You might be wondering why you are dealing with all this credit card crap in the first place. Someone is taking a chunk of your revenue… you hate statements and bills…and now you have to worry about those fraudulent anarchists? (someone’s blog on fraud protection quoted the Anarchist Cookbook, which outlines details for pulling off credit card fraud).
You are probably savvy enough to realize there are good reasons to run plastic, without even looking at market data. When was the last time you found something you didn’t know you really wanted when you were shopping for something entirely different? What happens if you have no cash and there is no ATM nearby and you can’t pay with plastic? How many times have you actually gone back to buy it later? People are impulsive, and with competition abounding, it is important to make it as easy for people to spend money with your business as possible.
Here is some market data so you can look at things more scientifically:
This information came from First Data 2008 Study of Consumer Payment Preferences, a market study which surveyed 3,308 consumers from the United States. This is a relatively small pool, but it represents a larger trend in consumer spending.
According to this data, the percentage of debit, credit, and prepaid and gift cards have been steadily increasing as the percentage of cash and check transactions have been decreasing. More people are paying with plastic than with cash and checks. The percentage of debit cards has increased the most- a 17% increase over 9 years.
This alone is a good reason to accept cards. Lost transactions mean lost revenue.
So I was just about to share MasterCard’s merchant rules when I read the first paragraph from their manual online, which says:
“Proprietary Rights: The information contained in this document is proprietary and confidential to MasterCard International Incorporated, one or more of its affiliated entities (collectively “MasterCard”), or both. This material may not be duplicated, published, or disclosed, in whole or in part, without the prior written permission of MasterCard.”
Kind of a silly statement when anyone can access this information online directly from MasterCard’s website.
So, if you made it through my article about Visa’s rules, congrats, you can make it through this too! If you didn’t, good luck to ya! But do it anyway.
This is dorky, I know, but who wants to read a list of rules? These rules are lengthy, but important to know so you don’t get booted out of a credit card processing agreement.
1-Thou shalt not require a minimum purchase amount: As a merchant, you are not allowed to require a minimum purchase amount. I’ve seen this rule broken all over the place, but, this is a risky deal. Porque? Because you can get booted from your merchant account. Sucks.
2-Thou shalt proudly display stickers: Visa requires you to post their logo in a visible location at your place of business, on sales materials, or web sites.
3-Thou shalt not launder: You are not allowed to deposit transactions for anything other than your own business. Depositing transactions for a business that does not have a valid merchant agreement is called laundering… If you don’t know what laundering is, wiki it, or watch a few mafia movies damnit.
4-Thou shalt not discriminate against card types you find unfavorable: Visa has three categories you can choose from for what types of cards you want to accept. You must accept all cards with a Visa logo within your chosen category:
1-All Visa Cards accepted
2-Visa Debit Category accepted (Merchant chooses not to accept credit and business category)
3-Visa Credit and Business Category
Each category has its own logo. Fun! I love stickers.
5-Thou shalt not charge surcharges: You may not charge customers an extra fee to process any Visa transaction. However, you are allowed to offer a discount for cash transactions, “provided that the offer is clearly disclosed to customers and the cash price is presented as a discount from the standard price charged for all other forms of payment.”
6-Convenience Fees-Visa leaves this up to your discretion: For merchants who offer an alternate payment channel for customers to pay for goods or services, a convenience fee may be added to the transaction amount. If the merchant chooses to assess a convenience fee to its customers, the merchant must adhere to the following rules:
• The fee is being charged for a bona fide convenience of using an alternative payment channel outside of the merchant’s normal business practice (see example below).
• The fee:
– must be disclosed to the customer as a charge for the convenience of using the alternate method to pay
– is applied only to non face-to-face transactions
– must be a flat or fixed amount, regardless of the amount of the payment due
– is applied to all forms of payment products accepted in the alternative payment channel
– is included as part of the total transaction amount
– cannot be added to a recurring transaction
– is assessed by the merchant that provides the goods or services to the cardholder and not a third party
• The customer must be given the opportunity to cancel prior to the completion of the transaction
Example:
The merchant provides utility services to its customers, and the customary way to pay is by mail or in person at the merchant’s location. For the convenience of its customers, the merchant also offers a website for payments. In this example, the merchant may apply a convenience fee to payments made via the website.
7-Thou shalt not charge taxes in a separate transaction: Include any required taxes in the total transaction amount. Do not collect taxes separately in cash. This policy reflects the needs of the many Visa cardholders who must have written records of the taxes they pay for goods and services.
