Credit Card Processing Blog

When choosing a credit card processing company it is very important to research the company in question before making your final decision.  Merchants rely on these processors to ensure transactions are properly handled and that they receive payment for each transaction.  It is also important for merchants to understand the whole payment processing system which involves more players than the processor alone.  Credit card companies and banks are also involved in the process which means there is a chance that deceptive business practices used by any of these parties can affect the merchant as well as consumers.

This appears to be the case with Discover, the major credit card company currently the subject of a Minnesota lawsuit.  As stated in a New York Times article, “The lawsuit alleges that Discover Bank and its affiliated processing company made aggressive and misleading telemarketing calls to sign people up for these products, tricking people to sign up for the add-on products and in some cases, charging consumers for enrollment without agreement from the consumer.  This, the state alleges, would have been easier for Discover to do than your standard issue telemarketer because Discover already had access to their credit card numbers.” (more…)

Shelly Netzah Reuveni is the CEO of Legacy Merchant Solutions, a national credit card processing firm based in Los Angeles, California. In the five years since Legacy launched, it quickly took on large market share both regionally and nationally by providing quality service and competitive rates.

When asked about what a merchant should look for when shopping for a payment processor, Reuveni said to watch for hidden fees or unclear rates. She also recommended asking companies for references and investigating their reputations including checking with the Better Business Bureau. Also, any good payment processor should have readily available technical support.

But what about pay? How does a merchant know what is a good deal and what isn’t?

“Many factors can influence the fees/rates one pays. Among these factors: the length of time one has been in business, percentage of sales that are made over the phone, internet, or in person,” Reuveni said. “Phone/internet are more risky due to fraud, and therefore involve higher rates than an in-person, type of business (some are considered high/low risk), one’s personal credit rating, amount of each transaction, and the total sales/money earned each month.”

But the real name of the game is buyer beware.

“With this said, like with any business, ‘shop around’. Make sure that you see ALL the paperwork, read the small print, and read carefully before signing. If something is not clear ASK ASK ASK!”

In fact, Reuveni says there are a number of advertising tricks credit card processors use of which merchants should beware.

“Advertised fees less than two percent. These fees are for swiped (in person) transactions since they are less risky, or have less risk of fraud. In comparing processors, be sure to find out what all of the fees will be. Make sure you know the application fees, annual fees, discounted rate fees, equipment cost, monthly minimums, and any other fees that will be incurred.”

Some businesses can expect to have trouble finding a good deal on credit card processing. Reuveni prefers to avoid travel agents, casinos/gambling websites, adult websites/porn because these all come with a high risk of fraud and refund.

One sketchy practice among merchants who accept credit cards is charging transaction fees for using a card. According to Reuveni, this creates a number of problems.

“Simply put, customers will go somewhere where they don’t have to pay the extra cost,” she explained. “Furthermore, many small business owners charge customers to use their credit cards. For example, they charge $2.00 for paying with a credit card. This actually goes against the credit card processors  agreement (at least in California). Credit card processors can actually fine and terminate your account for this.”

Why is this such a big deal to credit card processors?

“Think about it this way, if a business owner requires a client to pay a fee for using a credit card and the customer refuses then the credit card processor looks bad and loses a ‘sale’.”

The bottom line in Reuveni’s book is transparency for both merchant and card processor.

So, who is the best credit card processor?

“One who will show you in black in white their rates/fees. Any credible credit card processor should be able to show you a rate sheet, which shows the exact fees. Also, they should have a 24 hour live support in case you need help,”

As more and more information comes to light in regards to how credit card companies earn their profits, merchants and consumers are asking for a change.  For many years prior to the recession, a large number of consumers were cruising along thinking all was well in the world of personal finances.  This is common in an economy that isn’t struggling.  It isn’t until things take a turn for the worse that people remove the blinders and begin taking a hard look at the reality of their situation.  This has recently occurred in a big way with regards to the banking industry and credit card companies.  Here we are going to look specifically at how credit card processing has helped the issuers of these cards see billions of dollars in profits annually.

The role of credit card processing

As a consumer, you may not spend a lot of time thinking about how a business gets paid when you use your credit card for payment.  What many people do not realize is there is an intricate process that happens once their credit card has been swiped or entered for payment.  The credit card processing system allows for money to be transferred from the bank backing the credit card to the merchant making the sale.  This process is not without fees, which are passed on to the merchant for the privilege of accepting credit cards.

The role of the credit card company

When a merchant wants to accept credit cards as a method of payment, they must first enter into an agreement with the credit card association and agree to certain terms and conditions.  In the past, one of these conditions is for the merchant to agree not to charge a different price to consumers who are paying with cash compared to those paying with credit cards.  This was to discourage merchants from passing on the cost of credit card processing fees to those consumers who use their credit cards while offering a discount to others who pay cash.  The result of that type of practice could very well encourage more consumers to holster their plastic and consider paying with cash.  As a result of this restriction merchants incur credit card processing fees which can be estimated at approximately 5 percent of each credit card purchase.  It has been discovered that while merchants and subsequently consumers pay the cost of credit card processing fees, the profits for major credit card companies continue to soar.  In 2009 credit card companies profited an astonishing $35 billion dollars by prohibiting retailers from offering different prices.

