Your Money Adviser: Credit Issuers Making It Easier to Know Your Score

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Your Money Adviser: Credit Issuers Making It Easier to Know Your Score

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DealBook: Barclays and Credit Suisse Post Strong Earnings in Investment Banks

Darren Staples/ReutersBarclays’ investment bank benefited partly from a bullish stock market performance in America.

LONDON — As European policy makers push financial institutions to cut back on their risky trading activity, some of the region’s largest banks are becoming more reliant on their investment banking operations to bolster performance.

On Wednesday, the British bank Barclays and a Swiss rival, Credit Suisse, both reported strong first-quarter earnings for their investment banks that helped to offset some sluggish growth in other divisions like retail banking and wealth management.

The healthy performance comes despite a push by European politicians to limit firms’ exposure to financial risks and to promote lending to local economies.

New tougher capital requirements have forced European banks to shed billions of dollars of assets since the financial crisis began. A proposed cap on banker bonuses that will become effective at European institutions next year has led to fears of a mass exodus of firms’ top earners to international competitors.

The two banks’ first-quarter earnings reflected the strength of investment banking.

Barclays’ quarterly pretax profit for its investment bank rose 11 percent, to £1.3 billion, or $2 billion, or roughly 74 percent of the company’s combined pretax profit over the period.

Over all, Barclays’ quarterly profit, when adjusted for one-time charges, was £1.8 billion, down 25 percent from the same period last year, which missed analysts’ estimates. The fall was linked to £514 million ($784 million) of costs related to a restructuring that includes 3,800 layoffs and a £235 million ($359 million) charge connected to the value of the bank’s debt.

Barclays’ investment bank benefited from renewed deal activity and a bullish stock market performance in the United States, where it now generates around 50 percent of its revenue. For example, the bank is advising Dish Network on its proposed $25.5 billion takeover of Sprint Nextel. “The reality is that investment banking is becoming more dominant for Barclays,” said Ian Gordon, a banking analyst at Investec in London. “The first quarter was a blowout performance.”

At Credit Suisse, pretax profit in its investment banking division rose 43 percent, to 1.3 billion Swiss francs, or $1.4 billion, partly driven by a strong performance in the bank’s fixed-income sales and trading business. In contrast, earnings from the company’s private banking and wealth management business fell 7 percent, to 881 million francs, over the same period.

Credit Suisse reported a net profit of 1.3 billion francs ($1.4 billion) in the first quarter, compared with a profit of 44 million francs ($47 million) in the same period last year, when the bank booked a loss of 1.6 billion francs ($1.7 billion) on the value of its own outstanding debt.

Analysts said the bank’s strong earnings were a result of a cost-cutting program started by the chief executive, Brady W. Dougan. The company’s investment banking division also benefited from a pickup in global stock markets in the first three months of the year.

“The investment bank was the main driver with impressive cost management,” Kian Abouhossein, a banking analyst at JPMorgan Chase in London, said in a research note to investors.

Shares in Barclays fell 1.3 percent in London on Wednesday, while Credit Suisse’s stock price rose 1.5 percent in Zurich.

Attention will now turn to other large European banks that will report their first-quarter earnings over the next few weeks.

Deutsche Bank, the largest bank in Germany and one with a major investment banking division, will announce its results on Tuesday, as will the Swiss banking giant UBS. Analysts are expecting a fall in UBS’s first-quarter net profit as the company continues to carry out sharp reduction in its investment bank, which includes around 10,000 job cuts, to focus on its wealth management business.

The continued reliance on investment banking at some of Europe’s largest institutions follows efforts by politicians and top banking executives to reshape the Continent’s financial sector.

Some banks, like UBS and Royal Bank of Scotland, are reducing their exposure to risky trading assets, while others, like HSBC and Standard Chartered, are increasing their operations in fast-growing emerging markets.

Antony P. Jenkins, Barclays’ chief executive, also is trying to rehabilitate the company’s image after a series of recent scandals. Last year, the bank agreed to a $450 million settlement with the United States and British authorities after some of its traders were found to have manipulated crucial global benchmark rates for financial gains.

DealBook: Barclays and Credit Suisse Post Strong Earnings in Investment Banks

Darren Staples/ReutersBarclays’ investment bank benefited partly from a bullish stock market performance in America.

LONDON — As European policy makers push financial institutions to cut back on their risky trading activity, some of the region’s largest banks are becoming more reliant on their investment banking operations to bolster performance.

On Wednesday, the British bank Barclays and a Swiss rival, Credit Suisse, both reported strong first-quarter earnings for their investment banks that helped to offset some sluggish growth in other divisions like retail banking and wealth management.

The healthy performance comes despite a push by European politicians to limit firms’ exposure to financial risks and to promote lending to local economies.

New tougher capital requirements have forced European banks to shed billions of dollars of assets since the financial crisis began. A proposed cap on banker bonuses that will become effective at European institutions next year has led to fears of a mass exodus of firms’ top earners to international competitors.

The two banks’ first-quarter earnings reflected the strength of investment banking.

