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Old 6th May 2013, 03:58 PM   #1
protec1
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Default Accepting Credit Cards (The Definitive Guide)

Hello Everybody,

I have seen a few questions on the boards regarding accepting credit cards from customers and I just wanted to make a quick guide for everybody regarding the payment card industry. I own a merchant processing company (link in signature) so I like to think I know what im talking about!

First a quick explanation on what the industry is, the costs associated with it, and what you absolutely need to know regarding processing credit cards (whether you are looking to be set up to take cards or have been taking cards for years.)

In order to be able to accept cards from your customers you need to set up what is called a "Merchant Account". A merchant account is a contract that allows a merchant bank to securely process a credit card transaction on your behalf. Now, the most obvious question is what are the costs involved with accepting credit cards. The actual "COST" of accepting a credit card is called Interchange. Interchange is what is charged from Visa and Mastercard and is the same for every merchant in the country. It does not matter if you processing $5 a month or $5 Billion. The difference is what the merchant bank is willing to charge you above interchange in order to service your business.

Now, as with any sales industry what do you think the goal of the salesman is? To charge you as much above cost as they can get away with charging you as to make as much money as possible for themselves. There are two methods of pricing that I would like to teach you about.

1) Interchange Plus Pricing
This method of pricing is the most transparent to the merchant. The bank charges interchange which is directly passed through to the merchant from Visa and Mastercard and a "Bump" above the cost usually in the form of Basis points. (100 basis points = 1%). Without a doubt Interchange pricing is the best way to be sure that you are getting a good price for the service you are paying for.

2) Tiered Pricing
This method of pricing is the most widely used, the simplest method, and the most expensive to the merchant! If you are already accepting credit cards there is a good chance that you were told that you would pay around 1.59% or 1.69% etc.... Now that may seem like a good deal, accept for the obvious question.....WHAT IS THE COST??? On a tiered pricing schedule you are never told what the cost is!

So lets say you accept a Visa Debit card which has an Interchange rate of .05% and .21 cents per transaction. On an interchange pricing model guess what you are paying. Thats right, pass through of the .05% and .21 cents along with, lets call it, 20 basis points. On a $100 transaction that means you are going to pay ($100 times .05 = .05 cents) Transaction fee of .21 cents and then your basis points ($100 times .002 = .20 cents). Cost of entire transaction .46 cents.

What if you were on tiered pricing of say 1.69% ($100 times 1.69% = $1.69) and the typical transaction fee of .10 cents. Total transaction cost is $1.79 and since you are not told what the cost was you have no idea that the company processing for you just profited $1.33 on your transaction. This may not seem like a whole lot of money but it really adds up after a month of processing!

Here is a complete list of the interchange pricing from Visa as of 2013.
http://usa.visa.com/download/merchan...-april2013.pdf

Please note that the example used was the first interchange value associated with a Visa Debit Card.




FAQ

1) Why are there so many interchange rates? Why not just pick one and stick with it!
That is a pretty good question. You would think they are doing this so that they can confuse the hell out of you. I am afraid not. In fact its pretty simple. You know how you have a card in your wallet right now that gives you $5 cash back for every $1000 you spend? How about that sky miles card? etc etc... you see where I am going with this? The rewards that you get back from using your card to make purchases are paid for by the merchant that you are buying your goods from! The more rewards a card gives to the card holder, the more expensive it is for the merchant to accept the card. (Makes you think a bit more about those cards you use doesnt it!)

2) What about American Express?
American Express actually decided to process credit cards for merchants directly. They did not want to outsource to merchant services providers and as a result they have all of their own in house customer service. However, have you ever walked in to a store that said they did not accept American Express? Why would they do such a thing?!? Well its because they charge more than Visa and Mastercard! Again, how do you think you are getting all of those super awesome rewards every time you whip out that AMEX card to make a purchase?

3) Am I getting good rates?
This is the question that drives the entire industry. The truth of the matter is that I have no idea. And unfortunately there is a good chance that you do not either. Unless you are very well versed in the merchant services industry you have no idea what the cost is with taking a card, what you are really paying for a service, and how much cheaper you can get it for. Rates also greatly depend on the industry type of your business. If your industry historically has high chargeback rates, for example, the risk of your account going into default is higher and therefor typically charged a premium from the merchant bank.

4) What can I do to make sure im getting competitive rates?
Either you can spend a whole lot of time learning the industry or you can go to one of your merchant bank's competitors and ask for a rate analysis. (Like me!). Analysis are usually completely free and they let you know if you are priced competitively. Usually you would just provide a merchant statement to the company and they come back to you saying what you paid, what the cost was, and what you would have paid with them.


