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Apr 1Roger Kohl

Credit Card Processing Fees and the fine print ~ Part 3

Apr 1Roger Kohl

big_banksIn Part 3 of Paul Downs small business blog on “You’re the Boss” – The Big Banks Come Knocking.


My Search for a Credit Card Processor, Part 3

In [Paul’s previous post], I wrote about my decision not to accept the credit card processing offer I had received from Emerald World. That left me at PNC, where I had my business accounts and where I now understood that I was probably paying more than necessary for card processing.
I decided to take the time to consider switching banks, and I did some looking around. In the end, I focused on two relatively large banks: Citizens Bank, which had acquired Mellon Bank, where I had banked throughout the ’80s and ’90s, and Wells Fargo, which had swallowed up the bank that had my personal accounts.
I met with a banker from Citizens first. He and I had been working together for some years — he has tried hard to get me to switch all of my banking to Citizens, and I have played coy. But now I was ready to make the switch, as long as I got a good deal on merchant services. Still smarting from my experiences with PNC and Emerald World, I told him up front that credit cards were going to make or break the deal.
He quickly arranged a follow-up meeting with a sales person, Dale, who works for WorldPay, the card processing firm associated with Citizens. Just as I had with Emerald World, I provided Dale with a couple of my merchant services statements to analyze, and she came back with some extremely attractive pricing: My cost for each transaction would be the interchange fee associated with the client’s card plus 0.1 percent. This compared with the interchange plus 2.1 percent I was paying PNC and the interchange plus 0.98 percent that Emerald World had offered.
That sounded outstanding, but now I knew what might be coming, so I laid it out for her: I didn’t want to have to put up a reserve account to do business. I was a good customer, with a perfect track record, who would be generating substantial fees. My regular operating accounts had plenty of cash in case there was a chargeback. She promised to do her best.
The meeting with Dale happened on a Friday afternoon. The following Tuesday she called with news: the underwriters at WorldPay wanted a reserve account, too. “How much?” I asked.
She responded: “Forty thousand dollars, funded by taking out 10 percent of the first $400,000 in transactions.”I was floored. This was four times the amount that prompted me to reject Emerald World. I told Dale it was unacceptable. She promised to go back and see what she could do.A couple of days later, she called back: “Great news! I got them down to $20,000.” I wasn’t super excited about that, but the pricing on the transactions was so low that, even with the reserve account, the deal made some sense. My cash position when we had this conversation was good, much better than it had been in the summer. And a $20,000 reserve fund certainly wasn’t out of the question if it would save me $10,000 a year or more in processing fees.So I asked her some questions about the reserve account. Whose name would it be in? Where would it be located? Would I have access to it through the Web and be able to check balances the way I could my regular accounts? Would its necessity be reviewed on a regular basis? If I ended my relationship with WorldPay, how long would it take for me to get the money back? These did not strike me as unreasonable questions, considering that it would be my money in the account. Dale promised to find out.She called back a couple of days later and told me that the reserve account would be operated according to its description in the merchant services agreement. This prompted me, for the first time, to take a close look at the agreement. Every deal I have ever seen includes one, but they vary somewhat in length and format. They are close cousins to the ubiquitous agreements that you encounter on Web sites, and their appearance — the size and type of font used, the overall layout of the document, the tiny text packed in dense blocks — seems designed to prevent easy reading and comprehension. But in general, the agreements I reviewed were written in standard English that was possible for me to understand.The agreements define the entire scope of the interaction between processor and merchant. The best of them, the PNC agreement I had signed in 2005, was quite readable, once you got past how it looked, and it actually had useful advice about avoiding problems with customers and what to do to prevent chargebacks. The Emerald World agreement was much closer to unreadable: dense blocks of text, lawyerly prose, clearly intended to cause eye glaze. The WorldPay and Wells Fargo agreements fell between those extremes.When I reviewed the WordPay agreement, I was most interested in seeing what it said about reserve accounts, and I found the relevant language easily. It was quite unsettling. Who would hold the money? WorldPay. Would I have access to any information about what was in the account? Not specified. Would the original, agreed-on amount — in this case $20,000 — be sufficient? WorldPay would decide, and it could increase the amount any time it wanted at “WorldPay’s commercially reasonable discretion.” WorldPay could also take more money straight out of my bank accounts any time it wanted without notice.

In fact, every aspect of the deal was subject to “WorldPay’s commercially reasonable discretion.” Ultimately, WorldPay could demand any amount it wanted, it could raise or lower that amount whenever it wanted, and it could keep it for as long as it wanted — even if the agreement had terminated. There was no mechanism for review or appeal by me. I went back and forth with Dale a few times, trying to find some way to modify these terms, but it was no dice. So I rejected the deal. Sort of.

In effect, without realizing it, I had already accepted it. Only now, reading carefully through the WorldPay agreement and then checking the separate form that Dale had filled out when we first met, did I realize that my signature on the application, which I had considered routine at the time, indicated that I agreed to the terms and conditions. And two of the terms and conditions were particularly interesting in this context.

The first stated, “This agreement shall be binding upon the customer upon the earlier of (a) the date upon which the first transaction is processed by WorldPay … for the customer, or (b) the execution of this agreement by the customer.” And that had happened when I signed the application, directly under text that stated, “By signing below, I (1) agree to the WorldPay terms and conditions for customer processing agreement.”

The second of the terms I found interesting was that I was agreeing that WorldPay would be my exclusive merchant provider. “Customer agrees that throughout the term of this agreement, it will not use the services of any bank, corporation, entity or person other than WorldPay to provide services similar to those contemplated by the Agreement.”

Technically, though I had entered it unwittingly, the agreement was already in force. I went back and checked the PNC agreement I had signed in 2005. It said the same thing. Apparently, simply by applying for WorldPay’s services, I had violated the PNC agreement. I looked at the Emerald World application and found the same language. That meant I had contracted with all three processors, and I was violating all three agreements.

So far, no one has made an issue of it. But forewarned is forearmed, so when I set up a meeting with the Wells Fargo bankers, I decided to play the negotiations a bit differently. I wanted to see if I could clear up the reserve account issue without signing another agreement.

Wells Fargo seemed eager to make a good impression. It sent over a team of four bankers in nice suits, an unusual sight in my office. And they too quoted attractive pricing: interchange plus 0.55 percent, cheaper than Emerald World but more expensive than WorldPay. I laid it out for them just as I had for Citizens: I was interested in transferring all of my business banking, but the merchant agreement would be the deciding factor. I told them about my experiences with WorldPay and Emerald, and I said that I wanted to know whether a reserve account would be required, exactly how much it would have to be and whether I would have access to the account when I wanted.

The Wells Fargo sales person said she would do her best to come up with answers. I don’t know what battles she may have fought when she went back to her office, but it took her several weeks to get back to me. And in the end, she wasn’t able to come up with information as to whether a reserve would be required — unless I signed the application.

That’s because underwriting would make that decision, and underwriting wasn’t going to say anything until I signed. Which I was unwilling to do, because the Wells Fargo application, like the others, indicated that by signing, I was accepting their terms. And the terms stated that the reserve amount would be subject to the decisions of Wells Fargo, without my input. It could come back with any number at all, and it wouldn’t be revealed until I had agreed to buy.

Would you buy a house, a car, or even a candy bar, under those terms? On top of that, every credit card agreement I saw required my personal guarantee, as officer of my company, to pony up my own money if things went bad. And there were so many ways they could go bad. I have substantial personal finances in Wells Fargo accounts — it appeared that just by signing the application I would be putting them at risk. I rejected the deal.

Next: Conclusions

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