Understanding Credit Card Processing

Hello and thanks for coming by. My name is Michael Saum. I live in western Michigan and have been in the credit card processing business for many years. It has afforded me a very comfortable living from an ever increasing clientele. I enjoy a very high customer retention rate simply because I take the time to educate my merchants.

Currently, I am semi-retired but still serving my existing merchants, as well as handling the numerous inquiries that come from this site and merchant referrals. This could be of great benefit to you if you decide to employ my services. Since I am already "living the good life", I don't need to generate a bunch of additional income any longer. Consequently, you will receive great rates, coupled with unparalleled service, no matter where you are located. My merchants know that I care about them as individuals and we enjoy mutually rewarding long-term relationships.

If you're like most merchants, you feel that your fees relative to accepting credit cards in your business, are too high. However, according to Visa/MC the fees that are being charged by them are "justified" based on the risks and services their member banks provide. Obviously, that's their opinion but there are currently grass roots initiatives that have been launched in congress (Credit Card Fair Fee Act) arguing this issue. The real question is are you paying your credit card processing service provider fair and reasonable fees? And furthermore, are they educating you thoroughly so that you know what exact rates you are paying on all the various types of cards you are accepting as well as the various types of transactions?

Many times when I approach a merchant to do a review for them, they hand me their statement in a sealed envelope saying something like, "I don't bother looking at these any more because I can't decipher all the fees". It's a shame! You pretty much have to accept cards in todays environment or you lose business. But, don't you think you're entitled to totally understand what you're paying for and how you are being charged? That's precisely what this site is all about. You will get a thorough understanding of how the industry works and have a much better handle on how pricing works. It's what your current provider should be doing for you but, likely isn't.

In my tenure in the field, I have been continually stunned at the amount of vaguery and outright deception that, unfortunately, seems to prevail in our industry. It shouldn't be that way but I'm sad to say, it is. There are a lot of, let's say, less than ethical reps that recognize the great income that can be derived by being cleverly deceptive.

Both brick and mortar and click and order merchants are misled by supposedly "the lowest rates available" and never informed about all the other fees and charges that show up on their statements or how individual transactions are categorized. You absolutely MUST EDUCATE YOURSELF!

Quite simply, every business is different based on their SIC code and how they typically transact business. It isn't, and shouldn't, always be only about rate. Your individual needs are different than the business next door or across the street. I tend to function more as a consultant when I meet with merchants. To me, it's important to set up the account right in the first place. I always strive to recommend and provide all the value added services that my merchant needs and can benefit from, and nothing more. Most importantly, any terms and ALL fees, any surcharges and simply any costs related to the account need to be revealed and discussed thoroughly. NO SURPRISES LATER!

On this, and related sites, you will learn the difference between 3 Tier, 4 Tier and Cost Plus or Interchange Plus Pricing. Bundled and unbundled rates are discussed and you'll better understand which is best for you. Learn the difference between on-line and off-line debit transactions and their pricing. You'll discover all the crucial questions to ask of any provider. The bottom-line is that you'll simply be able to improve your bottom-line.

You'll also find, educational information, regarding the credit card processing industry and the many difference types of providers available. I'm confident that you will find the information obtained to be enlightening and profitable.

Now obviously, you can click on any of the numerous ads found on this site, or elsewhere, and check out their offers. Or, you may contact me directly and allow me the privilege of personally being of assistance to you and your needs. THE CHOICE IS YOURS!

I've also developed a comprehensive eBook on the subject that can be found, and purchased, at my website below. Or, you can contact me with any specific questions that you may have. Thanks again for stopping by and I look forward to hearing from you and will count it as a blessing to be of service to you.

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Let's take a look at the industry itself and get a better understanding of what happens when a customer uses plastic to pay:

Step 1: Cardholder uses a Visa or MasterCard to purchase goods or services in your establishment. You swipe it or hand key it into your credit card terminal or POS software. The processor sends the credit card transaction through the card association (Visa or MC), which in turn sends the request for credit card authorization to the card-issuing bank.