Barclays’ quarterly pretax profit for its investment bank rose 11 percent, to £1.3 billion, or $2 billion, or roughly 74 percent of the company’s combined pretax profit over the period.

Over all, Barclays’ quarterly profit, when adjusted for one-time charges, was £1.8 billion, down 25 percent from the same period last year, which missed analysts’ estimates. The fall was linked to £514 million ($784 million) of costs related to a restructuring that includes 3,800 layoffs and a £235 million ($359 million) charge connected to the value of the bank’s debt.

Barclays’ investment bank benefited from renewed deal activity and a bullish stock market performance in the United States, where it now generates around 50 percent of its revenue. For example, the bank is advising Dish Network on its proposed $25.5 billion takeover of Sprint Nextel. “The reality is that investment banking is becoming more dominant for Barclays,” said Ian Gordon, a banking analyst at Investec in London. “The first quarter was a blowout performance.”

At Credit Suisse, pretax profit in its investment banking division rose 43 percent, to 1.3 billion Swiss francs, or $1.4 billion, partly driven by a strong performance in the bank’s fixed-income sales and trading business. In contrast, earnings from the company’s private banking and wealth management business fell 7 percent, to 881 million francs, over the same period.

Credit Suisse reported a net profit of 1.3 billion francs ($1.4 billion) in the first quarter, compared with a profit of 44 million francs ($47 million) in the same period last year, when the bank booked a loss of 1.6 billion francs ($1.7 billion) on the value of its own outstanding debt.

Analysts said the bank’s strong earnings were a result of a cost-cutting program started by the chief executive, Brady W. Dougan. The company’s investment banking division also benefited from a pickup in global stock markets in the first three months of the year.

“The investment bank was the main driver with impressive cost management,” Kian Abouhossein, a banking analyst at JPMorgan Chase in London, said in a research note to investors.

Shares in Barclays fell 1.3 percent in London on Wednesday, while Credit Suisse’s stock price rose 1.5 percent in Zurich.

Attention will now turn to other large European banks that will report their first-quarter earnings over the next few weeks.

Deutsche Bank, the largest bank in Germany and one with a major investment banking division, will announce its results on Tuesday, as will the Swiss banking giant UBS. Analysts are expecting a fall in UBS’s first-quarter net profit as the company continues to carry out sharp reduction in its investment bank, which includes around 10,000 job cuts, to focus on its wealth management business.

The continued reliance on investment banking at some of Europe’s largest institutions follows efforts by politicians and top banking executives to reshape the Continent’s financial sector.

Some banks, like UBS and Royal Bank of Scotland, are reducing their exposure to risky trading assets, while others, like HSBC and Standard Chartered, are increasing their operations in fast-growing emerging markets.

Antony P. Jenkins, Barclays’ chief executive, also is trying to rehabilitate the company’s image after a series of recent scandals. Last year, the bank agreed to a $450 million settlement with the United States and British authorities after some of its traders were found to have manipulated crucial global benchmark rates for financial gains.

You're the Boss Blog: Processing Credit Cards and Anger

The struggles of a business trying to survive.

I’d like to thank everyone who took time to comment on my posts on searching for credit card processing. Many of those comments shed additional light on aspects of the experience that I, for the sake of brevity and clarity, left out. As I hope I made clear, the world of card processing is extremely complex. Here are a few further thoughts, in no particular order:

Obviously, there is no one best solution for everyone. You will need to identify the size of your typical transaction and project a monthly charge volume in order to start the shopping process. My situation is unusual in that my transaction size is large and I never swipe cards. If I were running a restaurant or a store, I would have different needs. But I am sure that every merchant would benefit from a deal that has no fixed term and that you can get out of at minimum cost. Many providers are willing to waive term requirements and cancellation fees.

It also seems that leasing a terminal is a bad idea — it is much less expensive to buy one. Another warning that everyone should heed is to enter a personal identification number with debit card transactions. If you don’t, you will be charged very high interchange fees, instead of the low costs mandated by the Durbin Amendment.

My posts concentrated on the structure of the deal and short-changed discussion of pricing alternatives. Commenters were divided into two camps: those who favored interchange-plus pricing and those who liked a fixed fee, as offered by services like Square and Stripe. Nobody had anything good to say about tiered pricing (that link goes to an article that is informative but has a definite point of view). And there are still other pricing options out there. If you are looking for a short, authoritative look at all of the pricing alternatives, I wish you luck. The most comprehensive page I found was at Wikipedia. It offers concise definitions for the terms you might run across in your search but little guidance as to what might be the best choice. All of the other information I ran across was provided by someone who was trying to sell a particular type of transaction and should be understood in that context.

That said, I was intrigued with the service offered by CardFellow. This site allows you to submit information about your business and get offers from various processors. I tried it out and was quickly contacted by a company that promised me interchange plus .1 percent, a very attractive rate, along with a no-term contract and waiver of all cancellation fees. That seems to be about as low a price as anyone will offer. The accompanying agreement that I reviewed had all of the usual unfair provisions — the acquiring bank can levy a reserve account and change the deal any time it wishes. I have not seen an agreement that omitted all of this, but perhaps someone, somewhere, is offering one (let us know!). What I liked about CardFellow was the opportunity to get a variety of quotes and the site’s well written blog (not unbiased, but informative).

