Credit card processing is about more than your “rate.”

By: Eric Cohen, CEO, Merchant Advocate

The first thing you need to know about credit card processing for your practice is that the merchant services industry is unregulated. There are absolutely no licenses or accreditations needed in order to sell merchant services.  Why is this important to know?  Well, this makes it easy for processors, sales agents and sales organizations to set up different pricing models that take more money out of your pocket than necessary.  We have caught several processors using these different pricing models, allowing them to charge hundreds of thousands of dollars in unnecessary fees. 

We recently helped an orthodontist who was overpaying by more than $3,000 a month and didn’t even realize it.  He was told his rate was 1.59%, a very decent rate.  However, what he and most business owners don’t understand is that the 1.59% is the base rate without “add-ons.”  After surcharges and hidden fees were added to this rate, the overall rate came to over 5%!

Why it’s not easy to know your net rate

There are many different pricing models available for processors to use. Some processors use a bill back method of charging you.  For example, they charge a flat rate of 1.59% and then for all cards that are “not qualified” at that rate, they add a surcharge. “Not qualified” can mean anything the processors want it to mean, but they don’t add those fees until the following month or even two months later.  This causes confusion when you get your bill because the fees charged might be partially from the current month and partially from a prior month without you even realizing it.  In fact, some statements will show the current month’s volume but last month’s fees, thus making it even harder to figure out what you are paying on a percentage basis.

“Warehouse stores” where you buy items in bulk resell merchant services as well.  For example, Costco resells merchant accounts for Elavon, a large processor. The Costco Processing advertises flat rates, but of course there is an * in the advertising.  The * shows that these are flat rates but there are all sorts of surcharges on top of these rates.  Once again proving that not all rates are equal.  This is compounded by the fact that the warehouse store is advertising discounted rates and consumers trust them because their brand promise is to supply the lowest rates and deepest discounts.  When looking at most accounts that get set up through them, we see that they really do not have the best rates or your best interest in mind.

Another type of pricing model is a 3-tier or 6-tier method, which usually uses names like qualified, mid-qualified and non-qualified. This pricing model is inefficient and is, again, usually not the lowest overall cost.  The idea here is that instead of telling you exactly what types of cards you take (there are over 600 categories of card pricing) the processor lumps the 600 cards into 3 categories.  The problem is that one category has cards that have a real cost ranging from 1.15% to 1.75%, but the cost of this tier will be 1.75%.  So the lower priced cards are surcharged.  This is intentionally done to gain additional profit for the processors.

Another pricing model that seems great is the wholesale pricing model where you join a “membership.”  The pitch is that if you join as a member and pay a fee, you are able to bypass the processors and go directly to Visa and save money by getting the wholesale rate.  This information is actually on their web-site.  The issue here is the monthly membership fee is not needed to get wholesale rates. You probably guessed it, the wholesale rates advertised are really not the best available.  This is a creative sales pitch that allows people to feel as though they are getting something that they can’t get anywhere else. 

What is real and what is not

Again, it important to understand that the processing industry has no regulation.  This allows processors to make up fees that do not exist anywhere in the Visa/MC processing system.  For example, we audited a business whose processor was charging a line item called Discount for Credits.  This was a fee that was charged on all returns that the merchant made.  It turns out that this fee was 100% profit to the sales organization that sold the account and was completely made up. How can this be?  As long as a processor gives you 30 days notice on your merchant statement, which many fail to see, they can charge whatever they want.  They can also increase your rates whenever they want.  If you continue to process with them after the notice, you are essentially agreeing to the increase.

All of the complexity involved in the merchant service business allows processors to make more money from your practice.  Remember if they are charging you 1% extra on your gross income, this could amount to 5-7% of your net bottom line!  It is extremely important that you understand all pricing models and what the best one is for your practice.  It is also important to have someone monitor your account statement every month as processors continue to increase profit by hiding fees.

ERIC COHEN is the CEO and founder of MERCHANT ADVOCATE, an independent advocate helping merchants save money in the unregulated credit card processing industry. A veteran of the finance industry, Eric Cohen founded Merchant Advocate in 2007. After his extensive experience in the merchant services industry, he was determined to create a fair value proposition and transparency for merchants with their credit card processors. He established Merchant Advocate to act as a trusted advisor on behalf of all size and categories of businesses. Eric leads the team with passion that comes from saving merchants over $30MM in the past eight years. He is always striving to help the small business owner save money. His unique vision has driven the development of an entirely new industry of Advocacy in Merchants Services.

Prior to founding Merchant Advocate, Eric held various sales and training positions in the industry, gearing up for the formation of his own organization as an independent advocate for merchants. Eric earned his undergraduate degree in Communications from Rutgers College and his MBA from the Graziadio School of Business and Management at Pepperdine University. Eric lives in New Jersey with his beautiful wife and three adorable daughters.