If anybody has any questions that they would like answered feel free to PM me and I can add the question to the FAQ.

_________________________
Merchant Processing Information - http://protecmerchantsolutions.com/


Last edited by protec1; 7th May 2013 at 08:11 AM.
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Old 7th May 2013, 06:56 AM   #2
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I've been looking at these lately. What's the advantage vs using Paypal or Square?

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Old 7th May 2013, 08:00 AM   #3
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Square charges 2.75% per swiped transaction. If you read my entire post you would see that Interchange is not even close to that, which means that square is very expensive.

However, since they do not charge any other fees (Statement, Minimums, ETC....) they are usually cheaper as long as you do not go over $5,000 in monthly volume. Even still I would recommend that you get yourself an actual merchant account, as it helps to build business credit and can make it a possibility to get a Merchant Cash Advance Later on.

Paypal is a buyers tool. What I mean buy that is that it is geared towards the buyer. Typically Paypal will charge a high rate, they can hold your money for weeks at a time, among other things. I would definitely recommend against opening a paypal merchant account.

Any other questions just let me know!

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Old 7th May 2013, 11:11 AM   #4
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I already have a Paypal merchant account, and have never had my money held etc etc. Like you made with the comparison to Square, what's the threshold where Paypal starts becoming more expensive than a regular Merchant account?

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Old 7th May 2013, 01:42 PM   #5
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Paypal may not necessarily hold your funds for long periods of time, however they are not exactly competitive in the marketplace for things like Next Day funding. I have seen holds from 48 Hours all the way to Two weeks to validate transactions.

As for the question regarding when it makes sense to have your own merchant account, that is a hard one to answer. It really depends on the "Matrix" of credit cards that you accept on a daily basis. For example if you are accepting 90% debit cards (with a .05% Interchange) and are priced at 1.69% it would make sense for you to have an Interchange Pricing Model no matter how much you do a month in processing. Paypal typically charges 2.9% and .30 cents a transaction for small merchants and 2.2% for over $10K a month. If you process $10K per month at 2.2% you pay $200 for the processing fee along with an additional .30 for every transaction. VERY EXPENSIVE. My company could very easily save you a big percentage, how much money that equates to would depend on how much business you do every month.

You have to realize what Paypal was created for. A solution was needed for a seller that does not go through an underwriting process, may or may not own a business, may or may not be credible. In that case scenario (Especially with Ebay which now owns Paypal) funds are held for a period of time to allow customers a chance to dispute the sale and Paypal would still have the funds in Escrow. Processing for merchants that actually have a business with a customer base is not the sole focus of Paypal and therefor they are a bit behind the 8 ball when it comes to innovation and competitiveness in the marketplace.

Square was made to capitalize on small business owners like landscapers etc.... If you are processing more than 5K a month it really does not make sense to use either of these options unless you are selling on Ebay.

If you want any more information regarding your personal situation, want me to check out one of your merchant statements, etc... feel free to shoot me a PM. That is what im here for!


Last edited by protec1; 7th May 2013 at 01:50 PM.
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Old 17th May 2013, 05:04 AM   #6
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Correctly configured Interchange Plus account is definitely the best way. So, why Tiered pricing is offered under Rates tab on your website?

“There are three major categories that a credit card falls in to when being accepted as a form of payment. They are know as Qualified, Mid-Qualified, and Non-Qualafied rates. Below are a few examples that outline what types of information would be needed to fall in to the desired categories and typical rates for each category.”

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Old 17th May 2013, 01:00 PM   #7
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Well the "best" way is very dependent on the situation. For example, some companies want to know exactly how much they are paying for each card this way they can add a service fee on products that they are selling to account for the processing charge. If they are priced on Interchange it is not really possible because they are not likely to look up the Interchange rate for the card that is being given to them.

If by "Best" you mean cheapest than I would say you are correct. However, risk on an account greatly influences pricing structure as well. For example, a high risk client (Such as online pornography) would almost never qualify for Interchange pricing. The merchant bank processing the transactions is taking a significant risk on behalf of merchants (which I could go into with you but it is a very lengthy conversation). They want to be compensated for the risk they are taking and therefor would not provide interchange pricing, nor would almost every competitor (unless its interchange plus 200 points).