Merchants and consumer benefit from changes

Fortunately this practice has been called into question and merchants may soon be able to offer more options for consumers.  While the credit card industry supports the restrictions in place, claiming any change will result in consumers using credit cards to be “punished” with higher prices- the Justice Department seems to disagree.  In fact, a lawsuit brought against the major credit card companies (Visa, MasterCard and American Express) for unfair business practices displays the seriousness of this issue.  When merchants have the ability charge consumers more for payment options that cost more, individuals have the right to choose which method of payment is most affordable.  This freedom of choice is more about saving money for both the consumers and merchants than punishing people for choosing to use a credit card.

Photo via spamdude060

While most information regarding credit card processing centers around how the merchant receives payment, there is another side of this process that should be explored.  What happens when a customer wishes to return a product or receive a refund for services?  Just as credit card processors ensure merchants get paid, they are also responsible for ensuring customers receive credit when it is due.  Here we look at what happens (or should happen) when a customer requests a refund or credit.

Define your return/exchange policy

It is important for each merchant to establish and clearly disclose a return or exchange policy that describes both the merchants responsibility as well as that of the consumer to ensure there are no misunderstandings that can result in a dispute.  The credit card processor can only support the merchant and customer if each adhere to the rules set forth regarding exchanges or refunds.  If there is no clear policy in place between the merchant and customer it becomes difficult to prove one’s case if there is a disagreement over a refund.  The return/exchange policy should be defined in one of the following ways:

  • No returns or exchanges–  If your business considers “all sales final” then it is imperative your customers understand your policy.  This should be clearly displayed and relayed to customers when they make a purchase to ensure there are no misunderstandings that refunds, returns and exchanges are not an option.
  • Exchange only–  If you are willing to accept an exchange for another product that is similar in price to the original, then your policy should state exchange only.  In this case a customer will not be able to return a product for a full refund but rather get another item that costs the same (or less) than the original purchase.
  • Credit with receipt–  If you are willing to issue a credit for merchandise returned in the original condition or other special circumstances, this should be disclosed in your return policy.  Many vendors opt to have the return policy printed directly on the receipt to facilitate easier returns.  Whatever conditions the customer must meet to receive a credit should be outlined in the policy.
  • In store credit–  Many vendors opt to offer a credit but one that can be used in-store only.  This means there is no actual reversal of charges on the credit card but rather a store credit that can be applied to the customers next purchase.

By establishing a clear-cut policy on returns and exchanges, it becomes much easier for the credit card processor to support the rights of both the consumer and merchant.

Issuing a credit to a credit card

If your policy allows for a customer to receive a credit on their credit card purchases, you must honor that policy if all the terms have been met.  When this occurs the amount of the credit will come out of your account and be credited to the customers account via your credit card processor.  While some merchants would prefer to not deal with the hassles of issuing a credit, for most this is one of the best ways to retain customer loyalties and encourage repeat business.

In an ideal world one would never have to change who supplies their credit card processing services.  Unfortunately that is rarely the case and each vendor should have a back up plan in place should their current credit card processor not work out.  While there are plenty of opportunities to switch processors, it is also important to have a plan in place should your current processor fail (literally).  If you rely on your credit card processor to ensure you receive payment for services and products, it is better to have a plan in place before disaster strikes versus waiting until the day you are no longer receiving payments.

What would cause a credit card processor to fail?

Under most conditions a credit card processor will provide reliable and predictable service.  There may be conditions that arise on occasion which make it difficult to process payments.  This may be the result of contractual issues among parties or software problems that halt the processing of transactions.  In any event, if your business would be at risk due to the inability to process credit card payments in a timely manner, it is essential you know what to do to ensure your business can survive.

Back up your credit card processing service.

It is important for each vendor to determine how vital credit card processing is to their business.  If you have other forms of payment which you accept and a temporary halt in credit card sales will not put you out of business, it may not be cost effective to invest in a costly back up plan.  Conversely if you rely solely on credit card sales or the bulk of your business is conducted online, over the phone or other credit card intensive areas, it might be a good idea to have another way to process credit card transactions in a relatively short period of time.

Merchants who count on the ability to process credit cards should always consider having a secondary processor who they can turn to in a pinch.  Whether you opt to actually change processors altogether or want to add a layer of protection should you need it, will be determined by each situation and the factors that contributed to the inability to process payments in the first place.  Small business owners may consider an alternative processor such as PayPal to expedite immediate payments or even invest in a mobile processor that can be attached to their cell phone.  Larger businesses can research alternative processors to determine which would be the second in command should the need arise, which will reduce the amount of time lost gathering and comparing important information on short notice.

To be successful in business you have to have all of our bases covered and then have a back up plan should your primary business needs become jeopardized.  This is true for all areas, not just credit card processing.  Taking the time in advance to ensure you have the ability to accept and process payments is vital to the success of your business.