If you are looking for a single place to see reviews of various merchant service providers, take a look at Merchant Maverick. I came across this site while searching for information on CardFellow, and I read a few reviews. I liked the format. I have no idea whether it is doing a good job, but at least it offers a point of view. It didn’t offer reviews of PNC or Emerald World, but it did review Wells Fargo and WorldPay, both of which I have dealt with — and those reviews seemed to comport with my limited experiences. Merchant Maverick also has reviews of point-of-sale systems and shopping-cart providers — something for everybody!

Nobody had much to say about American Express. It seems as if we are all stuck with the company’s high fees and slow payment. Last year, about a third of my card transactions were American Express transactions, and I paid a little less than 4 percent in fees. I should probably stop accepting American Express — it is of no benefit to me, as a merchant. I would bet that most of the people who offer us an American Express card also have a regular credit card and that refusing it wouldn’t cost me sales.

One point that did not come up in comments but that I thought about a lot during this ordeal was whether worrying about credit card fees was a good use of my time. Here’s the sad math: even if I cut my card processing costs in half, my savings would be 2 percent of $400,000. The $8,000 savings is not insignificant, but there are many issues I could have spent time on that might have yielded similar or greater savings.

The more I learned about the credit card industry, the angrier I got, but rage is not a great reason to burn a lot of hours on a project. My free time is precious. I always have a list of things I can do to improve profitability. For example, I could have been working on my pricing spreadsheets to make our quotes more accurate. Or I could have dug deeply into our labor costs, or spent time on the shop floor making sure our procedures are as efficient as possible.

Credit card costs are on that list, but a rational analysis probably wouldn’t place them at the top. There is much more money to be saved elsewhere. Of course, the service providers know this, and the market is clearly structured on the assumption that this is true for the vast majority of small businesses — it takes a huge amount of time to figure out what is going on, and at a certain point, most merchants will give up and accept the deal that is being offered, just to get it over with. That’s what I did – after all of the time I spent with Wells Fargo and Citizens, I decided to just pull the trigger on Emerald World. It was a much better deal than I had at the time with PNC, so I went ahead with it. Now that commenters have exposed more options for my consideration, I may or may not revisit the issue. I’ll work with Emerald World for a while and see what happens.

I hope that the hours I spent on this project are of use to you. If anyone has anything further to add, please comment.

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.

You're the Boss Blog: My Search for a Credit Card Processor, Part 3

The struggles of a business trying to survive.

In Wednesday’s post, I wrote about my decision not to accept the credit card processing offer I had received from Emerald World. That left me at PNC, where I had my business accounts and where I now understood that I was probably paying more than necessary for card processing.

I decided to take the time to consider switching banks, and I did some looking around. In the end, I focused on two relatively large banks: Citizens Bank, which had acquired Mellon Bank, where I had banked throughout the ’80s and ’90s, and Wells Fargo, which had swallowed up the bank that had my personal accounts.

I met with a banker from Citizens first. He and I had been working together for some years — he has tried hard to get me to switch all of my banking to Citizens, and I have played coy. But now I was ready to make the switch, as long as I got a good deal on merchant services. Still smarting from my experiences with PNC and Emerald World, I told him up front that credit cards were going to make or break the deal.

He quickly arranged a follow-up meeting with a sales person, Dale, who works for WorldPay, the card processing firm associated with Citizens. Just as I had with Emerald World, I provided Dale with a couple of my merchant services statements to analyze, and she came back with some extremely attractive pricing: My cost for each transaction would be the interchange fee associated with the client’s card plus 0.1 percent. This compared with the interchange plus 2.1 percent I was paying PNC and the interchange plus 0.98 percent that Emerald World had offered.

That sounded outstanding, but now I knew what might be coming, so I laid it out for her: I didn’t want to have to put up a reserve account to do business. I was a good customer, with a perfect track record, who would be generating substantial fees. My regular operating accounts had plenty of cash in case there was a chargeback. She promised to do her best.

The meeting with Dale happened on a Friday afternoon. The following Tuesday she called with news: the underwriters at WorldPay wanted a reserve account, too. “How much?” I asked.

She responded: “Forty thousand dollars, funded by taking out 10 percent of the first $400,000 in transactions.”

I was floored. This was four times the amount that prompted me to reject Emerald World. I told Dale it was unacceptable. She promised to go back and see what she could do.

A couple of days later, she called back: “Great news! I got them down to $20,000.” I wasn’t super excited about that, but the pricing on the transactions was so low that, even with the reserve account, the deal made some sense. My cash position when we had this conversation was good, much better than it had been in the summer. And a $20,000 reserve fund certainly wasn’t out of the question if it would save me $10,000 a year or more in processing fees.

