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What credit card processing costs can you control?  If you look at my second blog post (November 2013) you will see a bullet point titled "Processing fees - Negotiable."  This outlines the basics of controllable cost.  This same post also outlines the basics of interchange cost which is the uncontrollable cost issued by the card associations (Visa, MasterCard etc.).  You must exercise caution when looking at "processing fees."  Many processors will pad interchange cost to make their processing fees look lower.  Many also have confusing or basic statements so that it is impossible to distinguish between processing fees and interchange cost...this is true of all bundled, tiered and flat rate programs.

Only a true interchange (cost) plus program will show all of the interchange costs and processing fees, but what are processing fees?  Processing fees are the fees charged by your processor so they can make a profit.  They include a percentage of credit card dollar volume fee (also known as basis points), per transaction (per authorization) fee, monthly service/maintenance fee, statement fee, batch/close/settlement fee, pin debit service fee, pin debit authorization fee, monthly minimum, regulatory and compliance fee, TIN validation fee and early termination fee (ETF) name a few. 

If you have a really good processor they will only charge you the percentage of credit card dollar volume fee (also known as basis points or discount rate), per transaction (per authorization) fee, pin debit authorization fee (if applicable), monthly service/maintenance fee and possibly a batch/close settlement fee.  There is no reason to pay any of the other fees.  Their sole purpose is to pad the processor and sales reps' pockets.  I do not charge any fluff fees.  I believe in long term relationships based on FULL disclosure, great pricing and excellent personal service.

There are some "Other fees" that you may encounter in addition to Interchange cost and Processing fees.  These fees are virtual terminal (gateway hosting) monthly fees, wireless device fees, virtual terminal/gateway authorization fees and PCI compliance fees to name a few.  You should definitely get a good explanation for all of these fees to be sure you are not paying for fluff.

So how do you know if you have good controllable costs?  Call or email me with any questions you may have.  I can also do a free analysis for you.  Every business is different...retail, wholesale, card not present, eCommerce...and then there is customer demographics which affect the types of cards you receive for payment as well.  I can help you find the best program available to fit your needs.

1.      Early termination fees – No processor HAS to charge an early termination fee.  They do this to hold you hostage while they raise your rates every 6 months.  They know that if you have to pay a contract cancellation fee, then you will probably not look into switching.  Did I mention that almost all contracts in merchant processing are “green” contracts?  This means they auto-renew unless you cancel within a certain timeframe.

2.      Rate creep – Ever notice how your rates go up every 6 months?  As stated above, they have you locked in and they do this because they can and they are greedy.  If you are on “bundled” or “tiered” or “flat rate” pricing then you have or will experience rate increases regularly.  They will do this every April and October and blame it on “interchange adjustments” even if there was not an interchange adjustment that would have affected you.  You need to be on a real “interchange plus” pricing setup with a processing fee lock.

3.      Monthly minimums – This is a fee that a processing company will charge to make sure they are getting a good source of revenue from you, even if you have some slow months or are building your business.  This is a fluff fee.  Don’t do business with someone that charges a monthly minimum.

4.      Annual/Startup/Application fees – These are all fluff.  This is another way for processing companies to add margin to their deals to pad their pockets.  The only exception is if you choose to use a virtual terminal such as USA ePay (one of my favorites) and they charge you a one-time USA ePay setup fee of say $99.  This is how USA ePay makes its money.  Your processor may or may not get a portion of this $99 fee.

5.      Bundled, tiered or flat rate fee structures – This is the most common area for processing companies to hide fees.  While it may be much easier to understand than interchange (cost) plus pricing, it WILL cost you much more.  This is a fact.  These bundled rate programs are designed to keep you in the dark.  These programs hide your actual interchange cost so your processor can maximize their profits.  It also makes it very easy for them to raise your cost every April and October based on “interchange adjustments” when you don’t have a clue what interchange cost is and how it affects you.  See my article “Basics of interchange (cost) plus pricing.”  You ALWAYS want to be on interchange plus pricing (aka cost plus pricing).