Step 2: The issuing bank accepts or declines the transaction and electronically sends the message back through the card association. The card association contacts the processor with the credit card authorization, and it is then sent back to you, the merchant, through your POS terminal (this transaction typically takes less than 10 seconds). You deliver the goods/services to the customer. The merchant settles, or batches, their terminal at the end of the day, the processor finalizes the credit card transaction with the issuing bank and the funds are transferred into the merchants account typically within 48 business hours.

Step 3: Merchant pays their processing provider (your credit card processor) a "discount fee" for its services. These fees are billed either once a month on the total volume or, in some cases, it is billed daily from each batch total (this is called daily discounting%u2026an accounting nightmare%u2026good for the processor but bad for you).

Step 4: Merchant bank (again, your credit card processor) pays interchange fees (these are wholesale costs to the processor charged by the member banks of Visa and MC) directly to the Issuing Bank of the cardholder that made a purchase from you. Interchange helps cover the banks cost of issuing cards and collecting payments, or at least that's what they say anyway..

Step 5: Issuing Bank charges its customer for the purchase and collects payment.

As you can see, it is a pretty simple process but many merchants have never given it much thought and their provider has not taken the time to educate them. The majority of the fees that are collected from you, by your provider, go directly to the card issuing banks (in the form of "interchange fees") of the cardholder. Some, in the form of "assessments" go directly to Visa and MasterCard and a very small piece of the pie goes to the processor.

Also, here's something for you that you might not know. There is an ever increasing prevalence of "rewards" type cards in consumers hands these days. You may even have one in your wallet that pays you some form of cash back, bonus points, air miles or whatever. You, the merchant, are paying more in credit card processing fees to accept these cards in your business so you are, indirectly, paying your customers to shop with you. Nice huh???

What's in your bucket?

Maybe you're wondering what I'm talking about here. Let me explain. In any kind of a tiered pricing model for accepting credit cards, your processor decides which "bucket" or tier they will put transactions.

Okay, let's say you are on a Three Tier Pricing model which, quite honestly, is quite an outdated format. Up until just a few years ago, this was the ONLY pricing model available but times have changed and you need to be informed. If you find yourself still priced on Three Tier, then it's time for a review because the only one that benefits from this type of pricing is the processor..

Your statement would have Qualified, Mid-Qualified and Non-Qualified transactions. Typically, in this model, when you swipe either a debit or credit card, thru your terminal/software, it will be processed at the Qualified level. Usually, this is also your best rate as well.

Now, let's say you hand-key a transaction from a phone order or simply a worn out card that your machine won't read. Most (not all) processors would then treat that as a Mid-Qualified transaction at a higher rate than your Qualified rate. Now, this certainly is justified because the costs to the processor, due to the perceived higher risk, is more so it is passed on to you. Most processors will also throw some forms of Rewards cards into this Mid-Qualified bucket. These types of cards have a higher interchange level and, in essence, you are helping to pay some of the "reward" back to the cardholder by paying these higher fees.

Typically, what falls into the Non-Qualified category would mostly be corporate type card transactions. However, some processors, knowing that their merchants don't know much about this industry, will clear even some Rewards cards in this Non-Qualified category. The big question here is, do you ABSOLUTELY KNOW what category ALL or your different transactions are falling into? You should! Ask your current provider to thoroughly explain and if they don't to your satisfaction....find another provider. Now, of course, you could simply go to my website and purchase my ebook on credit card processing. It has received rave reviews in educating merchants around the country.

Maybe, you are on a 4 Tier Pricing model. In this case, the 1st Tier would represent debit cards swiped. The 2nd Tier would be credit cards swiped. The 3rd Tier would be hand-keyed and some Rewards cards. And last, but not least, the 4th Tier would mostly be corporate cards. However, you still have this "bucket" mentality here. Each processor can put whatever cards they want into any "bucket" they desire. Again, all the more reason for you to really become educated.

Over the past couple years we have seen a surge in Rewards type cards being issued and used. You possibly have one or more in your wallet. When customers go shopping in your establishment and they have a "generic" V/MC in their wallet and a card that pays them some sort of reward for their purchase, which one do you think they will use? Guess what! You pay more to accept them and, indirectly, you are helping the card issuing bank to pay the reward to the customer. It's kind of like paying them to shop with you. Nice huh?