So I asked her some questions about the reserve account. Whose name would it be in? Where would it be located? Would I have access to it through the Web and be able to check balances the way I could my regular accounts? Would its necessity be reviewed on a regular basis? If I ended my relationship with WorldPay, how long would it take for me to get the money back? These did not strike me as unreasonable questions, considering that it would be my money in the account. Dale promised to find out.

She called back a couple of days later and told me that the reserve account would be operated according to its description in the merchant services agreement. This prompted me, for the first time, to take a close look at the agreement. Every deal I have ever seen includes one, but they vary somewhat in length and format. They are close cousins to the ubiquitous agreements that you encounter on Web sites, and their appearance — the size and type of font used, the overall layout of the document, the tiny text packed in dense blocks — seems designed to prevent easy reading and comprehension. But in general, the agreements I reviewed were written in standard English that was possible for me to understand.

The agreements define the entire scope of the interaction between processor and merchant. The best of them, the PNC agreement I had signed in 2005, was quite readable, once you got past how it looked, and it actually had useful advice about avoiding problems with customers and what to do to prevent chargebacks. The Emerald World agreement was much closer to unreadable: dense blocks of text, lawyerly prose, clearly intended to cause eye glaze. The WorldPay and Wells Fargo agreements fell between those extremes.

When I reviewed the WorldPay agreement, I was most interested in seeing what it said about reserve accounts, and I found the relevant language easily. It was quite unsettling. Who would hold the money? WorldPay. Would I have access to any information about what was in the account? Not specified. Would the original, agreed-on amount — in this case $20,000 — be sufficient? WorldPay would decide, and it could increase the amount any time it wanted at “WorldPay’s commercially reasonable discretion.” WorldPay could also take more money straight out of my bank accounts any time it wanted without notice.

In fact, every aspect of the deal was subject to “WorldPay’s commercially reasonable discretion.” Ultimately, WorldPay could demand any amount it wanted, it could raise or lower that amount whenever it wanted, and it could keep it for as long as it wanted — even if the agreement had terminated. There was no mechanism for review or appeal by me. I went back and forth with Dale a few times, trying to find some way to modify these terms, but it was no dice. So I rejected the deal. Sort of.

In effect, without realizing it, I had already accepted it. Only now, reading carefully through the WorldPay agreement and then checking the separate form that Dale had filled out when we first met, did I realize that my signature on the application, which I had considered routine at the time, indicated that I agreed to the terms and conditions. And two of the terms and conditions were particularly interesting in this context.

The first stated, “This agreement shall be binding upon the customer upon the earlier of (a) the date upon which the first transaction is processed by WorldPay … for the customer, or (b) the execution of this agreement by the customer.” And that had happened when I signed the application, directly under text that stated, “By signing below, I (1) agree to the WorldPay terms and conditions for customer processing agreement.”

The second of the terms I found interesting was that I was agreeing that WorldPay would be my exclusive merchant provider. “Customer agrees that throughout the term of this agreement, it will not use the services of any bank, corporation, entity or person other than WorldPay to provide services similar to those contemplated by the Agreement.”

Technically, though I had entered it unwittingly, the agreement was already in force. I went back and checked the PNC agreement I had signed in 2005. It said the same thing. Apparently, simply by applying for WorldPay’s services, I had violated the PNC agreement. I looked at the Emerald World application and found the same language. That meant I had contracted with all three processors, and I was violating all three agreements.

So far, no one has made an issue of it. But forewarned is forearmed, so when I set up a meeting with the Wells Fargo bankers, I decided to play the negotiations a bit differently. I wanted to see if I could clear up the reserve account issue without signing another agreement.

Wells Fargo seemed eager to make a good impression. It sent over a team of four bankers in nice suits, an unusual sight in my office. And they too quoted attractive pricing: interchange plus 0.55 percent, cheaper than Emerald World but more expensive than WorldPay. I laid it out for them just as I had for Citizens: I was interested in transferring all of my business banking, but the merchant agreement would be the deciding factor. I told them about my experiences with WorldPay and Emerald, and I said that I wanted to know whether a reserve account would be required, exactly how much it would have to be and whether I would have access to the account when I wanted.

The Wells Fargo sales person said she would do her best to come up with answers. I don’t know what battles she may have fought when she went back to her office, but it took her several weeks to get back to me. And in the end, she wasn’t able to come up with information as to whether a reserve would be required — unless I signed the application.

That’s because underwriting would make that decision, and underwriting wasn’t going to say anything until I signed. Which I was unwilling to do, because the Wells Fargo application, like the others, indicated that by signing, I was accepting their terms. And the terms stated that the reserve amount would be subject to the decisions of Wells Fargo, without my input. It could come back with any number at all, and it wouldn’t be revealed until I had agreed to buy.

Would you buy a house, a car, or even a candy bar, under those terms? On top of that, every credit card agreement I saw required my personal guarantee, as officer of my company, to pony up my own money if things went bad. And there were so many ways they could go bad. I have substantial personal finances in Wells Fargo accounts — it appeared that just by signing the application I would be putting them at risk. I rejected the deal.

Friday: I draw some conclusions — and make a decision.

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.

