Rule Breakers in the credit card processing industry

So what are some of the most typical "reasons" these processors give as to why a transaction may get hit with this higher "non-qualified" rate??

You're running into this because you're trying to avoid paying a large up-front fee to start accepting credit cards. These are consumer-grade gateways for small business merchants that have relatively low transaction volumes. Big businesses typically spend the time and money to integrate the credit card processing into their system and design in rules to make sure they get the best possible rate for each transaction. They often skip these gateway type services and go directly to the processor's platform. This also often allows for negotiating a better rate based on the transaction volume and ticket size.

Small business merchants can also go direct to something like Paymentech or FDMS, but then you have to spend the time and money integrating those platforms into your software. The prices of these merchant services may be misleading, but you're pretty much just being penalized for not spending a bunch of money up front on a solution tailored specifically to your needs.

The choice really comes down to using services like this with a low up-front cost, or putting a very large chunk of money up to save a lot more on your processing costs long-term.

The best way to avoid non-qualified fees is to be aware of what the various causes are ahead of time. Most non-qualified fees can be reduced or avoided altogether if you process your cards in a way that satisfies the requirements. There are usually only a few rules that are relevant to each business and knowing which ones make a difference to you can reduce your costs by 25% or more.

[...] “The credit card processing industry is notorious for extreme complexity, hidden fees, unsavory providers, and generally considered by many to be one of the most painful 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.” [More] [...]

@eng - If I correctly understand what you’re saying, directly integrating with a processor is probably a more expensive proposition than using a gateway would ever be. Not only do you have up front development and integration costs, but you also have to maintain that connection which can be quite expensive. The only companies that usually directly integrate with the credit card processors are equipment and software providers who provide the service to merchants. There may be some, but I’ve never known of a merchant making any financial sense from connecting directly to a processor over using a gateway.

@E Smith - great point.

Directly integrating with a processor is not necessarily less expensive, even for large companies. It can often be more complicated (adding to development costs) and it locks you into that one processor because changing to another is prohibitively expensive.

I work for a company that has created a payment processing and fraud detection gateway, and one of the main reasons people choose this way of connecting is because they can code to our system and easily change/add any supported processor they wish, whether it's Paymentech, First Data, or even PayPal or Bill Me Later.

Our software also has the rules for getting the best exchange built in. The client simply sends the transaction details through and based on the information we get, we make sure they get the best rate possible. It's a step in between "black box payment gateway" and directly integrating with a processor.

These companies still have their own merchant accounts with the processor allowing them to negotiate the best rates based on volume, etc.. they just don't have to deal with the headaches of keeping up with the ever changing specs or implementing new technologies such as Verified by Visa.

That said, there's always an associated cost for any service, but it is rather deceptive of these companies not to be completely clear about what the charges are.

@ Wayne - well said.

@Jake - In my opinion, your thinking of working with someone who will not only be upfront with the fees but also explain them is dead on. In this industry, as a consumer of credit card processing services, it's very challenging to ever learn enough to protect yourself from getting over charged. Get competitive prices, but in both the short and long run, you're always better off working with someone you can trust.

Maintaining a connection to the gateway? A lot of them are moving away from leased line and going to Internet connections. I'm not sure how this is an extra cost above a connection you'd already have to maintain to these low-end gateways.

In clarification, going directly to a processor usually involves middleware of some sort. What you can't do with the mentioned merchant services is negotiate your rate like you can when talking directly to a processor.

I'm not sure where the logic is in suggesting that up-front development costs doesn't save money. If the complaint is that you're getting hit for 3.27% of the transaction cost due to the inability to control how your transactions are being processed, your only option is to invest some money in cutting out the middle-man (i.e. Costco/Quickbooks/PayPal/etc). You're going to pay for the development of software for processing one way or another; these services just make you pay it in perpetuity through inflated discount rates. For small businesses, the ROI of the development just takes too long to justify when you're only cutting 1 to 1.5% off the discount rate. Thus, small businesses are stuck with these types of "predatory" rates. If you could justify the up-front cost through ROI, the cost savings would be realized in the long term.

And, yeah, I didn't realize you had a vested interest in making this situation sound like something bad. Nice way to spin this situation into a call-to-action.

Ah yes...the mid and non-qualified discount rate: what card-accepting merchants learn about, either while they're shopping for a processor, or (like me) AFTER.

Now, as to whether this tiered qualified garbage is ethical...The whole credit card game is a pain.

I'm sure most consumers don't know that their "rewards" cards, (as one example) costs the accepting merchant more $! "Get 1% back!" Yea, and guess where that 1% comes from!!!

