1 Ripped Off The inside secrets about how the banks rip your business off on your credit card processing and the steps you can take to protect your business.
2 Table of Contents Introduction...3 The Top Processing Schemes The incredibly low teaser rate: Low Flat Rate or Flat Fee Pricing Rate Hikes BIN Number Manipulation Holds on your money & Limits on your processing Equipment is non compliant Free Terminals Leasing Early Termination Fee What is Interchange Plus Pricing (IC Plus) How will the Durbin Amendment Effect My Business?
3 Ripped Off The inside secrets about how the banks rip your business off on your credit card processing and the steps you can take to protect your business. Introduction is conducting a series of whitepapers to empower small business merchants to save on their processing and avoid getting ripped off. In this white paper guide, will show you the most common processing schemes and will explain how you can avoid them. Along with this white paper, you will receive multiple free, no obligation quotes. These quotes are to be used as benchmarks and will help you navigate the tricky waters of credit card processing. The good news about the credit card processing industry is that there has been no better time for small business merchants to get great deals on their credit card processing. The bad news is that there are more sucker deals in the market than ever before. The online boom has created a boon for processors and their amazing deals. You can Google right now, credit card processing or merchant services, and you will find unbelievable deals, rates as low s 1.00%, free accounts, free terminals, no PCI compliance fee, free this, fee that, lowest this, lowest that. The ads are so misleading that the FCC would have a field day if these were broadcast on the TV or radio. This guide will provide clarity and arm you with the facts so that you can negotiate a great deal for your business and not have to worry about credit card processing again. 3
4 The Top Processing Schemes 1. The Incredibly Low Teaser Rates - Fact: There is not one Visa/Mastercard rate. Visa/Mastercard list their rates, called interchange. The interchange schedule have over 300 rate categories. Solution: Demand to see a schedule of rates. 2. Enhanced Billback Processor promises low rates and then adds high surcharges for non-qualifying transactions. Fact: Card Types and Transaction types (swiped or key in) qualify at different Visa/Mastercard Interchange Solution: Demand full disclosure of all rates and fees for all card types and transaction types. 3. Low Flat Rate or Flat Fee Pricing The processor takes the average pricing for your industry tacks on a surcharge. Think of this as above average pricing. Fact: Visa/Mastercard does not have a one rate plan. They have what is called interchange. Interchange has over 300 rate categories. Solution: Avoid this pricing plan. 4. Rate and Fee Hikes Fact: Visa/Mastercard periodically raise interchange rates and your processor passes those additional costs on to you. Solution: review each monthly statement, and know your contractual rights when your processor breaches your agreement. (Usually you can get out of the contract without an early termination fee.) 5. Bin Number manipulation Fact: Processors have some control over what tier a transaction may qualify for. Solution: Demand in writing to know at what tier each card and transaction types qualify. (Interchange Plus pricing does not have tiers. Processors can not manipulate the bin numbers.) 6. Holds on your deposits Fact: Processors can hold your transactions for a variety of reasons. Solution: Ask when deposits are made. Ask if there are any ACH holds. Ask if there are limits on transaction amounts and/or monthly volumes. 4
5 7. Equipment is non-compliant, Free Terminals, and Leasing Fact: If you have passed your PCI compliance with your current processor, then your equipment is compliant. Solution: Rarely is the equipment the issue. Here is a link to processing compliance SSC Quick Reference Guide.pdf Please keep in mind, free terminal offers usually include built in fees or penalties if you breach your agreement or fail to return the equipment on time. 8. Early Termination Fee Fact: Nearly every processor has an early termination fee. Solution: Nearly impossible to avoid so make sure you negotiate a great deal using these tips and your free quotes. If your processor arbitrarily raises your rates and you catch it in time, you may be able to switch companies without an early termination fee. Please remember that anything that the processor agent tell you, also GET IT IN WRITING. By law, the agent can say anything and not be held liable or his company liable. If you have it in writing, then you may have a good case. In most situations, the processor will give into your demands. Now, the guide will provide more detail on each of the points above. 