Why is the credit card processing industry so challenging?

Posted on Sunday, April 08, 2007

This last summer my car broke down late one Saturday evening in downtown Chicago. Without much of a choice, I had it towed to the only shop in town that was still open. After having some guy poke around under my hood for a minute, the owner of the shop told me about this complicated problem that was very serious. He quoted me something like $1,500 to fix it. I had no idea if his assessment was reasonable, outrageous, or somewhere in between. Despite my limited options, I just couldn't get comfortable with him or the shop. I decided that I would be better off to pay an additional $150 and have my car towed to a shop close to my house where I knew the mechanic. In my opinion, this experience was a very good example of what goes on in the credit card processing industry.

Merchants have a considerable disadvantage
It is very challenging for merchants to understand enough about credit card processing to negotiate fair and reasonable deals. There is an information advantage held by sales people in the industry that is terribly difficult for merchants to overcome. Not only is the industry fundamentally very complex, most providers don't seem the least bit inclined to make it any easier. There are occasionally articles written by knowledgeable third parties that are are very helpful in providing general advice. One such example is a recently Wall Street Journal Article Charge It!. Even after reading this, merchants wouldn't necessarily be aware of some of the key 'gotchas' that can be pretty significant. Even merchants that I've known over the years that have been the most ambitious in trying to learn about the industry usually come up short.

Very few barriers to entry and little industry regulation
Fueling this situation are the lower barriers to entry and a loosely regulated industry. Stock brokers and life insurance sales people are required to become licensed and abide by a strict code of conduct or face serious penalties. Those in the payment processing business are not required to obtain any licenses or certifications and the only governing body that ever really gets involved is the FTC, which only addresses the most egregious cases. So as you can imagine, it's a bit like the wild wild west and you get some interesting characters that are attracted to the industry. So this is what you get:

Complexity + information advantage + few barriers to entry + light regulation = the payments industry

These industry characteristics are not necessarily unique to payment processing. Similar characteristics exist in the mortgage industry. Anyone who has sat down to sign mortgage documents can see how far government oversight has gone to try and thwart unfair sales and lending practices. I am not arguing for oversight, just highlighting what inevitably happens when you combine motivation for profit without proper checks and balances. No particular type of merchant service company is really above the less than desirable tactics that appear to have long ago become the industry standard. That includes banks and well known national businesses.

My advice is to find a provider that is willing to provide some context around this complex industry and even educate you about its nuances. Make sure that the person/company you're dealing with has some long term accountability to you and profit incentive so that you reduce the risk of them trying to front load their profits and skip town. You can learn enough from this and other online sources to be dangerous in the questions you ask which will hopefully deter those who didn't have your best interest at heart in the first place. To become a better buyer you can read the following posts: How to choose a merchant service provider, and Some advice to help you avoid common mistakes.

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