6.      Padding of interchange cost – Some processors will place you on interchange plus pricing, but secretly pad the interchange cost.  This is very difficult to detect unless you really understand interchange pricing.  Your best defense here is to ask questions.  Ask lots of questions.  If your rep does not know the answer, you may be in trouble.  You can also compare their interchange cost to the actual interchange cost posted publicly on Visa and MasterCard's websites.

7.      Very attractive "Qualified Rate" promise – Many processors price based on bundled rates.  As stated previously, it is easier to understand, but it will cost you.  Most processors (their reps) will only show you the "Qualified Rate" up front.  This is the rate for credit cards that are swiped and includes check cards (pin-less debit) and regular credit cards, not rewards cards, key entered transactions, business cards or purchasing cards.  Where do all of these cards land in their "Bundle" the "Mid-qualified and Non-qualified" transaction tiers of course!  Why don't they tell you about these up front?  Because the rates are EXTREMELY HIGH!!!  Again, only accept a true interchange (cost) plus pricing setup.

8.      The vanishing rep – Have you ever bought a product or service and after being promised excellent ongoing service from your sales rep only to be abandoned after the sale?  I have and it is not acceptable.  To avoid this ask for references and call them.  Make sure the reference list includes long-term clients.  When I give a proposal I always include a reference list including clients that have been with me for over 8 years as well as newer clients so they can get a good feel for the service I provide.  If you get a good list including 10 references ranging from 6 months to 8 plus years and they all have great things to say, then you probably have found a good rep.

9.      Expensive equipment In most cases you only need simple equipment to process transactions.  Many reps out there use equipment as another revenue source.  In some cases the reps use it as a major revenue source.  For example, a rep offers you to lease equipment instead of purchasing it because "this equipment is expensive and you don't want to have to replace it if it breaks in 6 months to a year."  So they set you up with a 48 month (that's 4 years!) lease that costs say $45 per month.  That is a total cost of $2,160 over the course of 4 years (plus taxes) and at the end you don't even own the equipment!  Now here's the real kicker...  That equipment only costs $250 to purchase (maybe $340 with a pin pad).  You could have replaced that terminal about 9 times during that four year period for the same cost.  I have clients that have been using the same equipment for over 10 years!  Leasing and renting equipment is a rip off.

10.  Lies, lies and yes, more lies – My final point is something you have probably already figured out by now...that reps and the processing companies they represent will do or say anything to get you to sign with them.  It is a very sad fact and it makes my job very difficult because nobody trusts you as a merchant processing sales rep.  Some of you may say that not every rep is bad and I would agree, but the cold, hard truth is that most are bad...and some don't even know it.  Some just push the line of bull that their employer teaches them out of pure ignorance...they never take the time to learn this industry on their own to see if what they are being taught is the truth.  Your best defense here is references.  Good luck and as always contact me with any questions.

The official governing body of PCI Compliance is the PCI Security Standards Council and their website is  According to their website, meeting PCI DSS (Payment Card Industry Data Security Standards) "means that your business adheres to the PCI DSS requirements for security management, policies, procedures, network architecture, software design and other critical protective measures. In operational terms, it means that you are playing your role to make sure your customers' payment card data is being kept safe throughout every transaction, and that they – and you – can have confidence that they're protected against the pain and cost of data breaches."

If you are a large business with both retail and internet sales, you probably are already familiar with PCI Compliance and why it is important...just ask Target. They had a program in place and they still had a breach. The reason I bring this up is that being PCI DSS compliant does not guarantee that you will not have a breach. It helps prevent a breach and hopefully will help reduce fines imposed by the card associations in the event you have a breach. That's right, the card associations, Visa, MasterCard and Discover for example, are the ones that impose the fines if you have a breach, not the PCI Security Standards Council. Clear as mud right?! The council is there to help you become compliant and understand compliance, not to enforce compliance.

So, what does it mean to be PCI Compliant as a small business owner? 