You're the Boss Blog: What You Need to Know About Credit Card Processing

The struggles of a business trying to survive.

Starting on Tuesday morning, I am going to publish a series of posts about my search for an honest and affordable processor of credit card transactions. It was not an easy search, but I learned a lot — much of which I never wanted to know but some of which I think may be helpful to other business owners.

As a warm-up to the series, I offer this primer on card-processing basics. I think this background information will be helpful if you read the series or, more important, if you, too, have struggled to arrange credit card processing. My own search began when I was tipped off that I was paying more than necessary for my transactions. Many years ago, I agreed to let my bank handle them, and since then, I had given the topic little thought.

I wrote about my issues with my bank in a previous post, including my feeling that my credit card processing — also known as merchant services — was costing me too much. That feeling was set off by a cold call last spring from a processor that was interested in seeing whether it could lower my transaction costs. That prompted me to do some research.

I soon learned that there are four parties involved with every credit card transaction: the merchant receiving the payment (“merchant”), the bank that the merchant uses to provide processing services (“acquiring bank”), the bank that issued the card to the customer (“issuing bank”) and the customer (“customer”).

The money in the transaction is lent by the issuing bank to the customer, who will either pay off  the debt within 30 days or add it to a balance and pay interest on it. Technically, as I will explain in a moment, the acquiring bank is also making a loan to the merchant. Fees are deducted by both the issuing bank and the acquiring bank, so that the amount of money that ends up in the merchant’s account is less than the amount charged the customer.

The issuing bank’s fee is called the interchange fee. The acquiring bank’s fee is called the discount rate, and it might be supplemented with other fees. Both the interchange fees and the discount fees are expressed as percentages of the transaction, although a small fixed amount may be associated with each transaction.

Many banks issue credit cards to customers and act as issuing banks. These banks hand out cards of a certain brand, with Visa, MasterCard and Discover the most common. American Express is a little different — it acts as both the issuing and the acquiring bank and charges a single fee directly to the merchant but will administer the transaction through the acquiring bank so that a merchant can process American Express transactions through the same terminal as the other cards.

Those interchange rates are published information — you can see Visa’s fee structure here and MasterCard’s here. The exact interchange fee charged to the acquiring bank (and the merchant) is determined by several factors: whether the card is present at the transaction, what type of card is used (a rewards card? a card used by the government for purchasing?) and what type of merchant accepts the card.

Yes, the type of business you are in can affect the interchange rates. This is because the issuing bank wants to be compensated for the risk of the dreaded chargeback, which happens when a customer disputes a charge successfully. When a customer complains about the product or services you have provided, chances are good that the money you were paid by the acquiring bank, plus additional fees, will be taken out of your account. You can appeal this, but it will take a while and you will probably lose.

Some businesses are more likely than others to provoke chargebacks. The safest transactions, from the point of view of both issuing banks and acquiring banks, occur when the cardholder is physically present to swipe the card and sign the receipt and when the goods are inexpensive and unlikely to provoke complaints. Merchandise and services that are standard and used quickly are the safest, which is why gas stations, restaurants and car rental agencies get favorable rates.

The riskiest transactions are those that are done over the phone and Internet, especially if the transaction is large and the business is of a kind that tends to generate complaints. That’s why an important part of applying for merchant services is revealing what kind of business you are. To make sure everyone is speaking the same language, the processors employ MCC Codes, four-digit numbers issued for a wide variety of businesses as defined by the federal government. If you wade through the MasterCard interchange document I linked to above, you will see special interchange rates associated with different MCC codes. Visa works the same way.

If you need to accept credit cards for your business, you have to deal with the acquiring bank. It is common for the responsibilities of the acquiring bank to be split between two entities. The first, commonly called the merchant service provider, is in constant contact with the merchant. When a sales representative shows up at your door to try to sign you up for credit card processing, or when you interact with a Web site (such as Square) to investigate a deal, you are dealing with the merchant service provider, which can be an arm of a bank or a smaller independent company.

In every deal I looked at, standing behind the merchant service provider was another company. I’m not sure if this is the correct term, but I’ll call it the processing company. This entity actually executes the mechanics of the transaction: transmitting information among the merchant, the issuing bank and the acquiring bank. In my dealings with four merchant service providers, I found it difficult to tell exactly how the duties of the acquiring bank were divided between the merchant service provider and the processing company. The sales representatives clearly worked for the merchant service provider. The monthly statement could come from either the merchant service provider or the processing company. The card readers were provided by the processing company. And somewhere in the middle were the underwriters.

Underwriters? Is someone evaluating risk? Yup. It is important to understand that when you sign up to accept credit card payments, you are actually borrowing money. When the acquiring bank transfers cash to the merchant, it is assuming the risk that there will be a chargeback. That risk will remain until the transaction (which may, for instance, include shipping time) is completed and the warranty on the goods (which may last a long time after delivery) has expired.