The truth of the matter is that 95% of my merchants are priced on Interchange Plus. I do not advertise Interchange Plus on my website in case a high risk merchant comes to me saying that I told them one thing and then did another. I would not want to mislead any merchant by offering something I cannot absolutely guarantee (Unlike many other banks that have a main goal of getting your account no matter what they have to say to do it). It is simple really, if I do not give you the best pricing available, you are going to leave me for a company that does. I would much rather price you as competitive as possible to retain your business and to avoid wasting any of my time or yours.

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Old 19th May 2013, 06:44 AM   #8
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Quote:
Originally Posted by protec1 View Post
Well the "best" way is very dependent on the situation. For example, some companies want to know exactly how much they are paying for each card this way they can add a service fee on products that they are selling to account for the processing charge. If they are priced on Interchange it is not really possible because they are not likely to look up the Interchange rate for the card that is being given to them..
It’s not necessary to know each card cost. Calculate average effective rate (pricing model doesn't matter) and merchant will know what percent to add.

Quote:
Originally Posted by protec1 View Post
If by "Best" you mean cheapest than I would say you are correct. However, risk on an account greatly influences pricing structure as well. For example, a high risk client (Such as online pornography) would almost never qualify for Interchange pricing. The merchant bank processing the transactions is taking a significant risk on behalf of merchants (which I could go into with you but it is a very lengthy conversation). They want to be compensated for the risk they are taking and therefor would not provide interchange pricing, nor would almost every competitor (unless its interchange plus 200 points).
Ok, charge 200, 300 or 400BP, and/or make a note that high risk may not qualify for Interchange.

Quote:
Originally Posted by protec1 View Post
The truth of the matter is that 95% of my merchants are priced on Interchange Plus. I do not advertise Interchange Plus on my website in case a high risk merchant comes to me saying that I told them one thing and then did another. I would not want to mislead any merchant by offering something I cannot absolutely guarantee (Unlike many other banks that have a main goal of getting your account no matter what they have to say to do it). It is simple really, if I do not give you the best pricing available, you are going to leave me for a company that does. I would much rather price you as competitive as possible to retain your business and to avoid wasting any of my time or yours.
If I got it right, 95% of customers are on Interchange, but Tiered pricing is advertised in case high risk merchant will show up? It doesn’t make any sense.

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Last edited by Victor196; 19th May 2013 at 08:07 PM.
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Old 19th May 2013, 12:33 PM   #9
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Quote:
Originally Posted by protec1 View Post
Square charges 2.75% per swiped transaction. If you read my entire post you would see that Interchange is not even close to that, which means that square is very expensive.

However, since they do not charge any other fees (Statement, Minimums, ETC....) they are usually cheaper as long as you do not go over $5,000 in monthly volume. Even still I would recommend that you get yourself an actual merchant account, as it helps to build business credit and can make it a possibility to get a Merchant Cash Advance Later on.

Paypal is a buyers tool. What I mean buy that is that it is geared towards the buyer. Typically Paypal will charge a high rate, they can hold your money for weeks at a time, among other things. I would definitely recommend against opening a paypal merchant account.

Any other questions just let me know!
I find Paypal fees are too high. Square also charges too much. What is the solution?

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Old 19th May 2013, 06:58 PM   #10
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Victor,

It is pretty obvious that you just want to argue with everything I say because you are one of those so called "Expert" merchant processing salesman that is interested in lining your pockets instead of saving merchants money.

1) Calculating average effective rate would be great if you did not care about charging your customer more money that you need to and actually turn more of a profit off of them, which i'm sure does not bother you much because its the small guy that gets hammered. So a guy walks in with a card that has a .05% debit interchange but you charge him 2.5% over cost because that is your effective rate? I really hope that is not advise you are giving any merchants.

2) I do not need your advise on what I should or should not have on my company website. It serves my company and my merchants very well as a source of information. It is not a quote for any specific merchant, Obviously. It is showing a comparison to what we have seen on merchant accounts and what we have provided in savings. I thought that was EXTREMELY obvious.

3) Obviously your "porno" comment is another ridiculous attempt to discredit my company. Unlike you (it would seem) I would never potentially deceive my customers or claim something on my website unless I can provide it 100% of the time. Merchants do not know what is and is not high risk because believe it or not, they are not experts in the electronic payment market. Giving the least amount of information possible to a merchant to get their account is not our goal. Nor am I going to specify an Interchange rate with specific basis points without knowing anything about a merchants business. That is a cheap sales tactic used by deceptive companies that are only concerned with signing merchant accounts under false tense that give all of us a bad name.

You show your true colors with your ridiculous questions and comments. Good luck holding on to your accounts for long.

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