I had a merchant show me a recent statement from their provider. They were informed that as of October 2008, Visa Rewards 2 cards that had previously been cleared as a Mid-Qualified transaction will now be treated as a Non-Qualified. Keep in mind now that Visa didn't raise the Interchange Rate on these card types in October. The processor, seeing an increase in these in the marketplace, decided it was a great way to make more off the merchant. Oh, and also, the processor told them, in addition, they would be raising their Non-Qualified rates by .20%. Ouch! The, the DOUBLE WHAMMY!

The bottom line of all this is simply you need to get educated. If I can be of any assistance, there are numerous ways to contact me on this site.

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There are many ways you can acquire credit card processing services. Here is a brief description of those entities so you have a better understanding of what you might expect.

Banks: Likely, if you're in business, you have a commercial account set up with your bank. They may have asked about your merchant services (i.e. credit card processing) and offered to have someone contact you regarding a "competitive rate comparison". The "selling point" is to get "all your business services, under one roof". Well, in the greatest majority of cases, banks are not in the credit card processing business...they're in the banking business. However, they typically will have contracted with a provider (a processor) and offer their services to you. Typically, the designated representative will contact you, and they will provide the services directly. The problem with this is that the bank earns a "fee" from the provider for the referral, which will usually mean your rates are a bit higher to compensate for the banks earnings. You may even get statements from the processor each month, with the banks name on it (part of the agreement) making it look like the bank is actually providing the services. Not that this is a bad deal because the up tick in rates won't likely be substantial, but don't just assume that the bank is your best alternative. Shop around and try to go direct to obtain the best rates and service.

ISO: This is an Independent Sales Organization and is a private entity that reps for several different processors. Some of them are good and reputable but just remember, they are in business to make a profit, as are you. Often times their MLS's (Merchant Level Salespeople) will have great "gimmicks" and "sales pitches" to get you interested and often don't tell you "all the details". They have a way of making an offer look better than what it really is. I'll give you an example: I had a merchant call me recently, that has been with me for several years now.

A rep from an ISO called him and my merchant gave him a copy of his monthly statement from us (which I encourage my merchants to do periodically, just to keep us on our toes) and had him give him a rate comparison. Well, my merchant got it in writing and faxed it to me for review because he said, "this looks really good to me and unless you can compete, I may have to switch". After careful review, I was able to show him where he was being misled and advised him the specific questions to ask this rep about his numbers. This rep, by the way, wasn't local and had contacted him from half way across the continent (which isn't necessarily a bad thing since the internet makes this more of a way of doing business these days). When he finally returned his call, which was several days later, he provided lots of fancy footwork but never directly answered his questions. Needless to say, this merchant is still part of my portfolio and still sends me referrals.
Now, don't take this to mean that all of these entities are bad. There are many that have been around a long time and they have a serious interest in taking care of their accounts.

Processors: These are the actual business's that "process" the transactions between you, through the Visa/MasterCard networks through to the card issuing bank and then back to you with an authorization or denial for the sale. They pay the issuing banks the "interchange fees" and Visa or MasterCard, the "assessments". They in turn, charge you, a "discount rate" or your ISO a "buy rate" (who then charges you a percentage on top of that). These companies will provide your customer care and technical support as well. You can find lots of information on-line about processors. Do your homework before committing to anyone. The research may be time consuming, but rewarding in the long run armed with the knowledge you are gaining here. You could go to Search Processors, and type in the name of the processor you're considering. Also, add one of these keywords to the search (scam, fraud, lawsuit, rip-off, dishonest, illegal etc.). This way, you'll be able see what other people are saying and who has the best reputation.

PayPal: You're probably aware of PayPal, or other on-line payment processing services. These services are great for the small-time business or very infrequent users. They have no contract term and typically, most of them have no set-up fees. Their rates, however are on the high side (1.90% + $.30 up to 2.90% + $.30). If you're serious about your business, search for your own individual merchant account through one of the sources listed above.

To get a more thorough understanding of Three Tier Pricing for processing credit cards in your business, please visit my site shown below dedicated exclusively to thorough merchant education regarding credit card processing. The site is NOT A SOLICITATION for your credit card processing business.