Despite that risk, the acquiring bank will put the transacted funds in the merchant’s account a couple of days after the transaction is reported. The acquiring bank sees this as a loan and that’s why when you apply for merchant services, your fitness to borrow the amounts that your business generates in credit card transactions will be evaluated. Every merchant services application I have seen has required a Social Security number and demanded that all card transactions be backstopped by my own assets. My house, my car and my savings are all up for grabs if things go wrong.

And as with any personal guarantee, this one is likely to affect your credit score and your ability to borrow money outside the business. At the very least, if you shop around for merchant services, as I did, your personal credit report will show multiple inquiries — with whatever effects that might have.

Tuesday: My search for an honest credit card processor begins.

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.

You're the Boss Blog: Choosing a Credit Card Processor (and Drawing Some Conclusions)

The struggles of a business trying to survive.

My search for a credit card processor started last April and dragged on through the end of January. Like many small-business owners, I have plenty of things to keep me busy, so my search was an on again/off again thing. As it progressed, I found that the more carefully I looked at the terms I was agreeing to, the less I liked them.

It took a lot of hours to do the legwork necessary to understand how the industry works, how the deals are structured, and what would be my best way forward. Then I put a lot more time into writing this series of posts. If you have followed the series from the beginning, I suspect you may have come to the same conclusion that I arrived at: this market is stacked against the little guy.

Here are a number of things that nobody told me and that it would have been helpful to know from the beginning:

• Processing credit card transactions is expensive — I spent more than $27,000 on it last year, on $600,000 in transactions — and the discount rate can vary widely. The lowest rate I was offered was a whole lot lower than the rate I had been paying. It’s worth looking around.

• But looking around isn’t easy. Comparison shopping, by which I mean following the sales process to the point where the final pricing and terms are revealed, is almost impossible. I ended up violating three agreements in order to get the real rates. I don’t think anything bad is about to happen to me — I’m too small to bother with, I suspect — but unspecified fees and penalties are now hanging over my head.

• It’s worth taking the time to read the agreement. You may well find surprises that you don’t like. When I read through the Square agreement, for instance, I found limits to transaction size and frequency that would not work for me and that were not featured prominently on the Web site.

• If your experience is like mine, you will find that the sales representative from merchant services is the smiley front end of a deal that is really controlled by the company’s underwriters. The sales representatives I met were all pleasant, intelligent people. And they all omitted, or could not confirm, important information about the pricing and the structure of the contract. I was only able to determine the real terms after I had accepted them.

• Even so, the sales representative from merchant services is your best advocate when dealing with the underwriters. In the deals I investigated, I had no other way to communicate with the people who made the ultimate decisions about my reserve accounts. All three of the representatives that I worked with tried hard to come up with a way to make the relationship work. And if I had simply signed on the dotted line, and not asked questions, it would have been very smooth and easy.

• It is essential to understand that when you take a credit card payment, you are borrowing money — at least as far as the merchant service providers and their underwriters are concerned. The industry you are in, the type of business you do and your personal financial situation will be relevant to their perception of the risk involved. But I found, to my surprise, that the companies I dealt with were unimpressed by my perfect, multiyear record as a merchant with no chargebacks. I can only imagine what happens to start-ups or applicants with tarnished histories.

• Speaking of credit histories, my credit score dropped by more than 100 points while all of this was going on, from more than 800 to less than 700. My wife and I recently applied to refinance our mortgage, so that might have had something to do with it, but her score didn’t drop at all. While I can’t prove that the credit card applications caused the drop, it’s something to keep in mind if you apply for merchant services at the same time you apply for other credit.

So which company did I go with? Emerald World. Even though I didn’t like the company’s reserve account terms and even though it offered higher prices, I felt that Emerald World’s sales representative, Kelly Nelson, had been extremely helpful from the outset. He had opened my eyes to the true cost of the fees I was paying PNC. And he had offered, in writing, the ability to cancel the deal on 30 days’ notice. (WorldPay and Wells Fargo offered fixed, three-year terms.)

We started using Emerald World to run transactions last week. And you know what? It didn’t go all that smoothly. Underwriting was displeased when the first transaction I ran was much higher than the average number we had put on our application. Sigh. You would think that underwriters, of all people, would understand how averages work. But Kelly helped me through that mess, and we are now up and running.

As for my business banking, I am moving that to Citizens Bank. I like the guy I deal with there, the A.T.M.’s are right on my way home from work, and the Web site has been rock solid even when PNC’s has been shut down by hackers (which has happened frequently since September).

I hope that you find all of this helpful. I didn’t write this to discourage anyone from accepting cards but rather to clarify the nature of transaction processing. Credit cards definitely provide benefits to buyers, and merchants who don’t accept them are putting up a barrier to potential sales. If you are in retail or e-commerce, you really don’t have a choice. I could probably refuse to take them, but it would cost me a lot of business.

The story presented here reflects my understanding of a complex industry, based solely on what I learned when I started putting hours into researching it. If you think I have made any errors, please correct me in the comments. And please let us know if you can shine additional light on the industry’s practices.

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.

You're the Boss Blog: My Search for Reasonable and Understandable Credit Card Processing

The struggles of a business trying to survive.

