I have been outspoken about unscrupulous sales practices in the credit card processing industry. A comparable environment exists in the mortgage industry and the similarities between the two are many. Both industries have very complicated products and services (credit card processing is more complex). Sellers of both these services have a disproportionate knowledge advantage over buyers and often take advantage by extracting higher fees in sneaky ways. Both industries are very fragmented. And both have low barriers to entry allowing admittance to just about anyone who wants to be in the business.
So the question is: what is the best way to discourage such practices and protect consumers from falling prey? It's an issue that the credit card processing industry has just started talking about. Some within the industry have begun speaking out advocating that the industry better clean itself up before regulators have to engage. My take on that approach - good luck. With a sales environment so loosely controlled and transient, you'll never be able to play on your honor.
There is an article on the front page of the Wall Street Journal today: Illinois Tries New Tack Against Predatory Loans. In it, Amy Merrick rehashes the current turmoil in the credit markets that is stemming from subprime lending, and one of its biggest causes, predatory sales practices.
The article focuses on what the state of Illinois is doing to combat predatory practices: government intervention. This is apparently a new and improved approach from the first go around of attempts where regulators threatened fines and penalties to deter bad behavior. Thirty states, including Illinois, have predatory lending laws that prevent certain practices.
However, when that proved inefficient in curbing bad behavior, the new solution the Illinois legislature is now advocating requires prospective borrowers to sit down for 1 to 2 hours with a counselor prior to completing a loan. I can see the logic in providing expertise to those who don't have it, but requiring?
It's an interesting topic and one which is very tricky. I don't see any sort of regulation or oversight happening anytime soon in the credit card processing industry. Businesses receive different treatment than consumers from regulatory bodies. So in the meantime, you are all on your own, without a credit counselor to help you with your next credit card processing purchase decision. Good luck with that.
Comments: 0 | Post a CommentThe credit card processing industry is notorious for complexity, hidden fees, not-so-great providers, and generally considered by many to be one of the most challenging parts of running a business, and rightfully so. Buying credit card processing is like getting your car repaired in that consumers usually do not know enough about what they're buying to ensure that they're being treated fairly. Sellers end up having a significant knowledge advantage over their customers and can hide fees, overcharge for the service, or charge them for things that are unnecessary.
The rub for me has always been that the overwhelming majority of all merchant service providers don't play by the rules and capitalize on the industry's complexity for their own benefit. By "rules", I simply mean shooting straight with buyers. Some providers of course are more egregious law breakers than others. Despite being rule breakers, these companies are often rewarded because they win the business of even astute buyers over other companies who refuse to use the same sneaky tricks.
QuickBooks Merchant Services and Costco Wholesale are two great examples of 'Rule Breakers'. I could have chosen any number of companies as my examples but I wanted to demonstrate that even the largest players, with the greatest amount of perceived 'trust' are using the same sneaky tactics as everyone else. Let's look at QuickBooks first. Here is the screen shot for their main merchant services web page. I've highlighted the area in red where they show their rates: 1.72% for swiped and 2.44% for key entered. Fair enough, competitive rates. But..
If you look down in the fine print you'll see that some Non Qualified Transactions will be charged 3.27%. That's a significant bump from the advertised rates. That's important to know because depending on a few variables, anywhere from 50% to 80% of your transactions are going to be Non Qualified and fall into the 3.27% rate category. The actual split will depend on how a provider has structured each bucket but the aforementioned ranges are good estimates. As a consumer, I need to know about this 'minor' detail.
But let's say that you didn't read the fine print and then clicked on the "Try it!" button on the side to see just how much you should budget to pay for credit card transactions. What comes up is a comparison with only the 2.44% rate represented. The 3.27% rate for "Non Qualified Transactions" is nowhere in sight. So now they've provided two data points to demonstrate to you that you should expect QuickBooks Merchant Services to charge you 2.44% on your credit card transactions. That's simply not the case.
Finally, after not being upfront with their own fees, they make a disingenuous gesture and try to become your caretaker by announcing:
Now let's take a look at Costco; they're worse than QuickBooks. If you look at their website, they offer merchants a swiped rate of 1.64% and $0.20 and 1.99% and $0.27 for internet or mail order transactions. Nowhere on their website do they disclose that Non Qualified cards are charged 3.47% and $0.31. You have to pick up the phone and speak to a sales person before you can squeeze this minor detail out of them.
A few things about this:
Summary The problem I have with every provider who is selling this way is that it's underhanded. These are the same selling tactics that have been used in the mortgage and title business and what ultimately got Congress to start regulating those industries.
Companies who use these strategies bet that even though customers will become irritated when they find out the reality, they'll stick around to avoid the cost and effort of switching to another provider, who will probably just be the same. It's certainly a way to play the game, but definitely not one that I could ever be proud of.
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For Visa, it’s out with the old and in with the new. As part of a multi-year upgrade to their processing systems, they are in the process of launching Account-Level Processing (ALP) as its new standard for credit card issuance and usage. The change will allow consumers to keep the same credit card number regardless of their stage in life or particular card program. In the past, if you changed credit cards from when you transitioned from being a poor college student to a debt ridden professional, you got a new card with a new number. With Account Level Processing, you’ll keep the same credit card and your bank will be able to change credit limits, rewards, interest rates, and other variables on the back end.
The obviously advantages for banks is that they no longer have to issue new credit cards, which saves them money. They are also more likely to keep you as a long term customer as you move into different stages in life because you will be less likely to shop for a new credit card every time you want something different. The biggest incentive for Visa (and the banks) however is that ALP will allow them to better track your spending habits and then monetize that information to make you offers. Click here to read more about potential uses of targeted promotions and offerings and how this is slated to benefit merchants to help offset credit card processing fees.
Before ALP, only the first six digits on your credit card was used to process and manage transactions. Known as the Bank Identification Number (BIN), these six digits will become a thing of the past as all 16 digits will now be used in processing your transitions.
I was talking to David Fish, Senior Analyst at Mercator Advisory Group about this and his comment was that all the value that is being created by the ALP is now owned by Visa and the issuing banks. He said that processors acquirers (also known as back end credit card processors) should be banging down the doors begging for access to the ALP databases so they can tell their merchants who their best customers are.
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