Click here for extensive knowledge of Three Tier Pricing

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To get a more thorough understanding of Four Tier Pricing for processing credit cards in your business, please visit my site shown below dedicated exclusively to thoroughly educating merchants on the credit card processing industry. This site will help you negotiate better rates for your business and help you DRIVE INCREASED PROFITS TO YOUR BOTTOM LINE.

Click here for extensive knowledge of Four Tier Pricing

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To get a more thorough education on this newest, possibly least expensive, form of pricing, please check out my site on Cost-Plus Pricing at the site indicated below

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And, if you'd like to get even a more thorough understanding of how this whole industry works, obtain knowledge of what Interchange rates are and how they affect your processing costs, go to my website. It will introduce you to my eBook that provides a wealth of information for you regarding this ever-increasing cost center in your business. It will be one of the most beneficial, profit generating, investments that you have made in your business in a long time. This website is NOT A SOLICITATION for your credit card processing business.

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When priced by a merchant service provider, you can be priced either with bundled or unbundled rates. So, what is the difference and does it matter?

The general rule of thumb says that if you have numerous smaller size transactions, you will probably fare better with a bundled rate. It will be quoted as simply, 2.51% for example. If your average transaction is much higher and you process fewer of them, you will want an unbundled rate. This would be quoted as something like 1.79% + $.25.

When looking at either of these pricing scenarios, simply do the math, based on the majority of your transactions. You'll be better able to decide for yourself which one makes the most financial sense to you.

Many times when in the field, I had many merchants tell me they weren't taking debit cards. There still seems to be some confusion about these types of transactions, so I will clear it up here for you.

Way back in the old days (yah, it really wasn't that long ago) when debit cards came out, they could typically only be used at your banks ATM machine. Then, to make a long story very short, along came Visa and MasterCard offering to "brand" the banks debit cards with the Visa or MC logo. The banks were all for it as this opened up another potential revenue stream for them. Now, they can be used anywhere Visa or MasterCard is accepted.

Now, even though this "new" breed of cards may look like a credit card, they are in fact debit cards. There will never be any "credit" extended to the card holder. It is linked directly to their bank account and simply, if there's no money available, the card won't work.

Every debit card will have one of or a combination of the following words on the face of the card: "debit", "check card", "cash card" "money card", etc. Sometimes, for reasons that I will make clear further down in this article, the word or words are somewhat concealed in the hologram to make it more difficult to see.

Okay, so why does it matter to you the merchant? It's all about transaction COST!!! It's important for you to know what the different cost structures are and possibly change or alter your checkout procedures to reduce your fees.

Let's take a look at how a good majority of merchants do their business. A customer comes to the counter to check out. They whip out a card and you, or your employee, simply swipes it thru your terminal or POS. The transaction is approved, receipt is printed and signed and the happy customer is on their way.

Now, let's look at some costs here. For sake of this example, we're going to say that your current rates are 1.59% + $.25. So, on this transaction for say, $50, your processing fees will come to $1.05.

But, what if that card was actually a debit card going thru the NYCE network (you'll notice on the back of debit cards the network it is associated with like NYCE, Star, Pulse, Maestro, etc.)? Currently (as of April 2009), the NYCE debit network rate is $0.1375 + 0.65% (with a cap of $0.6875). So, if you would have had the customer enter their pin number into your terminal or pinpad, that $50 sale would have cost you about $.48 for the network fees plus, maybe $.10-$.15 for the processor or about $.61 total. As you can see, there can be quite a difference.

So, for the issuing bank, they would much rather that their customers use their cards as a credit card, without the pin (and in fact, many banks encourage this). In this scenario, the bank would earn the Interchange Rate. If you, the merchant, are able to capture the pin number, you save money and the bank earns ZERO, ZIP, NADA, ZILCH......AWWWW, isn't that a shame? When you capture the pin number, it goes right past the bank and directly thru the debit network.

Of course, in order to take advantage of this, you must have the proper technology (PinPad) for debit capture. So, you really need to do the math to determine if the cost of the equipment (if you don't already have one or a terminal with a built in pin pad feature)is going to be worth the savings you will potentially be able to achieve.