I have been accepting credit cards at my business for many years. My recollection is that I first signed up to take them in 1994. During most of that time, I have used my regular business bank, PNC, to process the transactions. When I signed up for PNC’s merchant-processing services, I knew that I would be paying fees for the services, but I was wrapped up in other business issues at the time and paid little attention to the details.

Last spring, I got a phone call that prompted me to take another look at those fees. It was from the president of a small, independent credit card processing company. He told me that it was extremely likely that I was being overcharged. I was especially interested in saving money because cash was short at the time, so I faxed him a couple of my processing statements. That took a couple of minutes, but it was the opening act in what turned out to be a long, strange saga. It would take eight months and many hours of meetings and research for me to understand how I was being charged and what I could do about it. And in the end, I did find a way to save thousands of dollars, but it wasn’t easy.

First, given the expense, you might wonder why I take credit cards at all. Two reasons. One is that they offer an immediate way for us to close a deal. There is a moment during a sales call when we ask the client to commit to the project, and nothing says commitment like forking over money. Getting that card number is a big moment for the sales team.

The second reason is that we have a number of large corporate and government clients who ask us to take them. You might be surprised to learn that a midranking officer in the United States military has a credit card with a $25,000-per-transaction spending limit, but some of them do. Some big military contractors use them, as well. We did a job for one of these last year and ended up getting a single payment of $38,847.

The first time I signed on with a credit card processor was in 2005, when I switched all of my banking to PNC. Part of that process was a visit from the merchant service sales person. She asked me a few questions about my business and then filled out a form and checked boxes with my answers. The application process took maybe 30 minutes. I still have a copy of the forms.

Looking at those forms today is interesting. My annual card volume was listed as $150,000 on a total sales volume of $1,150,000. Average ticket size was $2,000. And the fees I was charged? Only the discount rate is listed, along with fixed fees per transaction and per month but no mention of an interchange fee (as I explained in the credit card primer we published Monday, for every transaction, a discount fee is paid to the bank that issued the credit card while an interchange fee goes to the bank that processes the transaction). The Visa and MasterCard discount rate is listed as 2.1 percent, American Express transactions are 3.95 percent. One would get the impression, looking at PNC’s paperwork, that I would pay 2.1 percent plus a couple of bucks on my transactions. The structure of the deal seemed O.K. to me at the time, and it was quickly approved by the bank. I got my terminal a couple of days later and started running cards.

Fast-forward to the spring of 2012. I have not, as far as I know, amended the agreement with PNC. It had a three-year term when signed and continues on a yearly basis unless either party terminates it. I have not considered reviewing the contract over the last eight years because processing fees have been pretty far down my list of worries. (If you are new to my story, you can get a recap here.)

And then, in April 2012, I took a call from Kelly Nelson, president of a company called Emerald World, which provides merchant services and specializes in companies like mine that do a lot of large ticket, business-to-business transactions. He spent some time on the phone explaining the whole concept of interchange fees and discount rates, which I had never heard of. He asked for a couple of my PNC statements, so that he could see how they were charging me. A week later he called back and told me that he could save me a substantial amount of money.

This was hard to spot without some serious detective work. My PNC statement shows the gross value of the transactions we ran that month and, separately, the discount charges from a given month along with the interchange from the previous month. The discount charges are listed by batch number, but the interchange charges are listed by card type. The fees are sorted by the payee. The statement also shows the gross value of the American Express charges, but the fees that American Express charges me end up on the American Express statement.

This is all very confusing, and it is very difficult to total up the charges and fees associated with a single transaction. The interchange fee varied depending on the type of card used, but the discount rate was fixed at 2.1 percent. It seemed I was paying a little over 4 percent on each charge, before additional fixed fees. When I checked my books, it turned out that last year we did 131 credit card transactions, totaling $639,000. Of that amount, $611,714 actually landed in my bank account. The rest — $27,286 — went to charges and fees. That’s a total processing cost of 4.27 percent — considerably more than the 2.1 percent or so that I initially signed up for.

I looked back at the application I had filled out for PNC in 2005, and its associated merchant agreement, a multipage booklet. I could not find any mention of interchange fees in either document, but there was language to the effect that any change in the annual amount of transactions we ran would allow PNC to change the terms unilaterally, without notice. Hmmm. I don’t know when the bank started charging the interchange fees, or whether I had overlooked this from the beginning.

Kelly offered me a different pricing scheme: the interchange rate for each card our clients gave us plus a fixed percentage markup, in his case .98 percent. He also showed me the types of cards my clients had used in the preceding months, and the varying interchange fees that had been charged. And he gave me a spreadsheet with all of the current interchange fees for Visa, MasterCard and Discover, on a single page.

Running my eyes over the hundreds of card options, a few caught my eye: Visa General Services Administration large ticket, with an interchange fee of 1.2 percent, and Visa commercial electronic corporate, at 2.25 percent. We had been doing a lot of transactions in the second category, and we anticipate getting our G.S.A. contract in 2013 and doing significant business with the government. It seemed switching to Emerald World could save me 1 to 2 percent on each transaction — hundreds of dollars a month, thousands of dollars a year. He also offered me a free terminal and no long-term commitment. I could cancel the contract any time if I didn’t like it.

