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: 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: 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.