What I have also discussed with my merchants is the method in which they ask for the pin. Rather than asking "debit or credit" (which is the way most merchants do), you want to approach it differently. When a customer hands you a card, look at it and look for the word debit or the other identifiers. If they are there, then say to the customer, "I'm going to need you to enter your pin number in just a second", and then hesitate briefly. Sometimes they'll say, "I don't know my pin number" (which is rare) or "just run it like a credit" (they don't know, or possibly even care, that it cost you more that way....they simply look at it as a convenience for them). As long as they don't object in any way, select the debit prompt on your terminal and then the pin pad will prompt for the number. Once it's entered, THE SAVINGS ARE YOURS. I've had some merchants that have made up a nice looking sheet to be framed and displayed near the cash register that says something like "Thank you for shopping with us, If paying with a debit card, kindly enter your pin number as the cost for processing your transaction as a debit rather than a credit, is substantially less". Most customers don't know there is a cost difference but when prompted in this way, are more than happy to accomodate your request. Why not come up with something similar that you think would be appropriate for your business.

Another reason to capture pins is this. If you run the debit card as a credit, the system simply looks in their account to see if there is money available for the transaction, right then and there. If you capture the pin number, not only does it look, but it also immediately captures the funds making them no longer available to the account. Not necessarily a big deal, but, it could be.

Hopefully, this has given you a better understanding between On-Line debits (with the use of a pin pad) and Off-Line (run as a credit card). If you have any further questions, or concerns, you know how to contact me.

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Have you ever tried to figure out exactly what you're paying for the "privilege" of accepting credit cards in your business? You're not still stuck on the rate you think you're paying, are you? Most merchants, when asked what their current rate is quote their lowest rate they see on their statements. However, in reality, the real, Net Effective Rate is always much higher.

Obviously, when you get set up for merchant services, the reps typically only quote you the lowest rate you will receive. This will be for a plain ole generic Visa/MC debit or credit card swiped thru your terminal. If they were to quote you up front what your REAL rate was going to be, you'd probably opt out of accepting them all together. It's hard enough making a living these days without having to give up a chunk of your profits for "convenience" sake.

Keep in mind there are a multitude of categories your customers transactions could fall into. They will be categorized into varying "buckets" and subsequently, a variety of rates and fees will apply. So, how do you know what you're really paying? Let me explain a simple way to decipher it all.

For Existing Merchants: Here's what you want to do. Take a look at your most recent statement. Find your total fees paid for the month. This will be towards the end of your statement. You want to be careful here to make sure you're getting the real "total". For some merchants, they are on what is referred to as "daily discounting". This is where you are paying some of your fees out of each daily batch (great for the processor....an accounting nightmare for the merchant). You'll know this is happening if the total deposit you receive is less than the total sales each day. If that's the case, you'll have to account for these daily fees and add them to the month end fees. You'll want to add any and all miscellaneous fees like batch fees, supplies, statements, equipment rental, monthly or annual fees (these may be only charged once or twice a year but still, you need to account for them to get an accurate figure). Now, take that total and divide it by the total Visa and MasterCard volume. This will give you the true Net Effective Rate that you are paying.

I recently took a look at a merchants statement and went thru this exercise with them. They had never considered this nor had they been shown this process in the past. When I asked them what their rate was, I was told it was 1.49% + $.25. Now, this is a restaurant and this is an excellent rate for them. After examining their numbers, we found that they had total fees of $2,164.24 for the month on $78,132.50 in V/MC volume. Doing the math, we come up with an actual real total rate, considering all their downgrades and transactions types of, 2.77% (the Net Effective Rate). I was then able to do a line by line analysis for them on their actual types of transactions, and show them how to effectively lower their overall rate, quite nicely. Not just their "quoted" rate but their "real" rate. As you might imagine, they were quite pleased with the education and the resulting savings. They have a much better handle on how the whole industry works now, as well. Try doing this with your own statement or even send me a copy for help, if you like.

