Credit Card Processing: Red Flags for Ecommerce Merchants, Part 1

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 first installment of a three-part series on “red flags” that can indicate a merchant is overpaying.

I audit hundreds of credit card processing statements every year. I have audited statements from virtually every processor and probably every industry. I have audited so many statements that I can likely determine if a merchant has obtained a good processing deal by simply looking at the merchant account provider’s name on the statement, or by glancing at a couple of key numbers, or by asking the merchant a couple of quick questions.

In this three-part series, I am going to 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. No calculations or math skills are required. You just need to have your statement in your hands, remember how you chose your current provider, and know a few things about yourself.

Red Flag 1: Failure of the Merchant to Review the Processing Statement

Do you periodically review your statement in detail? You won’t believe the number of merchants who simply glance at their statement then file it away. Perhaps you are one of them. I typically find that up to 30 percent of merchants are being priced incorrectly. I’m not talking misleading pricing. I’m talking about dumb mistakes. As a former quality engineer, I would rate the quality in this industry as somewhere between horrid and pathetic. Here is a reproduction of one statement I audited recently.

Card Type Transactions Processing Cost Total
# Dollar Amount Percentage Per Item
Discover Discount Fee 6 $4,865.87 2.8900 $140.63
Discover Transaction Fee 6 $0.00 $0.15 $0.90
MC Discount Fee 13 $9,032.98 0.2500 $22.57
MC Transaction Fee 13 $0.00 $0.15 $1.95
Visa Discount Fee 39 $20,529.50 0.2500 $51.33
Visa Transaction Fee 41 $0.00 $0.15 $6.15

This is one of two businesses owned by this merchant. The businesses should be priced at 0.25 percent + $0.15 over interchange and card company pass-through fees. The first business was set up correctly and Visa/MasterCard pricing is set up correctly for this business. However, take a closer look at the Discover pricing. This merchant is set up at 2.89 percent + $0.15 over interchange and pass-through fees. Why so high? I’ll speculate that the person keying in the information was not focused. When he saw the Discover pricing field on the screen he probably thought “American Express One Point” pricing and keyed in 2.89 percent instead of 0.25 percent. This merchant is overpaying on his Discover sales by $130 every month and doesn’t even know it.

If you do not or cannot audit your processing statement, get professional help from a knowledgeable CPA, accountant, or someone in the industry. They should perform basic statement audits free of charge. If you choose someone in the credit card industry make sure he or she is not affiliated with any providers or their salespeople, and that they do not receive any residuals from them.

Red Flag 2: Misleading Analyses by Merchant Account Providers

Below is part of an actual cost savings analysis recently presented to a merchant. Keep in mind that the merchant is already on “interchange plus” pricing.

The merchant’s monthly card volume is $99,993.71. Approximately 44 percent ($44,084.70) is credit card and 56 percent ($55,909.01) is debit card. The salesperson is telling the merchant: (a) that all credit cards will be charged 1.49 percent + $0.15, (b) all debit cards will be charged 0.05 percent + $0.28, and (c) all credit cards that downgrade to the “mid/non qual” — i.e., “mid-qualified, non-qualified” — level ($25,415.90) will be charged an extra 1.49 percent.

Before reading my comments below, please look at the analysis, noting the immediate concern the merchant should have had with the misleading tactics used. Focus on the “New Proposed Pricing.” Don’t worry about the “Current Provider” information.

Current Provider
Volume $99,993.71 44%
Avg. Ticket $34.59 56%
# of Trans 2891.20 44%
Total Fees $2,179.45 56%
Effective % 2.180%
New Proposed Pricing
Credit Card $44,084.70 x 1.49% = $656.86
Debit Card $55,909.01 x 0.05% = $27.95
Trans Credit 1272 x $0.15 = $190.82
Trans Debit 1619 x $0.28 = $453.34
Mid & Non Qualified $25,415.90 x 1.49% = $378.70


Current Provider New Proposed Pricing
Volume $99,993.71 44% Credit Card $44,084.70 x 1.49% = $656.86
Avg. Ticket $34.59 56% Debit Card $55,909.01 x 0.05% = $27.95
# of Trans 2891.20 44% Trans Credit 1272 x $0.15 = $190.82
Total Fees $2,179.45 56% Trans Debit 1619 x $0.28 = $453.34
Effective % 2.180% Mid & Non Qualified $25,415.90 x 1.49% = $378.70


Concerns and Misleading Tactics

  1. Switch to tiered pricing. The salesperson is trying to move the merchant off interchange-plus pricing to a tiered pricing plan. In my opinion, the salesperson should have been shown the door. If a merchant is not currently being priced fairly on interchange-plus pricing, he should first look for a better interchange-plus offering versus moving to tiered pricing.
  2. Unrealistic assumptions on debit card rates. The salesperson is telling the merchant that 100 percent of the debit cards will process under the regulated (Durbin Amendment) interchange rates. This is blatantly misleading and I am seeing more of this. The salesperson should know that the Durbin Amendment only affects debit cards issued by financial institutions greater than $10 billion in size. Therefore, in actuality, only 60 percent or so of the debit cards will process at 0.05 percent + $0.28. The other 40 percent will process at rates as high as 2.98 percent + $0.15. It would not surprise me if additional transaction fees were added.
  3. Unrealistic assumptions on mid-qualified, non-qualified tiered rates. The “mid/non qual” volume is extremely low. A more realistic number would be $38,000 in credit cards and $20,000 in debit cards — depending on actual debit downgrade pricing.

Did you catch these tactics, or even understand them? You need to audit any cost savings forecast prepared by a provider or salesperson. Also, realize that what I showed above is the easy part of auditing a cost saving analysis. You also have to audit it against the merchant agreement and the terms and conditions. For example, it would not surprise me to find that this provider also charges all the card company pass-through fees, PCI fees, regulatory fees, and other fees in addition to what is shown in the cost saving analysis.

Red Flag 3: Complacency

How long have you been with your current provider? Three years? Five years? Ten years? In my opinion, loyalty means nothing in this industry. Think about it. How often has your provider raised your rates or added new fees over the last several years? Moreover, how often has the provider called you and said “We are happy you have been processing with us all these years. We are going to significantly lower your rate.”

If your provider has told you they are going to lower your rate, then read “Red Flag 4” in next month’s installment. Merchants should always know when their contract expires, how long before the expiration date the provider must be notified to avoid being penalized, and what the early termination penalty will be should you want to leave them before the expiration date. Merchants should be reviewing their business against their pricing plan each year. You may be entitled to lower pricing if (a) your card processing volume has increased, (b) your average sales amount has increased, or (c) your risk has decreased. However, don’t just ask your provider if you’re entitled to a lower rate. You need to do your homework and know what you are entitled to. You need to tell them what your processing rates, fees, and certain terms and conditions should be. Don’t let your provider tell you.

Phil Hinke
Phil Hinke
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