More merchants ought to do their research on this subject on web forums for webmasters - its talked about a lot there. (Not the ethics, but giving "heads up" and recommendations.)

Word to the wise, (or prospective wise): My small-merchant experience, accepting Visa, MC and AMX online costs me, after ALL fees, and averaged together by the month - 5%.

@Cypressman - the experience you shared about buying credit card processing services is exactly what I'm talking about. Yours is a very common experience. The point I wanted to make on this is that companies can charge whatever they want, but it's reasonable to expect full disclosure. And regarding your overall rate, that's sounds high to me. I can understand it would be that high if either your sales volumes were less than 10k or if your average ticket was somewhere around $10.

[...] Rule Breakers in the credit card processing industry Bad Credit AdviceBad Credit Advicelockergnome26 min - May 29, 2007http://chris.pirillo.com/media/2007/05/29/how-to-repair-your-credit/ Tags:Share This [...]

Just use Google checkout for online payments. They charge 0% yes, ZERO percent. Easy as pie if you can do it without 'swiping' cards.

Thank you for the great website - a true resource, and one many people clearly enjoy.

@Jason Barclay - Thank you for the compliment, I appreciate it.

[...] Rule Breakers in the credit card processing industry [...]

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Integrating directly with a processor is not an affordable or realistic solution. These integrations take engineering staffs months and can often cost millions for development. PCI Compliance is tearing the industry currently because merchants will soon be directly financially responsible if their integrations are not compliant with the Payment Card Industry Data Security Standard. The company I work for is in business solely to write these integrations and offer a form of middleware for merchants. By purchasing middleware, the merchant can shop for competitive rates and change between any of the credit card processors as often as they wish.

As said before, these ISO (independent sales organizations) will often promise low rates..."I can save you 75k this year alone in processing fees." This is generally not true. These ISO's make money by setting up as many accounts as possible on their server. They are true middlemen as they often push the transactions directly to one of the major processors that a merchant can get to by using a standard POS (point of sale) system and middleware.

By spending a little more money using integrated payments (POS and Middleware that processes cards through register or touchscreen rather than a separate terminal), you can save in the long run by leaving your options open.

Businesses like Mercury Payment Systems and Sterling Payment Technologies currently offer some of the best deals in the business.

-Justin

Bryan,
That 5% includes all fees inc. batch, etc for an internet/mailorder business. Under 10K/mo, avg ticket $100 ($10 --> $250).

[...] fees. I am sure they are not the only ones. Time to go double check the fine print. futurama zapread more | digg [...]

This information is priceless! Thank you for sharing your expertise and explaining it all in easy to understand terms. Thank you, thank you, thank you!

[...] Rule Breakers in the credit card processing industry [...]

<strong>Caution: devious credit card merchant accounts are ripping us off....</strong>

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@ Canvas Grey - Thank you for your comments.

@ cypressman - it depends on how close to 10k you are but it still seems a bit high. I suspect most of that is being driven by your monthly fixed costs which will go down as an overall percentage as your volume increases.

I have be taking credit cards for 30 years and have seen it all. The points mentioned above are good ones.

Some other things to be aware on the back end of the system----you always pay fees, including when you issue a credit (refund). So on that $10 charge, you probably paid 75 cents; then again when you refund it. Also, if your employees are goofing around with the machine and input a $10,000 charge, then reverse it, you may be out $60+ for the joke.

Then there are the chargebacks----it is easy for a buyer of online/mail order goods to claim they did not receive it or the goods were defective. You get charged back at once----unless you have excellent documentation and repsond quickly and follow up, you will take a loss there.

The bank always wins----even if you have approval/authorization for a charge, any time later they can say it is a bogus charge and charge you back. And they do. So, do not ship orders that look too good to be true, eg
that $3000 order to Nigeria or Romania or Indonesia that they was shipped at once via Fed Ex. You will lose----in general, do not do business with any 2nd or 3rd world countries via credit card. Demand a bank transfer, do not take cards. You must be smart enough to decline this business.

This "non-qualified" thing is huge and will only get worse. You know all those mailing you get to switch your card to a, "signature" card and maybe they throw in an annual statement? This makes it non-qualified. They are always expanding their "business" cards and affinity rebate/reward cards.
And all foreign cards are non-qualified---thats 3.3% or more out of your pocket.

To get the qualified rate---which is the come-on, you must have up to date
software and address verification software (if not at a retail store where you have the card in front of you)---you have to have your act together, this takes effort and time.

