Credit Card Processing: Red Flags for Ecommerce Merchants, Part 3

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 third installment of a three-part series on “red flags” that can indicate a merchant is overpaying. “Part 1” and “Part 2” we published previously.

This is “Part 3” 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.

In “Part 2,” I identified three more red flags: (a) current provider lowered your rate, (b) obtaining your processing service from a member warehouse or office store, and (c) closed-minded merchants. This “Part 3” installment picks up with Red Flag 7.

Red Flag 7: Monthly Statement Lacks Processing Activity Details

I have seen merchant statements that state nothing more than “You processed X dollars for the month, you owes us Y amount, and you have 30 days to dispute our charges.” I would not use a merchant account provider that issues a statement with this little detail. How are merchants supposed to know if they are being charged in accordance with the agreement they signed? How do merchants know their accounts were set up correctly? As I stated in Red Flag 1 of this series, up to 30 percent of merchants are being priced incorrectly because of simple order-entry mistakes. I showed the example of a merchant being overcharged for Discover transactions. The lack of detail in a statement prevents a merchant from knowing if he or she is being charged honestly and correctly.

Even statements that break down transactions by Qualified, Mid-Qualified, and Non-Qualified do not provide sufficient data. Look at the example below — a replica of an actual merchant statement. It shows the breakdown of sales where the customer used MasterCard. The majority of transaction volume falls into the Non-Qualified category, which is the highest rate.

MasterCard Volume Rate Amount
QUAL DISC 1,327.07 .02190 29.06
MQUAL DISC 518.87 .03980 20.65
NQUAL DISC 2,296.82 .04180 96.01

In the example above, the merchant cannot determine from this statement the reason so many transactions are being processed at the highest rate. Is it due to operational issues or the card types processed? What card types are considered Non-Qualified for this provider? Remember, there is no industry standard for identifying what constitutes a Non-Qualified transaction, much less a Mid-Qualified or Qualified transaction. For example, provider A may have an international card transaction downgrade to the Mid-Qualified level and provider B may downgrade the same transaction to the Non-Qualified level. Further, there is no industry standard that states what downgraded to Mid-Qualified last year can’t downgrade to Non-Qualified this year.

You want massive detail on your monthly statements whether you understand it or not. You want to see the number of transactions and volume of transactions by the interchange rate charged for each card type.

For example, see first replica table below of an actual statement. This shows only four card types. But you may easily have 20 to 50 card types. You want to see the provider’s mark up — see the second replica table below — and you want to see the dues and assessments, access fees, and all other fees charged by the provider, which are not shown below.

Card Type Volume % of sales Trans % of Trans Interchange Rate Total
INT SPR PREM STANDARD (US) 136.93 0 1 0 2.53 3.46
FOREIGN STANDARD PLUS 721.16 0 11 0 2.15 15.50
DOMESTIC MERIT I 29,311.98 15 379 17 1.89 0.100 591.90
MERIT I ELECTRONIC COMMER 8,584.64 4 35 2 1.89 0.100 165.75
Plan Code # of Sales Sales # of Credits Credits Net Sales Ave Ticket Disc P/I Disc % Discount Due
VS 2,707 97,584.21 00 00 97,584.21 36.05 .120 .200 519.99
MC 774 27,616.48 00 00 27,616.48 35.68 .120 .200 148.12

You want to see all fees (a) to make the provider expose all rates or fees, (b) to ensure the rates and fees were entered into the processor’s system correctly and are as stated on your agreement, and (c) to determine if you have possible operational issues. I addressed fees in detail at “Understanding Credit Card Fees,” my previous four-part series on that topic.

Red Flag 8: Access Fee Higher than Stated By the Card Company

Visa charges an “Acquirer Processing Fee” of 1.95 cents per transaction. You may see this on your statement as an “APF fee” or “Visa Access fee.” MasterCard charges a 1.85 cent per transaction “Network Access and Brand Usage Fee.” You may see this on your statement as a “NABU fee” or “MC Access fee.”

As I explained in “’Interchange-Plus’ Pricing Not Necessarily Fair, Part 3,” some providers mark up these fees. I showed an example of a provider charging 5 cent instead of 1.95 cents. I have seen as much as 10 cents charged for these fees. These mark-ups not only occur with interchange-plus pricing but are also with tiered pricing plans. As I stated in the article, marking up these fees is nothing more than the provider adding an extra transaction fee and blaming the card companies.

What your provider charges for APF and NABU is a strong indicator of how it markets and sells its processing. If it marks these fees up, you need to take a closer look at what you are really paying for the processing service.

I’ll address APF next month, because you’ll see a new fee on the statement you receive next month. The fee is called Visa FANF — Fixed Acquirer Network Fee — and the net amount you pay Visa will be based on what your provider charges you for Visa APF. I’ll have more on that next month; you’ll want to have your statement in-hand when you read the article.

Red Flag 9: Annual and Monthly Fees Exceed $300 Annually

The monthly and annual fees are charged by the merchant account provider, not the card companies or the card issuing banks. These fees include PCI fees, statement fees, services fees, and host of other fees. As noted above, my previous four-part series on credit card fees explains all of these fees.

Merchants frequently ask me the maximum amount they should pay for provider fees. There is not a maximum dollar amount a merchant should pay. However, if an ecommerce merchant is paying more than $300 per year — $200 for brick-and-mortar merchants — for all monthly and annual fees combined, that is a red flag the merchant may not be priced competitively. These are not absolute figures. But, if your provider is charging more than these amounts, I recommend you look closely at your overall processing costs.

Phil Hinke
Phil Hinke
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