Everything you want to know about Merchant Services

One of the most common telemarketing calls we get are for merchant services. These are the services you pay in order to accept credit cards. I always brush them off. Credit Card processing is important. I am going to change processors soon. Last year I paid $5,035 in credit card processing fees. Credit Cards make up 56% of our sales. I paid 2.6% in processing fees. That isn’t a horrible number, but it isn’t great either. I think I can save about $500 a year in processing fees, but it will probably cost me about $1000 in new equipment. I wouldn’t bother, but two things are motivating me to solve this. First our payment gateway (I’ll get into that later) is at its end of life. If it were to stop working I would not be able to process credit cards. Second I will eventually have to have a Chip reader solution (EMV technology) eventually. So I am learning way more than is necessary about how this works. When I bought the business I was overwhelmed with a lot. Processing credit cards was something that was already working so I didn’t want to mess with it. I just had to redirect the funds to go into my bank account. When I finally did start looking in to it I made some mistakes that cost me over $1000. So now I am trying to make a change and I want to do it right.

The industry has evolved and will continue to evolve I am sure. I remember as a kid watching the gas station attendant swipe the credit card on one of these:


I didn’t know that the gas station attendant had to mail in the slips of paper to actually get the credit. I also didn’t know until writing this that these devices are still being sold and used.

When I graduated from High School I started working at a bank. I remember when the first ATM machines were installed at the bank. It was almost magic. You could get cash any time day or night. About the same time credit card processing machines came out. This is a newer version of the same type of machine, but this is what they looked like


The old ones worked over the phone lines. The new ones still can, but it more likely to be attached to the Internet. This is a pretty basic model that can do everything. It has a built in printer for signing slips and printing receipts. It has a magnetic strip reader on the right side for swiping cards. and it even has a place to insert a chip enabled card.

Right now I do not have anything like these pieces of equipment. I have a payment gateway which is a windows program. I connect to it with my Point of Sale (POS) software. The Franchise requires that I use PostalMate as my POS. I have to pay them $75 per month. I will have to pay them whether I use them or not. Here is the screen shot of the settings in the POS.



I am currently using PC Charge as my payment gateway. A payment gateway is like the software in the credit card processing machine above but running on a PC so that other programs can talk to it. This is great for websites that want to take payments without a sales person having to be involved. I think I paid PC Charge a one time fee when I first bought the business, but I do not pay them a maintenance fee or a per transaction fee. PC Charge is NOT the credit card processor. It is just a software program. PC Charge is no longer supported. It continues to work, but eventually it will stop working and that will be the end of that. The other payment gateways you see listed charge a per month and a per transaction charge for their gateways. It might be less convenient, but I am going to move towards using the machines above. One of the motivations for doing so is that there is not a working interface into the POS that will read chip cards. At least I haven’t found one. Some fellow franchisers say that they have ordered them, but it has been almost a year and they haven’t received them yet. If you pay attention when you shop you will see a lot of places like the grocery store and the post office have the chip reading devices but they ask you to swipe the cards.

I have to replace my payment gateway and I want to be able to accept chip cards. Neither of these things involve the merchant services. However since I am looking at the machines and payment gateways I decided to look at the whole solution.

First let’s see who the players are. There are the banks. They issue credit and credit cards. I give people credit. I also have taken deposits that people can draw off of. I don’t give them cards that they can use elsewhere, but just like a bank I have debit and credit accounts. The banks connect to a credit card network. There are a couple (AMEX, VISA, MasterCard, etc) I am only going to refer to VISA since it is the biggest, but they all work about the same. Visa’s network is called VisaNet. Visa is a spin off from Bank of America. The Bank of America name really didn’t work internationally. By connecting to VisaNet the banks can communicate with merchants about how much money a customer can spend. Most people don’t know this, but the bank also gets a small cut of that spending. This is why how a bank makes money even if you never pay any interest. In order to make its network more valuable VISA wants every merchant to connect to their VisaNet. That is how they make money. Every time a customer spends money on their credit card VISA charges the merchant (me) money. This is fair since they have spent a lot of money on building the infrastructure and relationships to make it all work. And besides I the merchant get the money right away even though the customer may not pay their bank for 30 days. Then of course someone has to pay for all those frequent flier miles and rewards that banks use to entice people to use their card.

I as a merchant could connect directly to VisaNet through their MDEX program. They recommend that you process 500,000 transactions per month for it to make sense. I process about 500, so you can see I am not close to having that make sense. VISA wants me to connect to their network but they really want me to work with an “acquirer” These are the merchant services people whom I pay and who in turn pay Visa. Of course they need to make money so they will charge a little on top of the VISA charges. I can’t negotiate with VISA. I can only negotiate with the merchant services provider, or acquirer, or payment processor. They are called different things. Now there is also a group of people called Independent Sales Organizations or ISO. These people do not actually have a connection to Visa, but they sell those services as if they did. That is not a bad thing.

