One of the contributors on that blog is Paul Downs, who is the owner/CEO of Paul Downs Cabinetmakers in eastern Pennsylvania (for some reason I’m unable to link to his site but if you’re looking for quality woodworking I encourage you to look him up), and writes under the title “Staying Alive.” You can find his blog here.
This past week Paul shared his experience looking for the best deal on merchant account services that many of us can learn from.
There’s a lot more to CC processing fees than simply what may seem as an attractive discount rate, not so visible interchange charges can easily double what you thought you’d pay, reserve accounts can delay your receipt of payment.
There’s a good deal that may be in fine print.
- Processing credit card transactions is expensive.
- If you don’t have a knowledgeable guide, shopping around isn’t easy.
- It’s worth taking the time to read the agreement.
- It is essential to understand that when you take a credit card payment, you are borrowing money.
Pauls write up is quite detailed so I’ll share in 4 parts over the next 4 days. It’s a very worthwhile read if you’re looking to contain your processing fees.
My Search for Reasonable and Understandable Credit Card Processing
By Paul Downs
I have been accepting credit cards at my business for many years. My recollection is that I first signed up to take them in 1994. During most of that time, I have used my regular business bank, PNC, to process the transactions. When I signed up for PNC’s merchant-processing services, I knew that I would be paying fees for the services, but I was wrapped up in other business issues at the time and paid little attention to the details.
Last spring, I got a phone call that prompted me to take another look at those fees. It was from the president of a small, independent credit card processing company. He told me that it was extremely likely that I was being overcharged. I was especially interested in saving money because cash was short at the time, so I faxed him a couple of my processing statements. That took a couple of minutes, but it was the opening act in what turned out to be a long, strange saga. It would take eight months and many hours of meetings and research for me to understand how I was being charged and what I could do about it. And in the end, I did find a way to save thousands of dollars, but it wasn’t easy.
First, given the expense, you might wonder why I take credit cards at all. Two reasons. One is that they offer an immediate way for us to close a deal. There is a moment during a sales call when we ask the client to commit to the project, and nothing says commitment like forking over money. Getting that card number is a big moment for the sales team.
The second reason is that we have a number of large corporate and government clients who ask us to take them. You might be surprised to learn that a midranking officer in the United States military has a credit card with a $25,000-per-transaction spending limit, but some of them do. Some big military contractors use them, as well. We did a job for one of these last year and ended up getting a single payment of $38,847.
The first time I signed on with a credit card processor was in 2005, when I switched all of my banking to PNC. Part of that process was a visit from the merchant service sales person. She asked me a few questions about my business and then filled out a form and checked boxes with my answers. The application process took maybe 30 minutes. I still have a copy of the forms.
Looking at those forms today is interesting. My annual card volume was listed as $150,000 on a total sales volume of $1,150,000. Average ticket size was $2,000. And the fees I was charged? Only the discount rate is listed, along with fixed fees per transaction and per month but no mention of an interchange fee (as I explained in the credit card primer we published Monday, for every transaction, a discount fee is paid to the bank that issued the credit card while an interchange fee goes to the bank that processes the transaction). The Visa and MasterCard discount rate is listed as 2.1 percent, American Express transactions are 3.95 percent. One would get the impression, looking at PNC’s paperwork, that I would pay 2.1 percent plus a couple of bucks on my transactions. The structure of the deal seemed O.K. to me at the time, and it was quickly approved by the bank. I got my terminal a couple of days later and started running cards.
Fast-forward to the spring of 2012. I have not, as far as I know, amended the agreement with PNC. It had a three-year term when signed and continues on a yearly basis unless either party terminates it. I have not considered reviewing the contract over the last eight years because processing fees have been pretty far down my list of worries. (If you are new to my story, you can get a recap here.)
And then, in April 2012, I took a call from Kelly Nelson, president of a company called Emerald World, which provides merchant services and specializes in companies like mine that do a lot of large ticket, business-to-business transactions. He spent some time on the phone explaining the whole concept of interchange fees and discount rates, which I had never heard of. He asked for a couple of my PNC statements, so that he could see how they were charging me. A week later he called back and told me that he could save me a substantial amount of money.
This was hard to spot without some serious detective work. My PNC statement shows the gross value of the transactions we ran that month and, separately, the discount charges from a given month along with the interchange from the previous month. The discount charges are listed by batch number, but the interchange charges are listed by card type. The fees are sorted by the payee. The statement also shows the gross value of the American Express charges, but the fees that American Express charges me end up on the American Express statement.
This is all very confusing, and it is very difficult to total up the charges and fees associated with a single transaction. The interchange fee varied depending on the type of card used, but the discount rate was fixed at 2.1 percent. It seemed I was paying a little over 4 percent on each charge, before additional fixed fees. When I checked my books, it turned out that last year we did 131 credit card transactions, totaling $639,000. Of that amount, $611,714 actually landed in my bank account. The rest — $27,286 — went to charges and fees. That’s a total processing cost of 4.27 percent — considerably more than the 2.1 percent or so that I initially signed up for.
I looked back at the application I had filled out for PNC in 2005, and its associated merchant agreement, a multipage booklet. I could not find any mention of interchange fees in either document, but there was language to the effect that any change in the annual amount of transactions we ran would allow PNC to change the terms unilaterally, without notice. Hmmm. I don’t know when the bank started charging the interchange fees, or whether I had overlooked this from the beginning.
Kelly offered me a different pricing scheme: the interchange rate for each card our clients gave us plus a fixed percentage markup, in his case .98 percent. He also showed me the types of cards my clients had used in the preceding months, and the varying interchange fees that had been charged. And he gave me a spreadsheet with all of the current interchange fees for Visa, MasterCard and Discover, on a single page.
Running my eyes over the hundreds of card options, a few caught my eye: Visa General Services Administration large ticket, with an interchange fee of 1.2 percent, and Visa commercial electronic corporate, at 2.25 percent. We had been doing a lot of transactions in the second category, and we anticipate getting our G.S.A. contract in 2013 and doing significant business with the government. It seemed switching to Emerald World could save me 1 to 2 percent on each transaction — hundreds of dollars a month, thousands of dollars a year. He also offered me a free terminal and no long-term commitment. I could cancel the contract any time if I didn’t like it.
It sounded great! So I filled out an application, and sent it in, anticipating that I would soon be enjoying lower costs.
Kelly called me back a week later. It wasn’t going to be so simple.
Next: Reserve Accounts