Practical Ecommerce

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

Bio   •   RSS Feed


Sign up for our email newsletter

  1. Ashley Berg February 17, 2012 Reply

    This is one of the best articles I have ever read on this topic! I want to share that there is an upcoming webinar on similar concepts on 2/29/12, at noon, est, if interested. You may contact me at for more details!

  2. MerchantFeeSavers February 17, 2012 Reply

    Ashley, thank you for the kind comments. A lot of thanks goes to Practical Ecommerce for allowing me to help merchants understand and navigate through the perplexity of the card processing industry. My engineering background, merchant experience, sales & corporate involvement in the processing industry, and my integrity just give me a unique advantage to help merchants.

  3. Ben Dwyer February 21, 2012 Reply

    This is a good article, but it fails to mention a fundamental flaw in the statement analysis/audit process.

    Auditing a statement correct requires three steps, not two. As this article demonstrates, simply comparing Processor A’s rates to Processor B’s rates leaves too much room for speculation. Every audit needs a control – a bottom line.

    The first step to auditing a statement is to determine how much any processor would have to pay to process a merchant’s volume (sum of interchange and assessments). In the case of tiered pricing, a reasonable and often very accurate estimate of base cost can be deduced through a processor’s qualification and a business’s processing profile.

    A cost comparison between or among processors should only be made after a base cost has been determined.

    The second step is to apply each processor’s rates and fees in whole to the base costs. This will produce the most accurate measure of the competitiveness of each offer because each offer is based on the same underlying assumptions.

    We have provided thousands of such detailed audits free of charge, and the reduction in processing expense for the average business comes in at just over 40%.

  4. sbouchever February 21, 2012 Reply

    Great article by Phil Hinke, one of the stand-up guys in the industry.

    We have always felt a well informed merchant was the best to process for. As the industry leans more and more towards interchange-plus pricing, this type of article helping merchants understand the games processors play is increasingly relevant.

    Unbiased statement analysis is crucial to assisting merchants in making that all important decision of staying with their current provider, or switching to a new processor that offers interchange-plus pricing. This is especially true for larger merchants looking to save significant dollars on their credit and debit card processing fees.

  5. kathywmn February 22, 2012 Reply

    For the small, independently owned business merchant, we fail at 1 and 3, not because we don’t care or on uninterested, but because we are busy selling a product, so have chosen to go with a "reputable" merchant service based on recommendation. Would you care to list your top 5 picks for merchant services/processors … for the small business? Which would you go with? Which would you avoid?

  6. tyhardison February 23, 2012 Reply

    A significant number of Acquirer Pass Through fees and Interchange modifications have been announced that will impact ecommerce merchants.

    Visa will initiate a new pass through Fixed Acquirer Network Fee (FANF) on a merchant Taxpayer ID basis (TIN) beginning April 1, 2012. The rate assessed to each Taxpayer ID will be determined based on channel and MCC with quarterly collection by Visa beginning in July 2012 for the previous calendar quarter. For Customer Not Present merchants will be assessed based on gross merchant sales volume originating from any Visa-branded card. Merchants that fall into this category with monthly gross sales volume ranging from less than $50 a month on the low end will see a $2 a month fee- to merchants with gross sales exceeding $400 million at a $40,000 a month fee. There are some 18 tiers, with a merchant falling into a volume tier of $8,000 to $39,999 a month seeing a new $15 per month FANF fee.


  7. MerchantFeeSavers February 24, 2012 Reply

    Ben, every month I am given a limited number of words to discuss perplexing card processing issues. This article was not on all the steps needed to audit a statement analysis (and there are more than 3 steps).

    This series is on several red flags merchants need to understand. Keep in mind, my comments were on just one piece of the salesperson’s savings analysis.

    Phil Hinke

  8. MerchantFeeSavers February 24, 2012 Reply

    Kathy, You are certainly not alone when it comes to 1 and 3. However, I feel it my responsibility to make sure merchants are aware of their importance.

    I do not recommend or endorse any providers or salespeople and I caution merchants to be careful with recommendations/endorsements made in this industry. Many recommendations/endorsements are made by organizations/people being paid behind the scenes by the provider/salesperson they are recommending/endorsing. This even includes many chambers and associations. It does not mean the recommendation/endorsement is not earnest. However, merchants just need to be cognizant of this issue.

    Phil HInke