If you do not touch the internet:

If you do not accept cards through the internet, say you only have a standalone credit card terminal that connects through an analogue phone line, you still have to be compliant. The basics are as need to make sure your credit card terminal has regular PCI encryption updates, you need written policies regarding who can handle credit cards and process payments in your workplace, you also need a written plan for the unlikely event of a breach, you need training materials for employees to teach them how to handle credit card information and you need to make sure that if you do store customer's credit card information, that it remains in a locked area that is not easily accessible to customers or non-credit card handling employees.  The full list of requirements can be found on the PCI council's website, but these are the basics. Remember, fraud can be both external and internal.

This level of compliance requires you to either partner with a qualified PCI assessor (found on the council website) or you can self-assess by downloading the most recent SAQ B form on the council website under documents. NOTE...check with your processor first. Some processors do not allow you to self assess and require you to use their preferred vendor. This is usually because they want to profit from your compliance. My company does not profit from compliance and we allow our clients to choose whomever they want for compliance.

If you do touch the internet:

If your customer's credit card information touches the internet in any way, you will need a higher level of protection. Self-assessment is still an option, but you will have to find a qualified scanning vendor that will scan your system quarterly for vulnerabilities. Check the council website to see if your current IT or web hosting company offers this service or if they have a preferred vendor that is qualified by the council. This level of compliance is in addition to all of the requirements of the SAQ B. You need to make sure you do not have any internet vulnerabilities. This is how Target was breached, through the internet.

Many small business owners believe that they are unlikely to experience a breach. The fact is that the vast majority of breaches happen to small business owners...sad but true. With fines in the $40k range (and up) it is a good idea to take the time to make sure you are compliant. I personally believe it is worth the $40 - $125 a year cost to have a certified PCI assessor make sure that I am compliant. It is a necessary evil and a cost of doing business.

The 2013 Target Breach:

Little is known right now about the Target breach other than their system was breached.  Cyber thieves stole card data from the magnetic strips between November 27th (Black Friday) and December 15th. Over 40 million customers credit and check card information was stolen. Target has a PCI compliance program. This can happen to anyone. Target is reacting very well and has hired a forensics company to help with the breach. The Secret Service is also performing an investigation.

If you shopped at Target during this time I recommend you keep an eye on your credit report, check your credit card account and bank accounts daily and possibly even cancel the cards used and order replacements. If you notice any activity, report it to your credit card company or bank (whichever applies) immediately.

If you’ve been in business for any amount of time, chances are someone has tried to “pull one over” on you.  The merchant processing business provides for an abundance of examples of this scenario.  I previously wrote about suspicious phone calls where someone calls acting like your current processor and before you know it you have been duped.

So how do you know when to look into an offer and when to tell them to take a hike…or flying leap?  In most cases you should tell them to go away and not come back, but what if you are looking to switch? 

The first thing you should do is to calculate your net effective rate or NER for short.  You do this by taking ALL of your processing fees and divide them by ALL of your merchant processing volume.  For example, if your fees total is $2500 for the prior month and you took $50,000 in credit cards last month, then your NER is 5.00%.  This is very high, but unfortunately I have seen higher.

So what is a “good” net effective rate?  The lower the rate is…the better for your bottom line.  If most or all of your transactions are “card not present”, “MOTO” or “keyed” then you should have a NER of 3.00% or below.  I have clients below 2.00% that key all of their transactions.  Your rate will depend on how much your processor is charging you and what type of cards your customers pay with.  If you are a retail location, your net effective rate should be much lower.  Your range should be somewhere between 1.50% - 3.00% depending on your business type and customer card types.  Some retailers are fortunate and have rates well below 2.00%.

If you feel your rates are too high after calculating your NER, then you need to find someone that offers interchange plus pricing with no contract and no fluff fees.  This is not very easy.  Most companies will do and say anything to earn your business, only to change the rates and rules after they have you locked into a contract.  Also, most reps in this industry are not empowered to honor the promises they will make so make sure you get it in writing with their company logo on it.  It is very important to get everything in writing up front.  Review every single line of every paper prior to signing anything.