8-Thou shalt not charge an estimated tip on service industry transactions: For restaurant, taxicabs, limousines, bars, taverns, beauty/barber shops, health/beauty spa merchants transactions with a Visa credit or debit card, authorize only for the known amount, not the transaction amount plus estimated tip. Cardholders now have the ability to check their credit or checking accounts almost instantaneously via phone, the Internet, or an ATM. Consequently, an authorization that includes an estimated tip can reduce a cardholder’s available funds or credit by an unrecognizable or unexpected amount. This kind of transaction may occur if a cardholder leaves a cash tip or adds a tip that is less than the estimated amount used for authorization; for example, if a restaurant authorizes for an estimated 20 percent tip, but the customer adds on only 15 percent.
9-Thou shalt not issue cash refunds: Complete a Visa credit receipt for merchandise returns or adjustments. Do not provide cash refunds for returned merchandise originally purchased with a Visa card. Visa does not permit cash refunds for any credit or debit card transaction. By issuing credits, you protect your customers from individuals who might fraudulently make a purchase on their Visa account and then return the
merchandise for cash. If a transaction was conducted with a Visa prepaid card and the cardholder is returning items, but has discarded this card, you may give a cash refund or in-store credit.
10-Thou shalt deposit Visa transaction receipts in a timely manner : Deposit your Visa transaction receipts within five calendar days of the transaction date. The sooner you deposit transaction receipts with your merchant bank, the sooner you get paid! For card-not-present transactions, the transaction date is the ship date, not the order date. Transactions deposited more than 30 days after the original transaction date may be charged back to you.
11-Thou shalt deliver goods and services at the time of transaction: Deliver the merchandise or services to the cardholder at the time of the transaction. Cardholders expect immediate delivery of goods and services unless other delivery arrangements have been made. For card-not-present transactions, cardholders should be informed of delivery method and tentative delivery date. Transactions cannot be deposited until goods or services have been delivered.
12-Thou shalt obtain two authorizations for delayed deliveries: For a delayed delivery, obtain two authorizations: one for the deposit amount and one for the balance amount. Some merchandise, such as a custom-covered sofa, requires delivery after the transaction date. In these delayed-delivery situations, the customer pays a deposit at the time of the transaction and agrees to pay the balance upon delivery of the merchandise or services.
To complete a delayed-delivery transaction, you should:
• Create two transaction receipts—one for the deposit and one for the balance. Write “Deposit” or “Balance, ” as appropriate, on the receipt.
• Obtain an authorization for each transaction receipt on their respective transaction dates. Ensure an authorization code is on each receipt; if your POS device does not automatically print authorization codes on sales receipts, write the codes on the receipts so they are clearly identifiable as such.
• Write “Delayed Delivery” along with the authorization code on each transaction receipt.
You may deposit the receipt for the deposit portion of the transaction before delivery of the goods or services. However, you must not deposit the transaction receipt for the balance amount prior to delivery.
13-Thou shalt not disclose cardholder information: Keep cardholder account numbers and personal information confidential. Cardholders expect you to safeguard any personal or financial information they may give you in the course of a transaction. Keeping that trust is essential to fraud reduction and good customer service. Cardholder account numbers and other personal information should be released only to your merchant bank or processor, or as specifically required by law.
14-Thou shalt register Third-Party Merchant Agents in accordance with the Visa U.S.A. Inc. Operating Regulations: Visa merchant banks must register Third-Party Merchant Agents in accordance with the Visa U.S.A. Inc. Operating Regulations. A merchant servicer is defined by Visa as a third-party agent that has a direct relationship with a merchant instead of the merchant bank. This type of Agent performs services such as payment gateway, fraud scrubbing, loyalty programs, etc. Member banks and their merchants are responsible for ensuring merchant servicers maintain compliance with cardholder data security and storage regulations.
Data Storage Merchants should also be aware of the following data security requirements:
• Magnetic-Stripe Data. Do not store magnetic-stripe data after receiving authorization. After a transaction is authorized, the full contents of track data, which is read from the magnetic stripe, must not be retained on any systems. The account number, expiration date, and name are the only elements of track data that may be retained if held in a CISP-compliant manner.
• Avoid CVV2 Storage. All merchants are prohibited from storing CVV2 data. When asking a cardholder for CVV2, merchants must not document this information on any kind of paper order form or store it on any database.
