This is the second installment of a 2-part series on common mistakes I see from merchants, when they negotiate the rates and fees of credit-card-processing providers. In “Part 1: Terminology, Exits,” I addressed three of those mistakes: confusing terminology, costs to exit the contract, and asking an existing provider to match a competing offer.
In this installment, I’ll address the mistake of merchants assuming they understand the providers’ offers.
Mistake: Merchants Assume They Understand
The credit card processing industry is a convoluted business with dozens of interchange rates and a litany of pass-through fees. It is easy for a less-than-reputable salesperson-provider to convince a merchant that he is receiving something better than he really is. Even competent, honest salespeople can forget or not fully explain key rates and fees.
Here are two examples of merchants incorrectly assuming they understood the offer.
Interchange plus pricing example. Say you are currently on an interchange plus pricing program of 0.25 percent + $0.10 over published interchange rates and actual pass-through fees plus some additional monthly fees. A competitor states that it will offer you interchange plus pricing at 0.15 percent + $0.10 over interchange rates plus pass-through fees and assessments with the same monthly fees. Is this a good deal?
The merchant who sent me this proposal thought it was a good deal. What he didn’t realize is that more than 90 percent of his sales would have been charged an additional 0.50 to 1.0 percent over the 0.15 percent + $0.10 markup. He wrongly assumed he understood the offer.
He didn’t realize that this provider adds surcharges to the interchange rates. Perhaps the provider’s definition of “assessments” means the provider’s assessments, which includes surcharging. Perhaps somewhere deep in the provider’s terms and conditions it states that the providers adds surcharges to interchange rates. But the bottom line is the merchant made an assumption that he understood the offer without asking some important questions
Tiered pricing example. This merchant was on a tiered pricing plan with a qualified rate of 1.99 percent. She called her provider and asked for a rate review. The provider’s representative said that because she was a loyal customer, the provider would lower the qualified rate to 1.79 percent. Is this a good deal?
The merchant believed it was a great deal. However, she didn’t understand two important points. First, the qualified rate only applied to swiped basic debit and credit card transactions, which were only about 20 percent of her sales. It did not apply to reward cards and business cards.
Second, the initial rate of 1.99 percent included the card company assessment fees, which range from 0.11 to 0.13 percent. However, the 1.79 percent offer charged the assessments separately. Therefore, the offer would have saved this merchant 0.20 percent on about 20 percent of her sales and charged her an additional 0.11 to 0.13 percent on 100 percent of her sales. So much for being a loyal customer.
Note that I included the tiered pricing example even though I dislike tiered pricing plans for many reasons, as I’ve explained many times.
Confirm the Offer Via Detailed Email
The best way for most merchants to determine the facts of an offer is to send an email to the salesperson-provider, to make sure. The email has a list of yes-no questions.
Here is an email example for an interchange plus offer at 0.15 percent + $0.10, a $5.00 statement fee, and a $15.00 quarterly PCI fee. You may have specific requirements or questions beyond this example. Just write all questions concisely and require a yes-no response. Lastly, if your business has multiple accounts or locations, make sure the offer addresses all of them and make sure you know which fees are “per account” and “per location.”
Thank you for providing the offer dated April 1 2016 [add any offer number or case number]. It is important for me to fully understand the offer so I can compare to our existing program or other offers.
This is how I interpret your offer. Please answer “Yes” or “No” next to each assumption I have stated below and email your response to me. Please make sure to answer every question so we do not have to repeat this process.
[Many providers attach to their offer a list of the actual pass-through fees charged by Visa, MasterCard, Discover, and American Express. If the offer did not include such a list, require that the provider send a list of the actual pass-through fees charged by these companies.]
1. Your offer is based on our current annual Visa, MasterCard, and Discover volume of $500,000 and on our average sale of $100. It is also based on 80 percent of the sales being card-present and 20 percent being card-not-present. In addition, the offer is based on our current risk factors, including chargebacks and industry type. Is this correct? Yes No
2. Your offer is based on interchange plus pricing. Specifically, we would be charged 0.15 percent above the interchange rates published by Visa, MasterCard, and Discover and the actual pass-through fees charged by Visa, MasterCard, and Discover. We will not be charged any surcharges or inflated pass-through fees. Is this correct? Yes No
3. In addition to the above-mentioned 0.15 percent, we would be charged a $0.10 fee on every transaction. Is this correct? Yes No
4. When we refund a transaction, any interchange rate refunded by the Visa, MasterCard, and Discover will be returned to us. In addition, we would be charged only a $0.10 fee for each refund transaction. Is this correct? Yes No
5. We would pay the following monthly, quarterly, and annual fees: (a) $5.00 per month statement fee; (b) $15.00 per-quarter PCI fee; (c) no annual fees. Is this correct? Yes No
[If the provider is offering gateway services, include a question on its cost, which will probably include a monthly fee, per transaction fee, and per-settlement fee.]
[If you accept American Express, ask the same questions as above for the American Express OptBlue program. American Express uses the term “wholesale rates” versus “interchange rates.”]
[If you accept PIN debit, ask the same questions as above. Pin debit companies use the term “network fees” versus “interchange rates.”]
[If you experience a high number of chargebacks you may want to address that cost.]
6. According to your terms and conditions, we would sign a 3-year agreement. I understand that the card companies occasionally change or add interchange rates and pass-through fees and any changes — increases or decreases — to these rates and fees will be passed through to us without any added charges. I also understand that the 0.15 percent + $0.10 rate, the $5.00 statement fee, and the $15.00 quarterly PCI fee mentioned above will not be increased during the 3-year agreement. In addition, you will not add new rates or fees during the 3-year agreement. I also understand that we may be entitled to an additional rate reduction should our processing volume increase in the future. Is this correct? Yes No
7. Per the terms and conditions for this agreement, we can cancel our agreement at any time without any termination fee or termination penalty. Is this correct? Yes No
Please respond by Wednesday, April 5, 2016.
Why Send the Email?
I am not an attorney. I cannot speak to the legal enforcement of this email. However, I do know that what some salespeople-providers say and what they will commit to writing can be very different. Also, this form of email will weed out some of the less reputable salespeople-providers because they won’t want to disclose their actual rates and fees.
Many salespeople-providers have an issue with question 6, addressing future rates and fees. Providers cannot know what their future costs will be. For example, their cost to conduct PCI scans could change. Also, providers cannot anticipate future government regulations, gateway or equipment changes, or other factors that can affect their costs.
The main purpose of question 6, however, is to make sure the providers tell you that (a) the 0.15 percent + $0.10 will not change as long as your processing volume, average ticket, and risk factors do not change, and (b) the provider will not add other fees.
Lastly, question 6 can give providers the opportunity to include fees they have forgotten to mention, such as a PCI non-compliance fee or an AVS fee.