Having said all this, we use Costco as our processor and it is the best deal we can get. You have analyze your pattern of charge to see what is best for you----for lots of small charges, a high percentage only may be best. If
charges tend to be larger, a fee of .35 plus a lower percentage is better.
Do the math! If mostly non-qualfied, focus on getting that rate down.

In closing, do remember what an incredible service you are getting---if you
have good systems in place, use common sense and run an online business--it is a beautiful thing to get your money within 24-48 hours after you ship and generally not get cheated. Obviously, you will have to pay for this service and you cannot exist in the modern world without it. So, do your
homework, train your processing people well, price your products right, get the best deal you can and review it each year. Then go out and commit honest commerce.

Of course, you could always avoid all these outrageous fees and charges by either offering a X% discount for cash or refusing to take credit cards. That is what I did during my first year of business.

[...] A quick search of merchant service providers will demonstrate that non disclosure of fees is a standard practice. See two examples here. [...]

Hi everyone,

I agree with Brian and he is quite dead on on all the points. I think there is a shift now on the processor's part on educating the merchants on these what this enigma of fees and charges are all about called interchange. I for example, has taken it as my "battle cry" to educate my clients on this regard and offer them straight pass through on all of the rewards cards, corporate, mid and non qual transactions, and the like. Meaning whatever is advertised on VISA and MC's website as far as interchange is concerned, I pass them through to my clients at cost. No padding. No hidden fees.

Other companies result to good salesmanship to sell you their credit card processing with that very attractive, "Hollywood facade" front rate but stick it up behind you this back end rate. Where when summed up together is really a slight of hand trick coupled with a statement that even a mathematical genius can't even understand.

Kuddos to Brian for doing such a brave job in shedding the light on what these things mean in a statement and carefully articulating this massive industry to a layman merchant. I actually refer my clients to this blog for references just to help them on their way to understanding this business.

Thanks a bunch!

Hi Bryan: My business partner and I recently started a staging and interior design business. Though I've owned businesses for years, this is the first time in 15 years I've needed to acquire credit card processing services. On 5/22/08 we were unexpectedly thrown into what seems like an unending vortex feverishly trying to collect $7,000 from iPayment Inc. We've felt like we were going crazy these past 10 days as we've been in disbelief that we can't access funds that we've earned and we have no apparent control over the outcome regarding those funds. We've found ourselves wondering if it's unreasonable to expect friendly/knowledgeable customer service, full disclosure and general education as a new merchant. After 6 hours of reading blogs, doing research and, fortunately, discovering your website, I've discovered other fellow merchants experiencing the same challenges. Sad!

Though it's obvious my partner and I didn't exercise enough due diligence in 10/07 when signing up for credit card processing services, do you have any tips on managing the relationship with iPayment to get an immediate positive resolution - accessing our money rather than enduring an indefinite hold on our operating funds? We don't want to be hostile since that will surely prevent rapid resolution but we also have no intention of capitulating out of sheer frustration and naivete!

Thanks for sharing your vast expertise.

@Dana - this is tricky. I suspect that when you signed up with this provider you projected your average ticket to be something like $1,000. You then you had this large $7,000 sale which their risk department is now holding until you can provide some supporting documentation to demonstrate the veracity of the transaction. Is that correct? From a risk perspective, it makes a lot of sense for a provider to flag and hold transactions that are outside historical transaction trends or pre-set expectations. The latter would be applicable to you as your merchant account is new.

After a transaction has been flagged and is being held, how a provider handles the process of supporting documentation, response times, etc. varies widely across the industry.

I would suggest that you 1) provide them the information they are asking so they can release the funds and 2) speak to your account executive to make sure that they properly understand the amount and ticket size of your expected transactions.

All the best.

I have a POS system that processes through Mercury Payment. Is there a way to get around that and use a different processor?

@Dave - yes, I don't know of a POS that does not maintain multiple processor integrations which provide you alternatives to Mercury if you desired.

To add in comment to iPayment. I've just recently run into a problem of where they illegally withheld a recent transaction of $ 3,000.00. I've been with iPayment for almost a year and have had out of the US transactions since then, with never a problem until "just now." iPayment told me the money was flagged because it is $ 2,000.00 over the $ 1,000.00 daily limit for each customer per day.

They were trying to tell me (2) things, (1) I had a limit of $ 1,000.00 per customer transaction, per day, and (2) I could not do business with Customers (who had bank letters and were verified already) that were out of The U.S. Even though these customers never had a charge back.