• Know your liability. Many merchant agreements now include provisions that hold businesses liable for losses resulting from compromised card data if a business (or its third-party processor) lacks adequate data security
15-Thou shalt clearly disclose merchandise return policies: As a merchant, you are responsible for establishing the merchandise return and adjustment (credit) policies that will provide your business with maximum profitability and customer service. Clear disclosure of these policies can help you avoid misunderstandings and potential cardholder disputes. Visa will support your policies, provided they are clearly disclosed to cardholders before the completion of a transaction. If you are unsure about how to disclose your return and adjustment policies, contact your merchant bank for further guidance.
16-Thou shalt legibly print disclosure statements on reciepts: For card-present transactions, Visa will accept that proper disclosure has occurred before a transaction is completed if the following (or similar) disclosure statements are legibly printed on the face of the transaction receipt near the cardholder signature line.
Disclosure Statement What It Means:
No Refunds or Returns: Your establishment does not issue refunds and does not accept returned merchandise or merchandise exchanges.
Exchange Only: Your establishment is willing to exchange returned merchandise for similar merchandise that is equal in price to the amount of the original transaction. In-Store Credit Only Your establishment takes returned merchandise and gives the cardholder an
in-store credit for the value of the returned merchandise.
Special Circumstances: You and the cardholder have agreed to special terms (such as delivery charges or restocking fees). The agreed-upon terms must then be written on the transaction receipt or a related document (for example, an invoice). The cardholder’s signature on the receipt or invoice indicates acceptance of the agreed-upon terms.
17-Thou shalt mail, email or fax disclosure statements for card not present transactions:
For MOTO transactions: For proper disclosure, your refund and credit policies must be mailed, e-mailed, or faxed to the cardholder. To complete the sale, the cardholder must sign and return the disclosure statement to you.
For Internet Transactions: Your refund and credit policies should be available to online customers through clearly visible links on your home page. You should also provide “click-through” confirmation for important elements of the policy. For example, when purchasing tickets for a sporting event, customers should be able to click on a button—Accept or I Agree—to acknowledge that they understand the tickets are nonreturnable unless the event is postponed or canceled.
Congratulations. You now know what you need to do!
Discover Card and American Express work on different networks than Visa and MasterCard, and are essentially their own processors. Most credit card processors will assist you with getting set up to accept these cards, but you can sign up with American Express online, directly. With American Express, you receive an American Express Service Establishment (SE) number, which then has to be programmed into your terminal or POS equipment.
Discover Card requires you to work through your merchant acquirer. With the assistance of your acquirer, you will be assigned a 15-digit Discover Network Merchant number, which also needs to be programmed into your terminal or POS equipment. They charge a onetime setup fee of $25.
Both American Express and Discover Card send you statements and bill you independently from your merchant acquirer. This means you will be receiving three separate bills. One from your merchant acquirer, one from Discover, and one from American Express.
American Express do not publish their interchange rates publicly, but once you sign up with a merchant acquirer, (or Discover or American Express if they are the only cards you plan to accept) you will be able to access information about rates. When you sign up with American Express, you also gain access to data on spending trends of American Express holders.
What kind of pricing structure should you choose with a credit card processor?
Before you dig into this question, take a look at the proportion of the type of cards your customers are handing you. On average, monthly, what kinds of cards are making the majority of your sales?
The proportion of card types, type of business you have and sales volume will give you different answers to this question.
As I mentioned in my “Fees Demystified” article, Visa and MasterCard’s interchange rates are higher for reward and corporate cards, and are categorized in the mid or non-qualified tiers in a tiered pricing structure. In a Yahoo article this January, 2009, Jonathan Silver, chief executive of Affinity Solutions Inc., a New York company that develops and manages rewards programs, stated that rewards programs are attached to 40 to 45 percent of existing credit cards. The proportion of rewards cards being issued has been steadily increasing.
The drawback to a tiered rate structure is that it is more difficult for you to know exactly what you are paying for. Visa and MasterCard actually have over 100 categories to determine an interchange rate based on business type, card type, and how a cardholder’s information is captured. Simplifying these into three or four tiers means credit card processor’s profit margins on different types of transactions will vary, but most credit card processors qualify their tiers differently. Credit card processors rarely disclose their profit margin on each category. With tiered price structures then, it is difficult for merchants to compare rates while shopping for a credit card processor without knowing the details of what type of transaction falls into each tier.
Interchange plus pricing is based on a fixed markup for every transaction. For example, instead of paying a discount rate of 1.72%, 2.64% and 2.99% for qualified, mid-qualified and non-qualified transactions respectively, you pay the price of Visa or MasterCard’s interchange rate plus a flat percentage markup (e.g. 30%) plus a transaction markup (e.g. $0.05) for every transaction. The rate for what would be labeled as “qualified” in tiered processing is higher here, so it is important to figure out which pricing structure will meet the needs of your particular business.