1. The incredibly low teaser rate: Banks, Club Stores, and sales reps like to simplify the sales process by selling you on a low teaser rate. Don t be fooled. Visa/Mastercard have over 300 rate categories called Interchange that a transaction could qualify. If you add Discover there are over 440 different rate categories. (Click on the link to download Visa s interchange rates.) To protect your business, ask your agent for an interchange schedule. Finally, ask your agent to estimate what your effective rate will be? (Effective rate is all your processing costs divided by your volume. Rate is what got you to sign. Effective rate is what you actually pay. If you process $10,000 a month and pay $300 to your processors, then your effective rate is 3%. $300/$10,000. That was probably much more than your bank promised you when you signed up. Even Costco offers 1.64% + $0.19, yet the effective rate is much higher). 5
6 Please review your quotes . We estimate each processors effective rate for you. 2. Enhanced Billback Processors salivate at the words, Enhanced billback. This is the most expensive pricing plan for your business. It is also the most profitable for the processors. Enhanced billback is a fancy terms for one rate plus surcharge. An agent may offer you a low rate of 1.64% on all your cards. This would be great if it were true. What he left out was that for the majority of your transactions, there would be a surcharge or billback applied. The surcharge may be as high a 2.99% or even as low as 1.00%. This is pure profit for the processors, because the other factor the agent left out was that the surcharge is added on top of the qualifying interchange. This is a bit confusing, but Visa/Mastercard charge different rates for different types of cards. The processor adds that difference to your rate of $ $0.20. Let s say you process a business card transaction and the interchange rate is 2.05%. In the enhanced billback pricing plan, you also pay that 0.41% plus the 1.64%, 2.99% and the transaction fee of $0.20 Example: Enhanced Billback for Business Cards 1.64% % % = 5.04% + $0.20 You may say, Well, I don t take many business cards. That fine. How about rewards cards, travel and entertainment cards, purchase cards, keyed in transactions? All of these would qualify for the enhanced billback. Unless you know exactly the card type and the transaction type at your business, then stay away from enhanced billback pricing. 3. Low Flat Rate or Flat Fee Pricing Some processors try to simplify Visa/Mastercard Interchange hundreds of interchange rates by reducing them to one rate or one flat fee. They do this by taking a weighted average of the probable transaction types in your industry. The one rate plan sounds great. It is a hedge against the higher rate transactions. The plan is certainly better than enhanced billback. You will still end up paying more than an Interchange Plus plan. The reason is that the processors are setting your one rate based on skewed weighted averages that favor them. If the processor is wrong, then they will simply adjust your rate higher. The processor is not going to lose money. Check out the Fees. A typical credit card processing agreement may have over 60 fees. Not all the fees apply every month. Some fees are periodic like 6
7 chargeback or ACH reject fee. Others are annual, like PCI compliance. You will need to review all the possible fees on your agreement to make sure there are no surprises. If you just concentrate on the rate, the agent may overload your agreement with fees. Yes, you got a great rate, but you are paying hundreds or thousands of dollars a year in fees. Single Monthly Fee. For lower monthly volume accounts, processors have developed a pricing scheme to remove the headaches of all these rates and fees. They ve bundled all the rates, transaction fees and other fees into single monthly fee. Let s say you process $1000 in credit cards. You might be offered a flat $35 fee. This sounds great. What happens if your business grows and does $5,000? The processor has a clause in the contract that allows it to charge a certain percentage over the stated amount, or in this case $1000. Now, you may pay $250 or 5% in fees plus the $35 dollars.. That is not so good. What if you do less than $1000? You still pay $35. So unless you know for certain what your monthly volume is, you should avoid this single monthly fee plan. 4. Rate Hikes All businesses raise their prices over time for various reasons. Some businesses are more volatile than others and the increases are quite dramatic. Take the oil business for example. There are situations where the processors take advantage of their merchant by