Credit Card Processing FAQs, Navigating Tiered Rates, Long Term Contracts, Equipment Leases and more

Choosing a credit card processing company can be a tricky process for a new business, and even trickier to switch credit card processing companies for an existing business.  There are a lot things to consider, which can end up being very confusing, which can lead to expensive mistakes.  Stephen Ronnow, Merchant Services Consultant & Broker, is a veteran of the merchant services industry, answers common questions regarding merchant services to help with informed decision making.

Is it better to buy or lease credit card terminals?

Stephen Ronnow: In almost all cases, it is not really in the best interest of the business owner to lease a credit card terminal. Leasing used to be a big way for credit card companies to make extra money off of a merchant. The merchant services company would charge anywhere from $20 to $100 per month for a 5 year lease. Doing the math, that’s anywhere from $1200 to $6000 for a terminal that in most cases, would cost $250-$500 (tops). In some cases, there are companies that can even offer “free” terminals, depending on certain factors.

What about POS Terminals, better to buy or lease?

Stephen Ronnow: POS Terminals (like Aloha, Micros, PosiTouch) may be bought outright, but sometimes, depending on a company’s needs, leasing a POS terminal might be in their best interest. For example, some POS terminals are very expensive, so in these cases, spending the money to lease may be more doable in terms of managing working capital. This is a case by case basis, but there are times when leasing a POS terminal is a better move than purchasing.  Doing a Cost Benefit analysis is a good way to determine whether or not leasing or buying a POS Terminal is best for a business.

Is a long term contract required for merchant services?

Stephen Ronnow: Many Credit Card Companies require merchants to sign 3 year contracts. This is typically to ensure that the merchant does not leave quickly and waste the credit card company’s time and money. However, some companies have these contracts because it’s their easiest way to “hold a merchant hostage,” so to speak. Some companies raise rates somewhat arbitrarily and in these cases, they know that having business owners in a contract with a high termination fee will force them to stay.  Business owners can find credit card companies that will waive these 3 year contracts.

If a business owner is stuck in a long term contract, is there any hope?

Stephen Ronnow: This is a common question.  Sometimes, even though business owners are overpaying for services, they will stay with their credit card company because they feel “stuck” in a long contract. There are two things to say to this.

First, in many cases, if a business switches companies, it may very well be that it will save more in a year (with the new company) than it will have to pay to cancel its former agreement.  Business owners feeling stuck in a long term contract with bad rates of poor service is an all too common situation.   For example: A business owner has a $500 cancellation fee for a contract, but will save around $1200 per year (i.e. $100 per month) if there is a change to a new credit card processing company. The question becomes, would the business owner rather pay $500 now to save $1200 over the year, or stay with the current company and continue to overpay for merchant services.  Second, some companies, depending on the size of the account, will even help pay off some of, or all of, the termination fee, so it is good to inquire about this.

What about hidden fees?

Stephen Ronnow:  Hidden fees are easy to hide in certain types of pricing. There are two main types, Cost Plus & Tiered Pricing.

Cost Plus: The first is called Cost Plus. In this type of pricing, things are more straight forward. Every type of credit card (i.e. Visa Debit, Visa Regular, Visa Rewards, Visa Corporate, etc) has its own “costs” when swiping that given card. These costs go to the card issuing bank. These “costs” are labeled as “interchange” in the industry. No credit card company can offer pricing that goes below interchange or else they would lose money. Thus, in “Cost Plus” pricing, the credit card company adds a certain “mark up” to the “interchange,” or base costs. For example, a credit card company may add 0.50% to the interchange costs. If interchange changes and goes up (which happens from time to time), this is passed through to the merchant. Its easy for a merchant to see in this type of pricing if their company is adding profit because in this case, they can see their “mark up” on their monthly statement. Cost Plus pricing is a more transparent form of pricing.

Tiered Pricing: The second type of pricing is called “tiered pricing.” In tiered pricing, its easier to hide “hidden fees,” or add fees. In tiered pricing, there are typically three or four different tiers. As mentioned prior, since each credit card has a different interchange rate, credit card companies will group 20-25 different types of cards into one category. Typically, the categories are broken into qualified cards (i.e. debit/check cards and certain credit cards), mid qualified cards (rewards cards, keyed in transactions) and non-qualified (other rewards cards, etc). There are two important things to keep in mind here as the merchant. First, in tiered pricing, typically only the qualified rate is disclosed. Thus, the merchant thinks they are getting a great deal with a low rate, but really, this low rate only applies to a few of the actual cards they will be swiping. Second, in tiered pricing, its easier for companies to raise rates/add fees. For example, if the qualified rate is 1.38% and 19 cents per transaction. The company might say that interchange rates have changed and thus, the new qualified rate will be 1.45% and 20 cents per transaction. This increase may be justified, however, because in tiered pricing, the mark up and interchange costs are together, its very difficult for a business owner to actually know if the additional fees are because of interchange costs going up or because his provider simply wants to gain more profit.

Thus, for a given business owner, be wary of tiered pricing, as its easier for credit card companies to hide bogus fees in this type of pricing structure.

How can a business owner figure out what his true costs are?

Stephen Ronnow:  At the end of the day, a business owner can uncover his true costs/fees by coming up with what’s called “effective rate.” Each processor will charge different fees (i.e. monthly statement fees, pci fees, yearly fees, set up fees, application fees, rates, transaction fees). What the business owner needs to do is divide the total fees charged in a given month by the total monthly processing amount. This yields the “effective rate,” which is the true cost of credit card processing services that the business is paying.