Before you do anything, learn the fee terminology and understand how fees work. (For an explanation of basic fees, read my article “Fees Demystified”). The more you know what you’re talking about when establishing an agreement with a card processor, the less likely you will be gouged by a fee you didn’t anticipate, or a rate you didn’t understand. And, seek out transparency. The more information you can get about fees from your card processor, the better. If they hand you a package of fine print, read through for snags.
For example, a card processor dangles a low discount rate, but isn’t upfront about the fact that they can change that rate at any future date, a fact they have written into your signed agreement. Three months later, your discount rate has jumped as high or higher as the competitors’ rates and you have saved nothing.
Even with the best processor, it is helpful to know a few things to help you keep fees low:
The key point is this: The riskier the transaction is for fraud, the more you will pay to the card processor. This is because interchange rates charged by Visa and MasterCard are higher for riskier transactions. For example, credit card processors will charge a higher rate if card information is keyed instead of swiped. The higher rates are intended to cover the cost of charge backs. Some processors use tiered rate structures which base rates on how risky the transaction is and what kind of card is used. This is an example of a three tiered rate structure:
The Qualified Rate (discount rate) is the best rate available and the one usually quoted by most merchant account providers.
The Mid-Qualified Rate is higher than the qualified rate and includes transactions that are keyed in (not swiped), even swiped transactions where the customer uses certain rewards cards, and transactions that are not batched out within 24 hours after a sale has been initiated.
The Non-Qualified Rate is the most expensive of the three rates and includes transactions that do not fall under the qualified or mid-qualified rate such as International, Government, corporate or particular consumer rewards cards.
The 4-tiered model adds one more tier at the top at the best rate for processing debit cards. All of the other tiers remain essentially the same.
Card processors generally lump rewards cards into the higher rate categories. Why? Issuing banks need a way to fund their rewards programs, and card networks charge higher interchange rates for rewards cards. Refer to the interchange rates published by Visa and MasterCard here:
If you sign on to a tiered pricing structure, don’t focus only on the qualified rate. Make sure you know what rates you will be charged for mid and non-qualified transactions because you’ll likely be running a large percentage of mid or non-qualified transactions
The third common price model is interchange plus. This sets a flat discount rate, which benefits you or doesn’t, depending on your sales volume, average ticket and what type of cards your customers present to you. Interchange plus generally works best for high volume sales with a low average ticket price.
On your end, when you are running transactions, use the PIN system for debit cards as much as possible. It is much less expensive to process a debit card through a PIN system. Generally, if a customer pays with a debit card, it doesn’t benefit them to go through the credit card system, unless they are crafty and use the delay in transferring funds from their account to their advantage (debit cards clear much faster).
One of the most difficult parts of understanding card processing is understanding how associated fees work, where the money goes and what you are being charged for. These fees are sometimes intentionally vague and are subject to fine print by many card processors. It is important to know how they work so that you don’t get burned by your agreement.
Every player in card processing gets a cut of a transaction. The fees can be broken down as follows:
Transaction-based fees:
The Discount Rate: This is the lump fee you pay the acquirer per transaction, and comprises a collection of fees divided by the players in the card processing chain. The discount rate is based on a percentage of the transaction’s dollar amount.
Interchange Fee: Paid to the issuing bank and is typically 1-3% of the purchase price. The card network is the player that sets the ground rules for this fee. Why does the card network set these fees when the issuing bank reaps most of these profits? Incentive. Issuing banks issue credit cards. The more an issuing banks makes by carving out some of the processing profit, the more incentive they have to issue more cards, thereby benefiting card networks.
The interchange rate varies by type of card, type of retailer, and a tiered pricing structure based on the risk of charge backs. I will explain why in a later article. Visa and MasterCard interchange rates are public, you can browse through them on their respective websites:
Discover Card and American Express do not publicize their interchange rates. You can discuss their rates with your acquirer. Since as a merchant you are virtually powerless to influence interchange rates, I suppose it doesn’t really matter if you know these if you plan on having a merchant account anyway…until you decide you want to accept either of these cards. It seems that people would be wary of making this decision based on limited information. Correct me if I’m wrong.
Assessment Fee : Fee paid to the card network.
Discount Fee: Fee paid to the acquirer, and/or merchant account provider.
