Interchange Plus Pricing: Not Everything?

Another great article by credit card processing veteran Phil Hinke:

I am a strong advocate of interchange-plus pricing. To date, I have allowed only merchant account providers that offer interchange-plus pricing to bid for my clients' business. However, I am also concerned about how some providers and salespeople appear to be pitching interchange-plus pricing as a panacea for ensuring merchants are being priced fairly. Therefore, I decided to turn last month’s article into a 3-part series on interchange-plus pricing — so merchants can see that while interchange-plus pricing can be important, it does not automatically guarantee fair pricing. 

This article is the second installment of that series.

Interchange Plus: 2 Things to Understand as a Merchant 

First, card processing is a very perplexing and convoluted industry. You can have, say, 30 different customers use their debit or credit cards to buy the same product at the same price on your website, and you theoretically could be charged 30 different processing rates. This is one of the reasons why a clever salesperson can offer what appears to be a good processing rate — and ends up being anything but that.

Second, don’t expect a salesperson to offer you the best possible price. If you are currently overpaying for processing by $20,000 per year and the salesperson thinks he can entice you into changing providers for $5,000 in savings, he may offer you a rate that saves you $5,000. There is nothing wrong with this type of sales approach. Merchants — like credit card salespeople — want to make as high a profit as possible. However, this perplexing and convoluted industry puts merchants at a disadvantage in the negotiations, which is the reason for my articles here each month. 

An Actual Interchange-Plus Example 

I have worked with several merchants recently that were offered interchange-plus contracts. Fortunately, they understand that interchange-plus pricing was not necessarily fair. As a result, each eventually received — after negotiations — far better pricing and terms and conditions than originally offered. Here is an example of one such merchant. 

This merchant was with one of the largest merchant account providers. The merchant was on a tiered pricing schedule — I explained tiered pricing in a previous article — and was grossly overpaying for the service. Its provider offered interchange-plus pricing at 0.31 percent plus $0.05 plus normal fees, all of which would save more than $100,000 over three years. As impressive as this may sound, in fact there were three problems with this offer.

First, the merchant was overpaying by more than $175,000 during that timeframe. The provider thought it could wow this merchant into thinking that the savings it offered would keep this merchant. However, after negotiating, the merchant ended up getting pricing at 0.07 percent (versus .31 percent) plus $0.08 plus normal fees, which saved the merchant the additional $75,000 over three years. Both rates were interchange plus, but only the latter pricing was fair.

Second, the provider included a “liquidated damages” clause for early termination. I encourage my clients to never sign a contract with a liquidated damages clause. Depending on the specific verbiage, it could cost thousands of dollars to terminate the contract early. In fact, I know of an ecommerce merchant who was forced to continue processing with his provider — or pay several hundred thousand dollars to terminate early. It should never cost more than $400 to terminate your contract early. 

Third, the provider was charging its processing percentage on returns. The provider charged the merchant 3 percent to process a $1,000 sale with a specific card type; the merchant paid $30 in processing for the sale. If the customer returned the goods, the provider would charge an additional 3 percent to reverse the credit card charges. Therefore, the provider received $60 and the merchant had a net sale of zero. There is no reason why a merchant should pay a processing percentage for refunds — other than it’s another way a provider can make money without the merchant understanding he or she overpaid. I know of one ecommerce merchant that was paying $6,000 per year in refund-processing fees.

An Important Interchange-Plus Question to Ask

I now see merchant account providers increase their fees or add new fees, while at the same time claiming to be passing through all of the Durbin Amendment debit-card interchange reductions. This does not seem right to me. Yes, they may be passing on the lower debit interchange rate. However, if at the same time they are taking more money out of the merchants' pockets with new or increased fees, are they really passing through all of the Durbin Amendment reductions? Are they really any different than the provider that is not passing through all the Durbin Amendment reductions? 

So, one of the questions I ask the salesperson during the negotiations is simply “Has your company increased any fees or added any new fees over the last year? If yes, explain why.” This is a question of provider integrity that each merchant should ask. I am not saying that the provider isn’t justified in increasing or adding new fees. However, all merchants should ask this question during the pricing negotiations. 

Conclusion 

In summary, remember these seven points when you negotiate an interchange-plus contract. Interchange-plus pricing is not a panacea. The card processing industry is perplexing and convoluted. Do not expect the salesperson to offer you the lowest rate. You need to work to get it. Do not be wowed by a large savings amount, as there may even more savings left on the table. Do not focus on just the rate. Understand, also, the fees, funding, and terms and conditions in the contract. Avoid liquidated damage clauses. Ask the tough questions during negotiations.

Debit Card Scam from Processors

(Via Bloomberg) The Federal Trade Commission said Friday that it is paying some $350,000 in refunds to 100 small U.S. merchants that were defrauded in a debit and credit card scheme. The scheme involved several firms that falsely promised they would save small businesses money in credit and debit card processing fees by offering lower rates that those of other card processing services. However, the firms failed to disclose fees and concealed pages of fine print until after the merchants had signed contracts for their services, the FTC said.

