Editor's Note: Contributor Phil Hinke is a veteran of the credit card processing industry. He now consults with ecommerce merchants on ways to lower their processing costs. Hinke believes merchants frequently overpay for credit card processing. His piece below is the second installment of a three-part series on "red flags" that can indicate a merchant is overpaying. His first installment we published last month.
This is "Part Two" of a three-part series where I identify indicators — I call them "red flags" — that you may be paying too much for your processing or you may not have the agreement you thought you had with your provider. In "Part 1," I identified three red flags: (a) Failure of the Merchant to Review the Processing Statement, (b) Misleading Analyses by Merchant Account Providers, and (c) Complacency. This "Part 2" installment picks up with Red Flag 4.
Red Flag 4: Provider Lowers Rate without Prompting
I very recently completed an audit for a merchant whose provider is a well-known, publicly-traded bank. The bank had the merchant on what I considered to be a horrible tiered pricing plan and had been overcharging the merchant by $50,000 per year. In December, the bank placed the merchant on an "interchange plus" pricing plan. However, the merchant was still overpaying by $46,000 per year.
If you read my three-part “Interchange Plus Pricing Doesn’t Automatically Mean Fair Pricing” series of articles last fall — see "Part 1," "Part 2,", and "Part 3" — this is a case where the merchant is still grossly overpaying even though he is now on an interchange-plus pricing plan.
But why would a provider lower a merchant’s rate or change his or her pricing plan without the merchant asking the provider to do so? There can be several reasons. In this case, there is a lot of buzz about interchange-plus pricing. The bank may have decided to offer this pricing plan, at a minimal cost savings to the merchant, to make him feel important and in the process prevent the merchant from looking elsewhere. I am seeing some providers now have a form of “debit rebate” on their tiered pricing plans. Of course, from what I have seen thus far, they are only giving the merchant a small percentage of the debit-card interchange reduction — I addressed this in "Durbin Amendment May Foster Deceptive Credit, Debit Processing Fees" — to which the merchant is entitled. However, many merchants may not know that and the provider likely knows the merchants may not know that. Here again, it makes the merchant feel good and helps prevent the merchant from looking elsewhere.
Another reason providers may lower a merchants' rates or change their pricing plans is because the merchants implicitly tell the provider that another provider is soliciting their business. If a merchant calls customer service and asks questions about his rates, fees, terms and conditions, expiration date, or notification requirements, those are tips to the provider that someone may be soliciting that merchant's business. The provider may proactively lower the merchant's rate slightly to appease him.
Of course, if you tell your provider that that you have been offered a better rate, your provider may say, “We’ll match the new rate.” And, if you have read any of my previous articles you know that I believe “We’ll match your rate” means nothing without first doing your homework and understanding all costs and terms and conditions that accompany the new rate.
Many merchants stay with their current processors even after a new provider offers a fair and honest processing value. Why do many merchants reward their current providers by staying with them even after the provider has been grossly overcharging the merchant for years? It's because many merchants do not want to spend the time to change providers. Providers that consistently overcharge their merchants know this and love their merchants for it.
Red Flag 5: Working with a Member Warehouse or Office Supply Store
Did you obtain your card processing from a member warehouse or office supply store? I am amazed at how many business owners walk into these stores and possibly think they are automatically guaranteed the perfect deal on card processing just by filling out the contract. I am sure there are merchants who receive good pricing from these types of stores. However, understand that selecting a merchant account provider is not like buying printer toner.
The merchant that I saved the most money obtained his card processing from a well known member warehouse store. Again, I am not saying that you cannot get good pricing from these stores and I’m sure they are trying to provide merchants a fair service. However, in my opinion you need to treat them like any other provider. You need to do your homework, understand the ins and outs of the pricing plan, and read their terms and conditions. Also, understand that the store is not doing the actual processing. It has simply put together some sort of profit sharing arrangement with the actual providers. In fact, you may have salespeople calling on your business who represent the same providers.
Red Flag 6: Business Owner Is Inflexible
Are you open to suggestions? In my experience, the more closed-minded you are, the higher the probability you are overpaying for your processing service. Two businesses that seem to overpay for processing more often than they should are CPAs and attorneys. The fact that these two businesses can overpay speaks to the complexity and convoluted nature of the processing industry. However, I also believe that being closed-minded plays a part as well. These are people who know numbers and contracts. Why would they need help? I recently audited a statement for a large CPA firm that was paying over 6 percent for processing. I showed my own CPA that he was paying almost twice as much as he thought he was.
A percentage of the statements I audit each week are priced correctly and fairly. I do not have an issue telling these business owners that they did a great job negotiating their processing costs. I may offer a few suggestions for further improvement that they can do on their own, but they do not need my help. The one thing I consistently find with business owners that have done a good job of minimizing their processing cost is that they don’t know if they have done a good job of minimizing their processing cost. They don’t know because they are not closed-minded and don’t let their ego or preconceptions get in the way of conducting their business.