arbitrarily raising their rates because they can. This can occur at any time. This is why it is imperative to review your merchant statement every month. Let me repeat. It is impetrative to review your merchant statement every month to ensure that your processor is not arbitrarily raising your rates. Most raises will occur in April and in October of each year. This is the time when Visa/Mastercard reviews their interchange schedule and proposes rate increases. When Visa/Mastercard issue a rate increase, your processor has little or no choice but to pass the increase on to you. This is across the board. (Don t be fooled by competitors claiming that they never raise rates. They all do. How much the processors raise your rates is another question entirely. The processor could decide to pass on the rate increase at cost. Or as in many cases, the processor adds a little extra. 7
8 By law, your processor has to inform you of the rate increase. They won t send you an or give you a courtesy call. You will get a fine print paragraph on your statement. How do you protect yourself? Review your statement each month and read the notices. You should also start to calculate your effective rate each month. The formula is simple. Take your monthly statement bill and divide it by your processing volume. Example: $300 bill and $10,000 monthly volume. Divide $10,000 into $300 and you get.003 or 3.00%. The effective rate is 3.00%. You can use this simple formula to track your processing percentage over time. If you notice a significant increase, you should immediately call your processor s retention dept and demand that they lower your rates and threatened to leave if you they are not reduced. Most merchants don t catch the increase until it is too late. Then what do you do? suggests to comparison shop. There is no reason you have to stay with a processor that treating you unfairly. You may have to pay an early termination fee, but it may be worth it in the long run. Along with this guide, you should have received multiple free, no obligation quotes from our pre-screened and highly rated vendors. (If you did not receive your quotes, you can log on to and click on get quotes to get more. You can even upload a statement on our site for a free statement analysis.) 5. BIN Number Manipulation This trick is pretty simple, but nearly impossible for the merchant to detect. Processors have the capability to manipulate or to assign the rates or tiered rates where the transactions qualify. Here s how this scheme works. The processor s agent offers you a super low qualified rate 1.59% + $0.20 for credit and 1.14% + $0.20 debit. On the surface this is a great deal. However, the majority of your transactions will not qualify at these rates. The processor has set up his system to where 80% of your transactions will qualify at the much higher mid and non qualified tiers. The result will be that your effective rate may be well over 3.00%. To protect yourself, you should change to IC plus pricing. The processor cannot manipulate the bin numbers. If you must have 3 tier, find out what the mid and non qualified rates are. Ask what cards and transaction types qualify for those tiers. GET THIS IN WRITING. 8
9 6. Holds on your money & Limits on your processing Some processors are notorious for placing holds on your money for all sorts of reasons some are valid. Most are not. They are excuses to hold your money in their accounts and earn interest, while you wait. The most ubiquitous hold is the five-day ACH delay. Another hold is for large transactions. Usually transactions that are 3 times your average are held until the processor can verify the transactions with the cardholder. This is done to protect the processor, which is held liable for the amount if the transaction goes bad. Some processors may require a deposit. If they tell you upfront, you have the option to go somewhere else. If they confiscate your funds after you start processing, that s another matter. They have the legal right to do it. It s all in the fine print. Processors usually require high-risk businesses like travel agencies, to put up deposit. Ask your agent if your business is considered high risk. If it is, then ask him if a deposit will be required. Get the answer in writing. Processors take on a certain amount of risk when processing your transactions. If the transactions go bad, they can ultimately be held liable. To mitigate their risk, the processors may put a limit on the size of a transaction and the monthly volume. You want to make sure that you tell your processor of any high transactions you may have and put that on the application. You also want to make sure that there are no monthly processing volume limits. Once you reach that limit, you may be able to process any more transactions until the next month. Processors protect themselves by imposing holds on funds and imposing charging and volume limits. In most cases, they do not tell the merchant during the sales negotiations and the merchant never thinks to ask. Frustration sets in when the merchants run into these limitations. Always ask upfront of any limits and or holds. Many reputable companies many have holds on large transactions until you build a solid transaction history usually 3 to 6 months. Don t be frightened by it. Make sure you get it in writing that the holds are temporary. 