you find it totally unreasonable.
5. Processors are looking for lower ticket, high volume, swiping (not internet or phone sales) merchants, so if you fit that profile, ask for better rates.
6. Negotiate. Don’t just focus on your debit rate (the low, often quoted rate).
True story: Once upon a time, a nice young, reasonably intelligent man decided he wanted to sell the t-shirts he designed and screen-printed at local street fairs and eventually he knew he wanted to open his own little shop. He also knew that nobody carries cash these days and he’d lose purchase-ready customers if he couldn’t accept payment cards. He also knew the mobile technology exists to accept cards pretty much anywhere. But how exactly does it all work?
So he Googles the following phrase, “How do I get started in credit card processing?”
What did he find? Advertisements. Self-interested, cluttered websites with big promises about the lowest rates, terminology he wasn’t familiar with, and no reliable information whatsoever about how to get started. Sound familiar?
So, figuring that the big corporation that sells everything in bulk gives him the best deals on everything else, it must be the place to go for the best processing deals. Well, maybe… He gets average rates and average equipment. It works. It’s fine. Gets the job done. But only after he signs the contract does he find out he could have done much better if he’d been able to find a little more information.
Now, perhaps you’re saying, it may not be the best deal but at least I know if I have a problem, I’ll know where to go and I trust them. If you’d prefer to pay a little more with a bigger company you’ve heard of and worked with, such as your bank, that’s totally understandable. But we will give you some general guidelines that will guide you in the right direction if you choose to seek out the best deal for your merchant processing.
The Funds Transfer Alliance only processes credit and debit (and gift cards, checks, etc.) for low risk merchants that have proven long-term success and established track records. However, we have heard the following questions time and time again from our entrepreneurial friends, “Should I just process with so and so’s recommended processor?” “Why is this process so confusing?” “What should my rates be?” “Why can’t I just get a quote?” “What is interchange?” “Should I take American Express?”
Hopefully, this blog will answer those questions and more.
Let’s start with a little lesson on the general operating principles of the payment card industry from the merchant perspective.
To process credit cards you need a merchant account. A merchant account is essentially a contract between You, the merchant, and the acquiring bank (for example, The Funds Transfer Alliance) to allow you to take credit cards for payment. The acquiring bank is a financial institution affiliated with Visa/Mastercard or a processing team that communicates on your behalf, through your terminal, with your customer’s bank to make certain they have enough money or credit in their account to buy your product or service. At the end of the day, the acquirer totals up all the money you’ve authorized that day, collects it from your customers’ banks, and deposits it your account.
Now, this process requires incredible levels of security, technology, and manpower, including tech support, auditors, analysts, data input, admin, equipment specialists, merchant support specialists, underwriters, etc. Processing credit cards is far more than swiping cards and waiting for a receipt. There are vast human and electronic networks behind the terminal to make sure each transaction runs smoothly. Needless to say, it’s not free. So you, the merchant, pay a small fee to Visa/Mastercard, etc. and to your processer for the work they perform to get you your money each day.
The fee structure associated with this is called Discount or Discount Rate, the largest portion of which is called the interchange fee. Interchange is the electronic exchange of financial and non-financial data regarding credit card sales. The interchange fee is a fee paid by an acquiring bank to an issuer such as Mastercard and Visa for transactions entered into interchange. The interchange fee is a percentage applied to each dollar transacted, based on Visa/Mastercard regulations. While Visa, Mastercard, AmEx, and others have their own unique interchange regulations, generally, you will be charged one of several different rates based on what type of card you have accepted. This is a called a tiered system and it drastically simplifies your statement by using card type ranges instead of listing a different fee for every unique type of card you have accepted. These tiers are called qualified (cheapest), mid-qualified, and non-qualified (most expensive).
So, if you take a debit card and the customer enters their pin, that is considered a safe transaction. And the least expensive. If you take someone’s card over the phone or Internet portal and don’t require any additional information about the cardholder such as address, etc., that is considered much less secure and therefore more expensive. Additionally, have you ever had an airline or other type of rewards credit card? Who do you think pays for those rewards? It’s not the issuer. It’s You, the merchant who accepts the card, in the form of a higher interchange fee. American Express cards are more expensive for merchants as well, which is why some merchants choose not to accept them. However, many of your customers will value their ability to use AmEx cards so you should think long and hard about whether or not you will accept them.
In addition to the discount rate, which includes a transaction fee bundled in the interchange fee portion, you will also be charged a transaction fee for each transaction that hovers around $.20-$.30. This fee is standard in the industry and goes towards maintaining the acquirer’s infrastructure.
Ok, so how do you know if you’re getting a good deal? Well, unfortunately, it’s hard to make blanket generalizations because there are so many variables. However, human nature seems to generally suggest that the less you pay for a quality product the happier you are so we’re going to assume that you want to pay the least for your transactions and offer the best and most reliable service to your customers. This means low rates, low transaction fees, few additional fees, and reliable service.