Well low and behold, when I pulled my contract, NONE of this information was in the contract. There were no limits documented at all, and there were no restrictions on where one does business, in or out of the US. I was told by risk management, that iPayment has the right to change the contract at any time and if they see fit, risk management has the right to hold funds up to 180 days even after the transaction has been verified. I even have a recorded message from the Risk Department that my money would be back in my account within 48 hours. That time has come and gone and still no money, but yet they drafted additional fees from my account. Needless to say, they are in serious breach of contract. Since they are illegally withholding my $ 3,000.00 still, in essence stealing funds to operate off of, needless to say the legal team is stepping in, as I was advised since what they have done will lead to an award of my money, the $ 3,000.00 they refuse to give back, in addition to punitive damages and interest.

Heads up though, I had this happen recently to another business owner that also experienced no problems until now as well. I tend to wonder with the economy the way it is if this is a trend we will start to see, Credit Card Companies holding the funds that belong to the businesses for weeks or months at a time, so they can use it like several of the Investors who have tried to make it by conducting business the Ponzi Scheme. By way of paying their expenses before releasing money that belongs to other people on a timely basis. If our economy wasn't bad enough, this alone could cause more businesses to close their doors. Our rates are going up, and our money is being tied up, something we business owners cannot control. So basically, I state to anyone who is not doing Credit Card business within your own bank itself, watch out, as this could be the beginning of people loosing even more money and more people loosing jobs because the Credit Card companies are claiming some sort of right to illegally with hold our money up to 180 days, even after the transaction was proven valid.

Since the mortgage crises went unattended for years, now that our Government is busy with that, no one is watching what the Credit Card Companies are now doing. People will be forced to go back to the old ways of conducting business, cash for services and products.

I am a rep for an ISO. I make it a point to take the extra time to give a merchant information on all the fees and charges and how the different bundled rates will affect them. I don't jack up the cost of eqipment or gouge the merchant with all the little extras, like a set-up fee, or an application fee, etc., etc... Yes this is a complicated field and the opportunity is there for iso's to hide fees. My company makes it a point NOT to hide fees and to build a good relationship through honesty with your merchant. It fit my personal philosophy to a T, but I am sad to say that I see businesses, especially small businesses, suffer because of deceptive info.
I want my customers grow their business and thrive and most of all... to feel good about the whole service I provide, and if I do it right, I may not get rich, but I can make a good "Honest" living.

I am a merchant rep. Regarding withholding of funds, you should have called your provider risk dept and tell them you will be charging above your monthly volume (when you intially signed your agreement you stipulated a certain average ticket, monthly volume) If you go over this amount considerably your provider/processer will hold your funds and will not release, sometimes for months. Reason they are fronting you the money (a certain amount based upon what you disclosed in your agreement). Extremely important stay within monthly volume if not immedialtly called their risk dept to forgo your funds being withheld

As a MA resident I have recently become aware of business owners whose merchant services provider base thier fees on gross reciepts (sales tax included) rather than taxable sales (minus sales tax). So when they are paying sales tax to MA Dept of Revenue, they are paying them total taxes collected even though the service provider is taking 3% in fees from the sales tax collected.

In two days the sales tax will go up from 5% to 6.25%, so while thier income from this month was the same as the income for next month they would take a loss on the month when the tax went up. The provider tells them they are unable to distinguish between sales tax and the sales (which seems to be B.S. to me).

Is this charging a fee or gross reciepts rather than taxable income common practice or varied from provider to provider? Any insight is appreciated.

Thank you for this valuable information.

If there a list that can be provided or a good website to checkout about which processors in the business are best to work with?

You mentioned Costco and QB are Rule Breakers...Who is not a rule breaker?

Are there any processors that do not charge "Non Qualified" rates?

This will help me to determine who I should look to for honest service.

Thanks

I am an agent for an ISO called Card Payment Solutions who is a subsidiary of I-Payment. On our Merchant applications/contracts we spell out what all rates will be (debit, pin-based as well as keyed, Qualified, Mid- Qual., and Non-Qual.). we are incouraged to be honest with the merchant, developing a close working relationship with them, thus offering them our personal assistance as a local contact whenever the need arises. No longer do they have to stay on hold during business hours taking them away from running thier companies. They have us to do that for them once we are told what issues of theirs we need to address. This type of Honest Customer service is something we are pround of, and is certainly not the norm with others in our business. There are like you say, a lot of crooks in the processing business, but i can truthfully say, I am not one of them, nor will I ever be!!

Direct integration with a payment processor is a relevant option for any company with decent IT skills and does not have to be an expensive project at all. Integration with certain processors can be accomplished through an API, similar to a payment gateway integration. It is an excellent option for companies processing higher volumes of transactions.