If you decide to let someone do an analysis for you, make sure you mark out your merchant ID (MID) on every sheet of paper you give them as well as your banking information.  Tell them they need to provide you with a detailed analysis showing if and how they can save you money.  If they will not or cannot share their detailed analysis with you, IN A WAY YOU CAN UNDERSTAND, then they need to go away.

If they provide you with a detailed report and they explain it in a way that makes sense, then you should ask them to send over the application showing all of the fees they charge.  Compare these fees to the analysis they provided you on the application.  The fees should match and there should not be any fees other than what was on their analysis.  The only exception is interchange cost that did not apply to the month they analyzed, but be careful here.  Look up the charge they show as interchange cost online.  It is there, you may just have to dig for it.  Look below for a link to Visa and MasterCard’s websites.

I place all of my clients on interchange plus pricing with no application fee, no annual fee, no monthly minimum…no fluff fees period.  There are a few others out there like me.  I have met them, but they are very few and very far between.

The bottom line is, if the offer seems too good to be true, it probably is too good to be true.  You will need to get DETAILS and email me if you have questions.

If you get a call from someone saying they caught an error on your account, or they need to get you new compliant equipment, etc...get their name and number, then hang up! They will act like they are calling from your processing company, but they could be crooks. They trick people into switching to their company for credit card processing...then you are locked in to a new contract with what will likely be huge fees and even bigger fees for cancelling.  I have even seen similar situations where they do not switch your processing, but they do empty your bank account and disappear.

This scam can cost you a lot of money. One company almost got one of my clients last week with their fraudulent trickery. The rep called my client saying they found an error on their bill, that they were double charged for their monthly fee and they already corrected the error.  This was partially true.  There was an error, but it was fixed by my company immediately and it had nothing to do with this company calling my client. 

These bottom feeders listen for an issue with a large processor then they get on the phones randomly calling businesses using the same line every time until they get someone that falls for their trick.  By the time it is over the business is now in a new contract that gives this fraudulent company full legal access to the business’ bank accounts and revokes the business’ right to sue said fraudulent company.  It is a genuine nightmare that commonly costs the business many thousands of dollars.

Always call your processing company or your rep before giving anyone information about your merchant account. Do not call the number provided by the person calling you.  You will just be led back into the hands of the same crooks that called you.  The number for your real credit card processor is on your statement, but you should also have your reps cell number if you have a good rep. 

First, let me start of by saying nothing is free…nothing.  Everything has a cost.  The last time I checked manufacturers did not go through the trouble of creating and manufacturing a product to give it away for free.  Credit card terminals are no different.  They have a cost and the manufacturer will get paid.

So why do some companies offer free equipment while others sell, lease and/or rent the same equipment?  The company that offers free equipment is hiding the cost of that equipment in your processing fees…plain and simple.  If they are offering you free equipment and the rates look great, something is wrong.  They are hiding fees from you, and/or they plan to jack your rates up soon after getting you to sign a contract which could be expensive to break.

Why not lease then?  You are paying for the equipment right?  In addition they will swap out the equipment whenever needed right?  Both of these statements are true, but it will cost you a lot of money to lease that equipment compared to buying it at a reasonable price.  A standard credit card terminal costs your processor between $175 - $250 while more feature rich terminals can cost around $350 - $550 and on the very high end you have wireless terminals which cost around $675 - $725.  That is your processors cost. 

An average lease payment is around $45/month for an average terminal.  It is a 48 month lease which cannot be broken for any reason, which means you are paying that 48 months x $45 (plus tax, but to keep it simple we will leave the tax out) = $2,160.  If you can get that same terminal for say $200 you could have bought it over 10 times.  How many do you think you would go through?  Most businesses keep the same terminal for years and years.  I have seen terminals that have been used for over 10 years.  Never lease, it is a big rip-off!