It sounded great! So I filled out an application, and sent it in, anticipating that I would soon be enjoying lower costs.

Kelly called me back a week later. It wasn’t going to be so simple.

Wednesday: I learn about reserve accounts.

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.

Staying Alive: My Search for a Credit Card Processor

The struggles of a business trying to survive.

At the conclusion of Tuesday’s post, I had just applied for cheaper credit card processing from Emerald World, and I had received an unsettling phone call about the status of my application. The events I am about to describe took place in June 2012, at a time when my business was experiencing a sales slump. We were about to come out of it, but I didn’t know that at that time. Cash was tight, and the prospect of saving money on my credit card processing was very attractive.

I have been in sales for 25 years. It has been my main job, with all the other tasks involved in being the boss playing second fiddle. So I appreciate it when I am buying instead of selling and find a real pro on the other side of the deal. Kelly Nelson at Emerald World, who had opened my eyes to the high prices I had been paying PNC for processing, had done everything right. He had taken the time to educate me about something I didn’t know. He had proven that his solution was better for me than my current situation. He had outlined a deal that was very low risk for me: my fixed costs were low, and I could back out whenever I wanted. And he was patient while I was distracted with my trips to Germany and Dubai, and he was able to remind me that he was still around without being annoying.

So when I finally pulled the trigger and filled out the application, I wasn’t expecting further delays. The application demanded information much like the one I had filled out years earlier for PNC: anticipated annual sales volume, average transaction, highest single transaction and percentage of sales over the phone (as opposed to transactions with a swiped card). And there was a fair amount of routine company info: tax identification number, years in business, partnership structure. Here and there were dense blocks of text, waiting for my signature to confirm that I had read this and agreed to that. Typical corporate sales contract. I had nothing to hide; I was coming off a very profitable year, I still had a good amount of cash in the bank, and I had been accepting cards for many years without any problems. What could possibly go wrong?

I would soon learn that Mr. Nelson, like many salesmen, particularly those who represent large organizations, had been emphasizing the benefits and glossing over the potential difficulties in the application process. Emerald World, it turned out, does not perform the function of acquiring bank. That is done by another company, National Processing Corporation, and final approval for the deal would have to come from it, specifically from its underwriting department. And the underwriters wanted more information.

They wanted to see my balance sheet and a profit-and-loss statement. They wanted to know whether we would use credit cards to take deposits or only when we delivered goods (we do both). They wanted to know the typical length of time between a deposit payment and final payment (six to 12 weeks). I provided all of that, and then I asked Mr. Nelson what this was all about. And from him I learned how National Processing saw me — not so much as a good client with a solid gold track record but more as a potential fraudster or failure that the company might not want to work with.

In my application, the underwriters would see lots of what they would consider red flags. For example, we do all of our transactions over the phone for large amounts of money, and we enter the card data into our terminal manually — we never swipe. Plus, there is a significant time lag between the receipt of the payment and the delivery of the goods. And my type of business, or MCC category, does not get a lot of respect from credit card companies. Furniture seems to be a difficult product for them. Apparently there tends to be a lot of damage in shipment and a lot of dissatisfaction even with products that arrive in one piece, which can lead to a lot of chargebacks (money returned to a customers when a transaction is disputed).

Of all those red flags — card not present, big ticket, delayed delivery and big chargeback rate — I concede I am guilty of the first three. But I can proudly claim that never once, not one single time in the 18 years that I have accepted credit cards have I had a chargeback. Zero. Zilch. Nada. That’s a reflection of the commitment we make to our customers to keep them happy, no matter what. We also are careful about our shipping practices and how we handle installation. I guess that some of my fellow furniture makers and dealers aren’t so fastidious, and I have been tarred with the same brush.

I provided all of the supplemental information and waited. Mr. Nelson got back to me a week later. National Processing was willing to go forward with the deal but on one condition — it wanted to establish a reserve account to guarantee that it wouldn’t be left holding the bag in case of an unresolved chargeback. It would withhold 10 percent of the first incoming payments until it had set aside $10,000 in the reserve account. And it would review the case after six months.

I had never heard of this before, and frankly, I was a little insulted. I asked Mr. Nelson whether this was common, and he told me that it happens now and then — when underwriters have doubts about a merchant. Now, I was really insulted. But leaving feelings aside, was this such a good deal?

The price of each transaction, interchange plus .98 percent, was still much better than I had been paying. But the format of the reserve — taking 10 percent off of incoming payments — would complicate the accounting of commissions I was paying to my salesmen. And for me, the cash itself was a problem. I had started the year with more than $180,000 in working capital, but our long sales slide had depleted that. By the beginning of the summer, I was operating with $60,000 to $100,000 on hand and spending, on average, $40,000 a week.

The savings in costs represented a reasonable return on a $10,000 investment. But I didn’t want my cash tied up. So I told Mr. Nelson that I would not go forward with the deal.

Thursday: The big banks come knocking.

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.