For New Merchants: For new merchants just getting set up, you won't be able to really determine a Net Effective Rate. What you will need to do, however, is to make sure you ask as many pertinent questions as possible. First, you'll want to know the rate you are being quoted or "teased" with. Ask the rep the following questions:

What types of transactions will this rate apply to (i.e. debit,credit swiped or whatever)

What, if any, transaction or per item fees there will be

What will hand-keyed or card-not-present rates be

How much will you pay for Rewards Cards

What are the rates on corporate or World cards

Are there any batch fees and if so, how much

Are there any Monthly statement or monthly minimum fees

Any application or programming fees

How about annual fees (this is one they don't often tell you about)

Supplies or any other miscellaneous fees....find out upfront before signing any paperwork)

Are there any PCI fees? Monthly, annually or both?

Out of all the fees described above, I'd have to say that the Rewards Cards are probably the biggest thing to find out about. Each processor can place these types of transactions into any category they choose (primarily when you are on a 3 Tier or 4 Tier Pricing Model). No matter what your type of business, these cards are beginning to show up with greater frequency. For the merchant that I described above, last year they were seeing about 19% of their volume was falling into this category. Currently, they are seeing about 30% and it's beginning to hurt.

Okay, there's your education for today. As always, I welcome your comments and look forward to being of any service to you that I might be.

This is your business and you are signing on the dotted line in order to be able to accept plastic in your business. Before you do, ask the questions and even ask to see a copy of the "fine print" in the agreement and actually read it. Ask for a copy that you can review, overnight, if need be. If they refuse to let you look at a copy, run. Know what you are getting into. Here are some things to ask:

Is there a contract term? If so, how long is it?

If I terminate my contract, is there a penalty? If so, how much? (Depending on how far along you are into your contract and you're looking to leave for a better deal, you may be better off just continuing to keep the account active and just paying the Monthly Minimum for the duration instead of the termination fee). Some processors will even pay your termination fee to come on board. Ask the questions and do the math.

Is there a monthly minimum? If so, how much?

Is there a statement fee? If so, how much?

Are there any PCI fees? Monthly, annually or both?

Are there Batch Header Fees? How much?

Are there any set-up or New Account fees? How much?

Are there any Annual Fees? How much?

Can my rate increase during the contract term? Why and how much? If they tell you NO...they're lying!

How about chargeback fees? How much?

Are there any Set-up fees for AMEX or Discover?

How much for Voice Authorization fees?

Do they offer 24/7 Customer Support?

Is the equipment they are recommending proprietary (only usable with that processor) or could you use it with any other processor if you decide to terminate your relationship with them?

Do they refund the discount rate to you when you issue a credit to the customer?

Can you reprogram my existing equipment? Don't replace it unless you absolutely need to. If so, shop around on-line or even on eBay for your best price.

As you have likely noticed on this site, I have not been attempting to solicit your payment processing business. My purpose is to willingly educate business owners regarding the acceptance of plastic. In so doing, if you decide that you would like to contact me for further personal help, I would be honored and more than happy to be of assistance.

Of course, if we end up doing business together, I will earn a commission and ongoing residuals.They will however, be very fair and our relationship will be mutually beneficial. I will always work hard to earn your trust and become a reliable and valued partner.

Likely, I will be able to save you money on your processing but you'll never hear me touting "lowest rates guaranteed" like so many others in our industry. I will work diligently to always provide the best of service and be readily available to your needs.

Even though we may not be in the same geographic area, it really doesn't matter. With the internet, and faxes, the whole continent has become much smaller. What's most important is to be connected to a reliable merchant services rep and a company that truly values your business. That is precisely what I can provide.

I'm a well seasoned, merchant services rep that already has a very comfortable monthly income from my large clientbase so I don't need to try misleading and deceptive practices (like so many in this business) to lure you in. If you would like specific help from me, all you need do is ask but I will not be aggressively trying to solicit your business.

Before clicking on any of the ads that may appear on this site, go to my website, or blog, to obtain critical knowledge that you absolutely need to know before making any decisions.

Once again, thanks for visiting and please leave your comments on my Guestbook and tell others about this site. Here is my contact info:

And, if you'd like to get even a more thorough understanding of how this whole industry works, obtain current Interchange Fee Schedules and increase your knowledge overall, go to my website. It will introduce you to my eBook that provides a wealth of information for you regarding this ever-increasing cost center in your business.

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