7. Equipment is non compliant Free Terminals Leasing Agents will use this equipment scheme to scare you into purchasing new terminals. This may have been true a few years ago when the industry went through some security upgrades. If you business has already been certified as PCI compliant, than your processors has approved your processing equipment. 9
10 You should be careful buying equipment online. On EBay, you can find great deals on non-compliant terminals. Don t buy them. If you do, your processor will not allow you to process on non-compliant equipment. The free terminal gimmick If the processor gives anything away for free, it still has a cost to his business. The processor has to make up those costs somehow. The processor will try to make up the difference in the rate, the fees, and sometimes in the cancellation or early termination fee. In some cases, you may have 10 days from the date of cancellation to return the equipment. If you don t, the processor will assess a terminal fee anywhere from $500 to a few thousand dollars. Ouch! Some free terminal offers let you keep the machine. The equipment is proprietary, so even if you leave the processor, you won t be able to use the terminal with your new processor. The main point is that free terminals is just that a gimmick. Your business might be better off with a virtual gateway, which turns your computer into a credit card processing terminal, or a mobile device that connects to your cell phone. You may have heard the horror stories about leasing. Leasing can be a fine alternative to purchase if you know what you are doing. The rule of thumb is not to spend more than 2 times the purchase price. So if the equipment costs $350, don t pay more than $700 in lease fees. s suggestion is to purchase your equipment or finance it with a credit card. If you can afford it, purchase a POS system. The accounting, inventory control, purchase features, customer database, and other features make it well worth the investment. 8. Early Termination Fee Nearly every processor now has an early termination fee. Even if the agent says they don t, they still probably do. It will be stated in the fine print of the application. The standard termination fee is $500. Many processors offer $250 or reduce the termination fee from $500 to $250. The processors have instituted the early termination fee to reduce churn and to defray the high cost of merchant boarding. You should not let an early termination fee deter you from changing processors if you are in a bad plan or experiencing poor service. Legally, the competing agent can t offer to pay your termination fee. But he can offer ways to offset that fee. 10
11 What is Interchange Plus Pricing (IC Plus) This type of pricing used to be reserved for Fortune 500 companies. Not any more. Now, even Mom and Pop shops can take advantage of IC Plus pricing savings. Banks are hesitant and sometimes outright refuse to give IC Plus Pricing to small businesses because the banks can t maximize their profits. They d rather sell you enhanced billback or 3 tier pricing, which is much more lucrative. Why interchange plus? As mentioned before, there are 440 different Visa/Mastercard/Discover Categories and you want each one of your sales transactions to qualify for the lowest possible rate category. This is exactly what IC Plus Pricing does. The pricing method places each transaction in the appropriate category and charges the corresponding rate. No other pricing method does this. For example, the most common pricing method, 3 Tier places each transaction according to the processors preferences. The processors prefer placing most transactions in the Mid and Non Qualified tiers as opposed to Qualified tier. Yet, these same processors will sell you on the Qualified Rate Tier. This is a classic bait and switch. IC Plus pricing is pretty simple. There are 3 components that make up your rate. Interchange + Visa/Mastercard/Discover Assessment Fee + Processor Rate Interchange consists of 440 Rate Categories. For most businesses, only about 60 categories will apply. That is still many. The range of rates vary widely from 0.95% + $0.10 for debit cards to 3.25% + $0.10 for certain corporate cards. Assessment fee is the rate Visa/Mastercard/Discover charge for each transaction. Currently this fee is 0.11% + $0.02. This fee does not vary by card or transaction types. The processor fee is exactly that the rate and/or transaction fee your processor charges. This is the only negotiable part of the interchange fee available to the merchant. Please keep this in mind when negotiating with your potential processors. This fee does not vary by card or transaction types. To get the final rate, you simply add up all the components. For example: Visa Retail Transaction Rate would look like this 1.54% + $ % + $ % + $0.13 = 1.75% + $