So what about renting equipment then?  Renting is still not as preferable as purchasing the terminal, but with a rental there is normally no contract attached to the rental so you can return it at any time.  I still think it is a big waste of money.  If you are unsure if you will be taking cards for long and are thinking of renting consider this… If you buy a terminal for around $175 - $250, you will be able to resell that terminal to another business and recoup all or most of your money if needed.  Just make sure you clear out the memory prior to selling it.

Without a question, the best option is to purchase the equipment.  Make sure you get a good price.  Yes, you can buy equipment on the shopping sites, but you must be careful there too.  There are sites that trick you into signing up for their merchant services by getting cheap equipment.  There are also people selling equipment that is broken or that will not work with your processing company.  The best option is to buy it through your processor at a reasonable price.  Ask them if they have any kind of swap program if something happens to the terminal and how long it will take to get the replacement.

Personally, I sell equipment at my wholesale cost.  I also have a swap program so that if something happens to the terminals, other than intentional damage, I can swap the terminal out with a like model for $75.  It is a deal I worked out with my equipment supplier.  That saves my clients from having to buy a new terminal in the unlikely event something does happen to their equipment.

As discussed in the post about interchange cost, there are many different fees associated with interchange.  There are also many fees being charged that are not part of interchange, but part of lining the pockets or your processing company and yes, the rep that “sold” you.  So how can you tell the difference between what is an interchange cost, legitimate processing fees and fluff?

The first step is to make sure you are on interchange plus pricing.  This is the most transparent, cost effective pricing model.  When you are on interchange plus pricing, you pay the processors cost plus their processing fees which are the fees they charge you to do your processing for you.  Bundled pricing setups will cost you too much, no matter what your rep or “banker” says.

The second step is to watch your statements monthly, especially around April and October.  The card associations make their adjustments every April and October so this is when you will notice the majority of changes to your account…rate hikes or “the creep.”  Watch for the small print warning of upcoming changes to your pricing structure.  Some changes are legitimate.  For example if you are on interchange plus and your statement message says something like the rate for Visa Rewards 1 transactions is being adjusted from 1.65% + $0.10 to 1.67% + $0.10…then it is likely to be legitimate.  You can always go to the Visa site and look for yourself.  It is posted. 

If you take the same scenario, but you are on bundled pricing…your statement message would likely say “…due to card association price adjustments your rates will be adjusted by +0.15%.  This means all of your cards will get a 15 basis point increase, not just the card that changed…rip off! The message may even just make a vague statement of upcoming rate increases “due to an interchange adjustment.”  Yes they will raise your fees even if their cost does not go up.  Think they can’t, read your contract.

The third step is to look at your statements for fees such as regulatory and compliance fee, TIN validation fee, PCI non-compliance fee, monthly PCI compliance fee, customer service fee, annual fee, etc.  Most processors charge a monthly fee of some sort and this is acceptable if your discount rate (the percentage in processing fees you pay) and the authorization fees are reasonable.  Never pay a monthly fee over $10 unless it includes your use of a virtual terminal.

Have a question you would like answered on my blog?  Email me from the contact page and I will either respond individually or I will give the answer in an upcoming post.

There are three components that make up the credit card processing fees that a business pays.

  • Interchange – Non-negotiable – This is the value Visa/MC/Discover has assigned to every different card type based on the way it is processed.  This portion of the rate paid goes to the issuing bank of the debit/credit cards.  This information is public and can be found at and
  • Assessment Fees – Non-negotiable – This portion of the rate paid goes to Visa/MC/Discover as the Card Associations.  This is where Visa/MC/Discover make money as businesses in the credit card processing industry.  This information isn’t found as easily as Interchange, but your processing company should share that with you.  This is also part of interchange cost…an uncontrollable, non-negotiable cost.
  • Processing Fees – Negotiable – This is the portion of the program that varies from company to company.  This is where the credit card processing company makes its revenue on a merchant.  There is a percentage added on above Interchange and Assessment Fees for the processing company to provide their services.
Interchange Plus pricing is by far the most efficient way for a business to process credit/debit card transactions.  It breaks out all of the “true costs” charged by the processor, and eliminates the ability for any rate manipulation by the processing company.  It also allows you to receive the full benefits of the Durbin Amendment legislation.  The Durbin Amendment drastically reduced the cost of certain types of debit card transactions that come through your business.