Many processors promise super low transaction costs, but get the money back on the back end with high fees. Thus, a business owner should take a look at the effective rate from time to time to ensure that the true cost is not ballooning on the business and eating away at the bottom line profit.

Is American Express really expensive, is it worth accepting?

Stephen Ronnow:  American Express is more expensive than other types of credit cards. This is because as a rewards card, the merchant is the one paying for the rewards, not American Express. So, instead of costing around 1.6-2% and 10 cents per transaction at cost (like some Visa and MC), American Express is around 2.89% + 15 cents per transaction for retail stores and around 3.5% + 15 cents per transaction for restaurants.

So, is it worth accepting?

Most people these days want to use rewards cards to rack up airline miles or other kickbacks they get by using the rewards cards. Business owners that take rewards cards, especially, American Express, will be able to attract clientele that may not otherwise want to shop at that given business. The question for the business owner becomes, “lose out on some business or pay an extra 1%-1.5% in fees in order to potentially gain more business?”

Is there anything business owners can do to lower their Amex fees?

Stephen Ronnow:  Recently, American Express decided to go the way of Discover and other card types. They decided to begin getting rid of their “sales” work force. By doing this, they have been able to begin lowering their fees. Not every credit card company has the privilege yet of offering these lowered rates, although for businesses doing lots of transactions with American Express, its in their best interest to switch to a company that is able to get these lowered Amex rates. As a broker, I have a company that receives these improved rates.

How quickly should business owners expect Credit Card sales to be deposited in their bank accounts?

Stephen Ronnow: The industry standard for a business to receive their credit card sales is typically 24-48 hours. That means that most businesses receive next day or two day funding.

Aside from getting the best/good/great rate, what are important things to consider?

Stephen Ronnow: PCI COMPLIANCE!

Protecting one’s business is something a business owner should always be interested in doing. This means that a business owner will purchase the right kind of business insurance, security system, etc. Likewise, in the credit card industry, a business owner needs to protect the business and customers from potential data breaches. A data breach occurs when hackers are able to steal credit card information which can be used for fraudulent activity.

Visa & Mastercard have established “Best Practices” in the credit card industry in order to be able to judge if a given business is using the proper means to protect the credit cards they process. These best practices are referred to as PCI Compliance. The PCI-DSS (Payment Card Industry Data Security Standards) was established by VISA/MC associations in order to govern this. Some “best practices” include hiring an “approved scanning” company to run an external scan of the wireless network to check for rogue access points. Some credit card companies have partnered with these “approved scanning” companies so that they can offer this to their merchants in order to keep them protected. Other companies will tell their clients that they need to use an approved scanning company and then leave it at that.

The bottom line here is that any merchant processing over IP needs to have an approved scanning company doing external scans on their network/machines. In this way, if a business has a data breach, there is high probability that they will not be liable for the data breach, as they will most likely be found to have been using “best practices” for PCI compliance.

What are the common mistakes that business owners make when contracting for credit card processing?

Stephen Ronnow: Common mistakes made by business owners when contracting for credit card processing include many of the things we have spoken about today: 1) agreeing to “tiered” pricing, 2) leasing equipment rather than buying, 3) not asking about PCI compliance and what is entailed in order to be PCI compliant.

Another common mistake business owners make is thinking that their bank is the best place to set up a merchant services account. Banks “can” be good, however, its like buying stocks. The more common methods include buying stocks of different companies in order to have a diversified portfolio. If one stock goes down, there are others that will do well and balance that bad stock out. Its similar in the banking world. If a business owner has a personal checking account, business account, loan and merchant services account with their bank, this is like putting all of ones money into buying only one stock. That one stock has all the power now. In regards to having all one’s money with the bank, this seems like a nice prospect, however, this gives the bank more leeway to raise merchant services rates arbitrarily (which unfortunately happens). This is because the bank knows that the merchant can’t “up and leave,” because they have a large loan with the bank, as well as all their money tied up in accounts. Basically, the business owner has given all the leverage to his bank. Second, banks typically partner with either a credit card processing company (like Union Bank & Elavon) or contract directly with the processor (like Bank of America & First Data). However, in these partnerships, the banks have to give a hefty kickback to their partners, so its in their best interest to gain more profit than usual on the account by raising rates arbitrarily.

When contracting with a regular credit card company, neither of these problems tend to exist. Credit card companies do not have the leverage that a bank would have when holding all of a business owner’s accounts/money. Plus, as there are no kickbacks that these credit card companies are sharing with someone else (like a bank with a partnered company), thus, the credit card company will be able to offer lower/more competitive rates in most situations.

Just Elementary: Great information from Stephen Ronnow.  It’s clear that merchant services & credit card processing is far more complex than it seems on the surface of the matter.  Make sure to do your homework to see if you should switch to a new credit card processor, or to choose the right processor for a new business.  If you have more questions or want assistance with your merchant services account, you can contact Stephen Ronnow via phone 714-928-4257, fax: 949-600-6263 or email , by email: Sronnow@PayProsAgent.com.  You can also learn more about him at his website and LinkedIn.

For questions about how this impacts the valuation for your business, contact our Client Care Manager, Sonia Chhabra at (888) 926-9193