Transaction Fee: Flat fee paid to the card processor for every card transaction, whether approved or declined , typically $0.25 to $0.50. Fee can be higher if the card information is keyed rather than swiped due to the higher risk of charge.
Other fees you may be charged:
Chargebacks: If your customer disputes a charge and it is subsequently reversed and/or if a transaction is reversed for other reasons, you are charged this fee of between $10 and $30.
Daily batch fee: Somewhere around $0.50 each time a batch is sent to the card processor.
Monthly Minimum Fee: Some card processors require a monthly minimum. If fees on your month’s card sales meet or exceed this amount, this fee is not charged. If the fees fall below the minimum, you pay the difference. For example, if your monthly minimum is $30 and the fees for that month add up to only $20, you pay the card processor $10 for the month.
Monthly Statement Fee: Around $10-$15 per month.
Early Termination Fee: This fee is highly variable, ranging between $150-$1000, and is charged if you break the contract before it ends.
If you are an online merchant:
Address Verification Fee (AVS): If you are keying in card information, this service cross-checks your customer’s credit card number with the mailing address. This per-transaction credit card processing fee is sometimes included in the discount rate or is lumped with the flat transaction fee.
Gateway Fee: Monthly fee paid to either gateway provider or card processor if your gateway provider is packaged with your card processor.
Card Processors will also charge you some one-time fees, including setup fees, cancellation fees, and equipment fees. My best advice would be to create an estimate of how all of these fees will add up on a monthly and yearly basis, and compare your options.
ddress Verification Fee (AVS): A separate processing service that cross-checks your customer’s credit card number with the mailing address. This per-transaction credit card processing fee is sometimes included in the discount rate.
A major part of starting a business is deciding how you will accept payments for your product or service. If you decide you want to accept credit or debit cards, you’ll discover that you need to set up a merchant account with a credit card processing service and have the equipment or software to process cards. Since it is not inherently easy to understand how credit card processing works, I will start by explaining the basics:
Credit Card Processor: A corporation that manages the process of transferring authorized and captured credit card funds between different financial accounts.
Merchant Account: An agreement between your business and a bank or third-party provider that outlines your rights and duties in accepting cards.
Let’s go through the steps of what happens when you swipe a credit or debit card or process an online payment. Before you can receive a payment, your customer’s card information must be verified and authorized for sufficient funds. This is the authorization process. Authorization requires a chain of communication involving five parties:
1-The cardholder.
2-You, the merchant.
3- Your merchant account (established with a bank or a third-party card processor, known as the “acquirer”).
4- A card network (VISA, MasterCard, American Express, Discover, etc.).
5- The bank that issued your customer’s card (known as the “issuer”).
Communication between these parties takes place every time you process a card payment. Think of a credit card processor as the bridge between you and your customers’ cash stash.
The next step of the process is the settlement process. How do you get paid for your transactions? Here is how it works:
Batching: All card based sales for the day are sent in a “batch” to the merchant account provider at the end of day. If you use an online payment gateway, this may happen automatically. With a POS or a terminal, you may have to initiate the process.
Ultimately, once a batch clears and fees are deducted by the acquirer, the remaining funds are transferred into your checking account.
With so many credit card processors on the market, choosing one can seem like a daunting task. Here are some tips to help you find your best option.
Get to know the ins and outs of the industry.
As I pointed out in my article Fees Demystified, it will help you immensely to understand how credit card processing works, what kinds of fees to expect, and learn how to identify sneaky practices. Read the fine print before you sign a contract. Ask questions if you don’t fully understand their wording. If the rep refuses to take the time to explain these questions, there are many other fish in the sea. Go to someone who will.
Don’t keep your eggs in one basket.
Although there are some reputable, large processors out there affiliated with banks, such as Wells Fargo, it is not a great idea to use the same bank for your merchant account as your business checking account. In the case that you process a bundle of fraudulent transactions, the bank will have the power to freeze all of your accounts. Bummer.
Negotiate a nice price, but pick someone with great customer service.
Since there are hundreds of processors to choose from, your main goal may be to obtain the lowest discount rate possible, but in some cases, this will be negotiating in bps points. (a bps = 1/100th of a percent). Kudos to you if you shave of one or two cents off each transaction, but what if they leave your business stranded when your equipment fails and you get to intimately know the voice on their voicemail system? You want to know you have someone to work with when shit hits the fan.
How do you know if their customer service is good? If they’ve been in business for a while, ask for references. Sometimes credit card processing sites have testimonials or a list of major clients. Contact these too.