The FTC identified the firms that perpetrated the scheme as Merchant Processing Inc., Direct Merchant Processing Inc., Vequity Financial Group Inc. and PPI Services Inc. Also involved in the scam were Aaron Lee Rian and Karely McCarthy, also known as Karly Speelman, the FTC said. The agency reached settlements with Rian and McCarthy that banned them from marketing card processing goods or services for sale or lease. Certain of their assets were sold to provide funds for the refunds, the FTC said.Merchants due to receive refunds were to get between $100 and more than $25,000, depending on how much the merchant paid, the FTC said.

More Deceptive Practices to Watch Out For

If you are not aware by now from reading this blog the credit card processing industry is one of the most deceptive. Most of the time  "what you see"  is not "what you get". In this article Phil Hinke describes some more of those very deceptive practices among sales people in the industry and how they hurt merchants:

I have seen merchants deceived on the actual discount rate they received. I have seen merchants deceived on the "terms and conditions." I have even seen a “1” in the discount rate on the merchant application mysterious change to a “7” after the merchant had signed the agreement. 

Most processors will attempt to lock you into a contract because they have hidden fees they simply don't want you to know about. They also have statements that are impossible to understand because they want to keep you in the dark. Make sure to stay clear of those problems so if something does arise you can leave without penalty.

MasterCard releases 5 Yr Plan for EMV in Australia

MasterCard has announced a new five-year plan designed to change how payments work in Australia and around the world :

By October 2011, all new and reissued MasterCard cards will be EMV enabled, 

and by 2013, all cards and payment terminals will need to be EMV capable.

All ATMS must be EMV capable by the end of 2015.

By October 2012, all MasterCards will be PayPass enabled, 

and several new merchants in certain retail categories must be able to accept these contactless payments – these include taxis, newsagents, bookstores, convenience stores, supermarkets, service stations, fast food restaurants, cafes, bars and cinemas.

By 2012, MasterCard debit holders will be able to take cash-out after purchasing goods through a retailer.

"This is a reaction to the increased competitive ambition by EFTPOS. At the moment, the EFTPOS cards have an advantage because they can be used for cash out, and are closing the gap with their own offering."

By April 2013, online merchants must provide MasterCard SecureCode authentication or the equivalent for all transactions over $200, the company announced.

By April 2014, all existing cards must have PayPass, and all merchants in those categories must be able to accept PayPass payments.

The move highlights the growth of contactless and mobile payments. 

Meanwhile, the Wall Street Journal has reported Google is teaming up with MasterCard to produce a new product that will allow users with NFC-enabled Android handsets to make payments with their phones. The program will allow Citigroup-issued card holders to pay for purchases by using contactless terminals at retailers.

The problem with Intuit Go Payment brought to you by Verizon

Verizon is now going to be promoting Intuit's answer to Square mobile payment systems: GoPayment.

The basics:

The pocket-sized GoPayment reader plugs into the audio jack of any supported smartphone or android BlackBerry operating systems. Merchants can swipe consumer credit and debit cards through the reader or enter card information manually, with all transactions processed immediately and funds automatically deposited into the user's bank account within a few business days.

We mentioned previously the problems with Square credit card processing  and as you can imagine with Intuit there is also a big catch. The free version that has no cancellation fees is not cheap: 2.7%. It is not clear but it would not be surprising to find out that is has similar limitations to square (only process $100 per transaction or 1k per month). The paid version of Intuit most likely does have it's typical 3 yr contract and has the regular monthly fees of $12.95 and although they advertise a rate of 1.7% they fail to mention this only applies to regular credit cards but do not mention what is charged for reward and corporate cards ( if it is anything like what they charge for a typical merchant account you can be assured you pay between 3.5-5% or more for those cards). Do your homework as  the seemingly cheapest way can end being the most expensive. The are companies that have secure mobile payment solutions without contracts or set up fees and those payment would hit your account much faster.

Move over Square! Here come Jumio!

We have discussed Square and it's credit card processing via a smart phone from the makers of Twitter. Well they may be getting pushed out a bit by Jumio. Jumio from the Co-Founder of Facebook, is threatening to take a chunk of the pie from Square. This new technology allows the simply a picture of a credit card to be used as a way of making a transaction. The smart phone simply scans the card similiar to the way a barcode scanner would work on your smart phone. How can this be you ask? The technology behind Jumio allows it to sense things such as if the card is actually plastic and if the hologram is real and if the numbers are embossed. They claim it is not only secure but has the ability to interface with E- Commerce. This means that if implemented, instead of entering credit card information you simply upload a picture of your card.  I'm not sure how many customers will feel comfortable about the idea of their credit card picture floating around out there. Time will tell....

Square Credit Card Processing Raises $100 Million

The NYT is reporting that the mobile credit card processing company "Square" has raised a whopping $100 million in in a financing round led by Kleiner Perkins Caufield & Byers. As part of the deal, Mary Meeker, a partner at Kleiner Perkins, will join Square’s board.


“Square has a great product with extensibility which we believe has the potential to have a lasting impact on how people make payments,” Ms. Meeker said in a statement. “Square’s product is fast, easy and fun for both consumers and vendors; a small business can be up and running within minutes.”


There is little doubt that although this space within the merchant service industry is getting a bit crowded, Square is a force to be reckoned with. As I've mentioned the problems with square is that many don't fully comprehend it's limitations. They are great for someone with a very small side business but for serious vendors a traditional merchant service company is what they need.