Typically, a merchant service provider (acquiring bank) seeking the business of rate shoppers will quote one rate and in little legal print there will be some information about the other rates. The rate they quote boldly is the rate for debit, which is obviously their cheapest rate. Sometimes, this rate leads you to believe you are finding a great deal, however, higher than usual mid and non-qualifying rates more than make up for the low debit rate. On the flipside, if the preponderance of your cards are debit, this may be the best deal for your business.
We would love to be able to tell you that you should have at least X.XX% rate for debit and this rate for your quals and mid-quals, etc., but a lot of the confusion for new merchants stems from the fact there is truly no “one size fits all” solution. Let’s just say this, if your debit rate is above 2.5%, you may not be getting the best deal. If you have any rates in the 4% range, unless there’s a very good accommodating factor, that’s just too high. How good your merchant account fee structure is depends completely on how well it fits your customer card use profile. You could have a rock bottom debit rate but if all of your customers use rewards credit cards there is potentially no benefit. So it helps if, in advance of opening your shop, you have an idea of who your customer base will be how they’ll be paying. Do a little research with your competitors. If it’s business travelers, the mid and non-qual rates will be important to you. If it’s students and young professionals buying your t-shirts, you have a decent combination of debit and credit. Ultimately, you want the best rate at every level but there is always room for negotiation.
In terms of equipment, it is very important that its security features are up to date (having a secure machine is part of PCI compliance, which every merchant must demonstrate). If you have a data breech because your equipment is noncompliant, that is very bad news. So you want new, up to date equipment and nowadays all processors are aware of PCI compliance regulations and will (hopefully) set you up with a compliant machine.
There are many ways to procure a terminal or Point of Sale system (typically for restaurants or companies with vast inventories), including outright purchases, rentals, leases, and deferral programs. Each method has its advantages and disadvantages. Our advice is to shop around and make sure the plan you choose fits your needs. There are as many unique procurement plans as there are companies. One thing to keep in mind is that you don’t necessarily have to put any money down to open a merchant account, including the necessary equipment.
Other factors to consider:
Will your money be in your account the next day? It is definitely possible to have your money in your account the next day as long as you “batch” before a set time. Batching out is the process of telling your acquirer and the banks, “Ok, I want to submit all of these transactions for payment.” Your terminal can be programmed to automatically batch or you can manually batch each business day.
Sometimes your own bank will tout next day deposit of your funds as an advantage of processing with them, but it is definitely possible with many different processors. Additionally, it may appear to be more convenient to process with the bank where your business checking accounts are located but it is definitely not necessarily more cost effective. Usually, it’s not. It is not uncommon for The Funds Transfer Alliance to save merchants a significant amount off their processing fees for those who were processing with their bank for the perceived convenience and trust of the known commodity. Ultimately, your processing system should be something that you shouldn’t even have to think about no matter who the processor is, so convenience should be a non-issue.
Many people find it counter intuitive that the prospective merchant needs to be approved for credit worthiness when you’re the one accepting money from others. However, we live in an opportunistic world and honorable merchants are very important to a functional system. Credit card fraud is a huge industry and is possible at every level of the transaction. That is why when you apply for a merchant account, you’re asked how much your average transaction will be, are your products or services seasonal, etc. Each transaction is monitored by various algorithms to make sure it falls within a certain range that is determined to have a high probability of legitimacy.
Your processor may charge you fees on top of your processing fees. I’m going to say it like this: in many cases, these fees are negotiable. We have been in the industry a long time and have seen a lot of additional fee categories. There are perfectly plausible reasons why these fees are legitimate and sometimes these fees are padding. As always, each case is unique. It’s definitely in your best interest to ask for many of the additional fees to be removed. Worst case, your processor explains why the fee is necessary.
Cancellation Fees
Cancellation fees are fairly standard in the industry but, again, if you have an issue or feel uncomfortable with it, ask your prospective provider and see if they’re willing to work with you. There are legitimate costs associated with bringing new merchants onto a network, which they attempt to prevent losing by including these in contracts, but everything is negotiable. Don’t be afraid to ask.
Paypal, etc.
Many people are inclined to use Paypal, Google Checkout, Square, and other for their online processing needs. Typically these are easy to install and customers feel comfortable with them because they feel there are certain safety mechanisms built into them. The downside is that they are universally expensive. Very expensive. They typically have standard set fees, which run a little bit above 3%. If you conduct one transaction a year, these may make sense, but if you’re running a lot transactions or for high dollar amounts, you can do much better with a smaller, more competitive processor.
After reading all this and you’re still unsure and you’ve got a contract and you want to know if it’s a good deal, email us at info@the-fta.org and we will answer your questions to the best of our abilities. This is not an attempt to win your business. We will not attempt to sell, persuade, or influence you in any way. Just the facts, as we see them. We hope you take advantage of it.
With the holiday season here and fraud levels at their annual peak, it's important to remember your business bears the primary responsibility for ensuring credit card transactions are legitimate before filling orders. If a credit card is stolen, and you fail to take the important steps required to verify the legitimacy of the order, you are left holding the bill when the rightful card holder challenges the purchase. Don't make the mistake of thinking an approval code ensures a transaction's legitimacy. It doesn't! It simply indicates the card is active and the funds are available.
