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Mar 31Roger Kohl

Credit Card Processing Fees and the fine print ~ Part 2

Mar 31Roger Kohl

reserve_accountsIn Part 2 of Paul Downs small business blog on “You’re the Boss” – Reserve Accounts and how they can hold up your receipts.


My Search for a Credit Card Processor, Part 2

At the conclusion of [Paul’s previous post] I had just applied for cheaper credit card processing from Emerald World, and I had received an unsettling phone call about the status of my application. The events I am about to describe took place in June 2012, at a time when my business was experiencing a sales slump. We were about to come out of it, but I didn’t know that at that time. Cash was tight, and the prospect of saving money on my credit card processing was very attractive.
I have been in sales for 25 years. It has been my main job, with all the other tasks involved in being the boss playing second fiddle. So I appreciate it when I am buying instead of selling and find a real pro on the other side of the deal. Kelly Nelson at Emerald World, who had opened my eyes to the high prices I had been paying PNC for processing, had done everything right. He had taken the time to educate me about something I didn’t know. He had proven that his solution was better for me than my current situation. He had outlined a deal that was very low risk for me: my fixed costs were low, and I could back out whenever I wanted. And he was patient while I was distracted with my trips to Germany and Dubai, and he was able to remind me that he was still around without being annoying.
So when I finally pulled the trigger and filled out the application, I wasn’t expecting further delays. The application demanded information much like the one I had filled out years earlier for PNC: anticipated annual sales volume, average transaction, highest single transaction and percentage of sales over the phone (as opposed to transactions with a swiped card). And there was a fair amount of routine company info: tax identification number, years in business, partnership structure. Here and there were dense blocks of text, waiting for my signature to confirm that I had read this and agreed to that. Typical corporate sales contract. I had nothing to hide; I was coming off a very profitable year, I still had a good amount of cash in the bank, and I had been accepting cards for many years without any problems. What could possibly go wrong?
I would soon learn that Mr. Nelson, like many salesmen, particularly those who represent large organizations, had been emphasizing the benefits and glossing over the potential difficulties in the application process. Emerald World, it turned out, does not perform the function of acquiring bank. That is done by another company, National Processing Corporation, and final approval for the deal would have to come from it, specifically from its underwriting department. And the underwriters wanted more information.
They wanted to see my balance sheet and a profit-and-loss statement. They wanted to know whether we would use credit cards to take deposits or only when we delivered goods (we do both). They wanted to know the typical length of time between a deposit payment and final payment (six to 12 weeks). I provided all of that, and then I asked Mr. Nelson what this was all about. And from him I learned how National Processing saw me — not so much as a good client with a solid gold track record but more as a potential fraudster or failure that the company might not want to work with.
In my application, the underwriters would see lots of what they would consider red flags. For example, we do all of our transactions over the phone for large amounts of money, and we enter the card data into our terminal manually — we never swipe. Plus, there is a significant time lag between the receipt of the payment and the delivery of the goods. And my type of business, or MCC category, does not get a lot of respect from credit card companies. Furniture seems to be a difficult product for them. Apparently there tends to be a lot of damage in shipment and a lot of dissatisfaction even with products that arrive in one piece, which can lead to a lot of chargebacks(money returned to a customers when a transaction is disputed).
Of all those red flags — card not present, big ticket, delayed delivery and big chargeback rate — I concede I am guilty of the first three. But I can proudly claim that never once, not one single time in the 18 years that I have accepted credit cards have I had a chargeback. Zero. Zilch. Nada. That’s a reflection of the commitment we make to our customers to keep them happy, no matter what. We also are careful about our shipping practices and how we handle installation. I guess that some of my fellow furniture makers and dealers aren’t so fastidious, and I have been tarred with the same brush.
I provided all of the supplemental information and waited. Mr. Nelson got back to me a week later. National Processing was willing to go forward with the deal but on one condition — it wanted to establish a reserve account to guarantee that it wouldn’t be left holding the bag in case of an unresolved chargeback. It would withhold 10 percent of the first incoming payments until it had set aside $10,000 in the reserve account. And it would review the case after six months.
I had never heard of this before, and frankly, I was a little insulted. I asked Mr. Nelson whether this was common, and he told me that it happens now and then — when underwriters have doubts about a merchant. Now, I was really insulted. But leaving feelings aside, was this such a good deal?
The price of each transaction, interchange plus .98 percent, was still much better than I had been paying. But the format of the reserve — taking 10 percent off of incoming payments — would complicate the accounting of commissions I was paying to my salesmen. And for me, the cash itself was a problem. I had started the year with more than $180,000 in working capital, but our long sales slide had depleted that. By the beginning of the summer, I was operating with $60,000 to $100,000 on hand and spending, on average, $40,000 a week.
The savings in costs represented a reasonable return on a $10,000 investment. But I didn’t want my cash tied up. So I told Mr. Nelson that I would not go forward with the deal.
Next: The Big Banks Come Knocking

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