12 Please keep this rule in mind. Swiped transactions have lowered rates that keyed transactions. Swiped or Keyed business cards have higher rates than swiped or keyed consumer card transactions. Debit card transactions have lower rates than credit card transactions Please remember in choosing your pricing method, keep in mind your effective rate, which you want to lower. The rate range is more important than the lowest rate. The lowest rate only applies to one transaction type. The rate range applies to all the cards and ultimately determines your effective rate. How will the Durbin Amendment Effect My Business? Small businesses will receive the biggest reduction in their credit card processing charges in the history of the electronic payment industry, but only if they are set up correctly. The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 included an amendment, which will greatly impact your credit card processing or more specifically your debit card processing charges. This Durbin Act will affect both signature and pin based debt interchange rates by drastically lowering them on October 1 st, Normally, the debit card processing rates (debit interchange rates) were set by Visa/Mastercard. The current debit card interchange rates are 0.95% + $0.20 for Visa and 1.05% + $0.15 for Mastercard. The Federal Government led by Senator Durbin has intervened and under the Dodd Frank Wall Street Reform and Consumer Protection Act reduced the debit interchange rates to 0.05% + $0.22. Merchants that process debit cards whether signature debit or pin debit will see huge savings on their merchant account processing statements. Debit, both pin and signature, comprise nearly 50% - 70% off all card transactions. Merchants could see their credit card processing charges cut in half. That is real savings. Unfortunately, many merchants, who do accept a high percentage of debit cards, may not see any savings, because their current credit card processing plan does not allow for the Durbin Amendment reduction. Instead their debit interchange savings will be going to their processors. This is especially true for merchants who are on 3 tier and enhanced billback pricing. The reason is that the processor is not compelled by law to reduce the rates. They are only reducing one component of your rate called, interchange, not the other two components, Visa/Mastercard Assessment and the processor s percentage. So if you are paying 1.64% + $0.20 per debit transaction, the difference of 0.95% to 0.05% will go to the processor and not to the you. 12
13 There is away around this dilemma and to ensure that your company and not the processor realize the debit interchange savings. This requires the merchant to switch to interchange plus pricing. This will guarantee that you will receive the reduction. The reason is that under IC Plus pricing, the processor is compelled to set the interchange rate at the current bank rate and then add his percentage on top. If the interchange rate is.05%, the processor must use that percentage as his base line and then add on its percentage of say 0.50%. In the 1.64% example above the processor has bundled his interchange and its percentage together. This is fixed pricing. As long as interchange is below 1.64%, the processor is going to charge that rate. Durbin Amendment Examples: Reduction in Interchange $100 Avg. Transaction Current Visa Debit interchange $100 x 0.95% + $0.20 = $1.15 Durbin Amendment Interchange $100 x.05% + $0.22 = $0.27 An example of how debit reduction will save you 50% or more on your debit transactions. Joe s Auto Repair has a $100 dollar average ticket. Joe pays 1.64% on swiped debit transactions. $100 x 1.64% = $1.84 Joe pays on average $1.84 per transaction. Joe heard about the Durbin Amendment and has decided to switch processors to receive Interchange Plus Pricing. IC Plus Savings on Debit Transactions: $100 x.05% + $0.22 = $0.27 Then we add in Visa/Mastercard Assessment (0.11% + $0.02) $100 x.11% + $0.02 = $
14 Finally, the processor fee of 0.50%: $100 x 0.50% = $0.50 Add the charges all together Total: $ $ $0.50 = $0.90 Over 50% savings over the current debt transaction rate. 14