There are two different pricing strategies used when setting up a merchant account for a business.

  • Unbundled.  Unbundled pricing is actually Interchange Plus pricing which was just explained.  We are unbundling each of the different factors that make up the total rate paid.
  • Bundled.  Bundled pricing occurs when the processing company takes all of the different rates charged by Visa/MC/Discover, adds the Assessment Fees and their Processing Fees and groups everything together.  They then offer a “Bundled” or “Tiered” program where you as the merchant may be offered only 3 or 4 different rates for all of the different types of cards that come through your business. You may see things on your statement such as Qualified, Mid-Qualified, or Non-Qualified, or Rates 1, 2, 3 or 4.  Very often in a bundled program the processing company may be offering a competitive “Qualified” discount rate for your typical consumer credit cards, but then inflates every other category to make up for being somewhat competitive on the “Qualified” transactions.

A lot of credit card processing companies use “Bundled” pricing because it is more lucrative for them.  They make more money because they can hide their processing costs in many of the rates charged to the merchant.

Unbundled or Interchange Plus pricing is better for the merchant.  It offers complete disclosure.  When set up properly on an Interchange Plus program, a merchant could actually audit the rates charged on the statement to the public information on Visa/MC websites.

I reluctantly entered the field of credit card processing (merchant processing) about 10 years ago.  I say reluctantly because even then credit card processing reps had a bad reputation…ranking up there with used car salespersons and life insurance salespersons…no offence intended.

I decided that I could still maintain my dignity and keep my moral compass pointing in the right direction so I agreed to join a large processor.  All was good for a while.  I was making very good money and I had great benefits.  But I am a learner.  I yearn for information. I have to be an expert at whatever I am doing.  I have to understand it inside and out.

My employer was not teaching me so I started digging.  I found something called interchange plus pricing.  It seemed like it would be a great selling point so I asked permission to start selling using this model instead of the “bundled pricing” model my employer required us all to use.  Well, that did not go over very well.  I was told no and when I pressed I was told it is not nearly as profitable.

Around the same time my employer started doing massive rate hikes affecting all of my clients…some of which I had just signed up.  When I asked why they did this, I was told my accounts were not profitable.  My next step was to run an analysis on a large portion of my portfolio using their old pricing, interchange plus pricing and the new pricing after the rate hikes.  What did I find you may ask?  I found that the accounts were very profitable under the old pricing.  Not only that, but I also found that we could reduce their rates and still be profitable.  I decided to bring this to the attention of some executives.  That did not go well.

I decided it was time to move on.  I had asked around and it turned out everyone I spoke to within the credit card processing industry was concerned with one thing…themselves and their riches.  After a short break (about 3 months) I decided to go back into credit card processing, but on my terms.  I decided that there has to be someone who will advocate for business owners in the credit card processing industry. I felt that I could still make a fair wage while offering great rates, service and not holding people hostage with contracts.

Well it turns out I was right.  No, I don’t make as much as most other reps in the business of credit card processing, but I do well enough and I still have an unbroken moral compass and my dignity…and I can sleep at night.  Now I am trying to spend more time educating people about credit card processing so they can make better decisions and not get into bad situations with expensive outcomes.

That is why I founded Merchant Owl.  You see, I love owls.  I see them as noble and wise.  One day, not long ago I was trying to figure out a catchy name for my business and I thought to myself, if I were an animal, what would I want to be (a game I play with my kids sometimes) and I thought an owl because they are intelligent and noble…not to mention they look really cool and they can fly!  Welcome to my blog.  Stay posted and get ready to learn about merchant processing.