There are quite a few ways that business owners can make mistakes when buying and maintaining credit card processing services. There are two reasons why this is the case. First, the merchant processing industry is so complex that it's challenging even for the most educated merchant to know what to look for when signing up for or maintaining a merchant account. Secondly, due to the fact that this industry is not regulated and has low barriers to entry, any Joe Schmo can get into the business. Low barriers to entry have created an environment where unsavory sales practices have become pretty common. You can also read Why is the credit card processing industry such a mess?
So if you have been involved in merchant processing at a previous company you probably know exactly what I'm talking about. And if you've fallen for one of the tricks I've listed below, hopefully I will help you avoid other potential traps. If you haven't ever taken credit cards before, you may save yourself some pain and suffering by reading the following.
This is not intended to be a comprehensive list, but it will hopefully give you a heads up on some of the most common tactics that sales people use to get a little extra money (or a lot) from you. Here is a list of six things to watch out for.
1. Promotional Rates
"Get a 1.39% rate!" or "1.99% on all internet and MOTO transactions!" Don't fall for it. That rate only applies to a limited number of transactions. Higher rates will apply to other card and transaction types that are often not disclosed. This is perhaps the oldest trick in this business and nearly everyone is doing it from the small shop to the largest providers in the industry. Merchant service providers will promote certain rates that lure merchants in, but it's a bait and switch tactic. Make sure you understand ALL of the rates that you're being offered, not just the lowest.
The best thing to do is specifically ask for ALL rates that may apply. The answer may vary according to what pricing structure your provider is using but those questions will at least get you headed into the right direction. More importantly, the sales person will then realize that you may know a thing or two about this game.
Keep in mind, that while the difference between a 1.79% and 1.99% rate may seem like a big deal to you on paper, calculate it out and see what it actually means. On $50,000 in sales, a 20 basis point difference would be $100 dollars. A $100 dollars is a $100 dollars, but it's fairly small in the larger context of your business and the importance of choosing a good, long term partner. My advice to you: get a competitive rate but don't buy on price because you're more likely to get yourself into a bad situation. Your cost cutting efforts may end up costing you $200 more a month because you went with someone who wasn't forthright with you.
2. Card not present or non-swiped credit card rates
One of my customers is a restaurant who has a large delivery component to his business. When I first spoke to him, he said, "I like your solutions but there is no way that you're going to be able to offer me the same rates as I'm getting today." The guy I'm working with told me that he was getting special wholesale rates. Yup, so you guessed it, his initial swiped rate was very competitive, but his phone order rates were very high. He had been paying over 5% for years.
These types of fees are often hidden in your statement in some cryptic language that not even the NSA can decode. Again, just be mindful of the various rates that you're being charged for different card types and means of transaction (swiped vs. non-swiped).
In recent years, contract problems have become less of an issue for merchants but it's still a significant enough problem that you need to be mindful of it. It's fairly standard in the industry for a provider to charge a merchant a cancellation fee in the amount of $200 to $500 if the contract is terminated before its expiration date. Contract terms usually vary from 1 to 3 years.
Some contracts out there however call for damages equal to the amount of money the provider would have made if the business would have completed the term of the contract. That can get very expensive. Just make sure if they are going to charge you a cancellation fee for terminating prematurely, that it's reasonable and doesn't have any extra hooks in it.
If a provider hasn't done a good enough job to keep the business, why should the merchant be penalized? Make sure that you read your contracts thoroughly and ask your provider specifically the duration of the contract and the cancellation fee. It's not unreasonable to ask for them to waive their fee but some sales people just don't have the option of accommodating your request.
4. Before and after the sale
It's not uncommon in this industry for a sales person to sneak in some extra fees and charges after you've signed the agreement. The monthly statement that most providers use is so complex that it will nearly be impossible for you to ever notice it.
So don't just assume that the credit card processing industry is like most any other industry where a company actually delivers on a price that is quoted, verify it for yourself. And when you try to verify it yourself and find that you can't because the statement is too complex, call your sales rep and have them explain it to you.
5. Cinco de Mula rate increases
Every spring Visa and MasterCard make some adjustments to their interchange rate structures (see Where do credit card fees come from) which means that rates usually go up. Most companies see this as a great opportunity to not only pass along the increases but increase their margins. The rate increases are always very complex so it's hard to actually understand what happened. Most providers in the industry will capitalize on that opportunity and tack on some additional margin for themselves. Like most merchants, you of course probably never knew that there were set times for rate adjustments; you just knew that your rates keep on going up.
I think that it's fair that merchant providers pass on the interchange increase with nothing extra added. You get the same competitive pricing from your provider and limit the sting to what Visa and MasterCard increased.
As I said before, this is not a comprehensive list, but hopefully after having invested a few minutes of your time, you are now better equipped to manage this portion of your business.