Most of the connected payment processors came out of the banks. It makes sense since the banks had to have connections to VisaNet in the first place. Some are still directly connected to the banks but operate as different divisions of the bank. They know that the merchants are going to have bank accounts and that the bank referrals are going to be key to their customer growth. Chase (the #1 largest bank in the US) has a payment processing division called Paymentech. HSBC (the 9th largest US bank) just parted ways with their payment processor Global Payments. Global Payments now operates as an independent processor. There is a potential for fraud, but there is a higher chance that a legitimate processor will be unscrupulous in how they charge for their services. This includes Wells Fargo and Bank of America both of which I have had problems with.

The ISO’s are the most aggressive. Their only job is to sign up more merchants. They do not have to worry about a lot of the things the real processors have to do. They probably pay their sales people on commission which saves them on cost. That can also cause them to lose money on customers until they have been with them for a year or two. Imagine an ISO pays a sales person $500 for a new customer and that customer generates $25 in profit every month. Obviously that customer will have to stay around for almost 2 years before the ISO makes any money. That is why they want to sign you up for a long term contract. ISO sell their service and send bills in their name. Sales agents sell for either an ISO or a payment processor most likely depending on who pays the best. A payment processor may charge a merchant $20 for services, but discount the service to $10 for an ISO. The ISO in turn may charge the merchant $15 for the services. Therefore going direct is not always the least expensive.

You have to sign up for merchant services or you have to change your merchant services. How do you choose which one? I am going to offer several suggestion but the number one suggestion: DO NOT tie anything you do to the equipment or payment gateways that you buy. Interestingly the equipment manufacturers sell their products through payment processors and banks. You can’t buy them directly. But the worse scenario is that the banks will offer to lease the equipment. Unless you are desperate for cash flow this is rarely a good idea. A $200 machine can end up costing you $1000 and you won’t even notice because it will be built in to your bill.

I haven’t had any links or pictures in awhile. So here is a good one. Visa-USA-Interchange-Reimbursement-Fees-2015-April-18. These are the published rates by VISA. This is what VISA will charge the payment processor. These are the numbers you should see on your bill. This is called Interchange rates or cost plus billing. In other words you will see all of the costs of the payment processor and then you will see an additional charge for the processor’s services. How much additional charge? 5 cents per transaction or 50 basis points. That is a good price. And you may be able to do better!


I know this is hard to read, but this is a slice of my merchant statement. The first line is what I paid for someone (actually 123 people) to use their VISA Debit card. If I look in the published VISA rates this matches exactly. I am paying cost plus merchant services. The regulated part of the name is from the Durbin Amendment. This was a law put into place by congress that said that .05% (or 5 basis points) is the most the credit card companies could charge for a debit card transaction. They can charge 22 cents for each transaction as well. The total cost to me was 73 basis points. That is a great deal. Imagine someone buys a stamp from me and uses their debit card. I make 12 cents on that transaction. VISA would charge me 22 cents. Ignoring all the other costs you can see I lose money on that deal. The Durbin Amendment also allows merchants to set a minimum on a debit card transaction. Before the law was passed a merchant could not set a minimum purchase even though a lot were doing it. Carl’s Jr. Charges a flat $1 for the use of a debit card. In case you were wondering the break even point is somewhere between $7 and $12. My average purchase was over $32. I am not going to set minimums in my store. I think that leads to a bad customer experience. But that is another post.

I can go through and verify most of these charges with the VISA published rates. I trust my processor but I did spot check a couple out of curiosity and they did match. The last line on this portion of the statement is the processor adding in their profit. You can see that I am paying 52 basis points. Not bad. There are other charges that make that number go up like a monthly service fee of $9.

In between that you can see a variety of card services that VISA has. You can see that the VISA Signature Preferred Standard has a transaction cost of 10 cents and a transaction rate of 2.95%. For my transactions that came to 3.28% on that particular card. That is what VISA is charging. Any processor who claims they will ONLY charge 2.5% or less is lying.

How is that some merchant services say that they can offer 1.5% processing fee? They are doing one or two things to make sure they do not lose money.  The first thing they can do is not offer cost plus. They will offer something called tiered pricing or something like that. The 1.5% is the charge for only certain cards. They will charge a lot on a per transaction basis. Just on a transaction basis I am paying 24 cents. So a processor could charge as high as 35 cents per transaction AND a percentage and they are going to come out pretty profitable. The other thing they can do is have a large cancellation fee. I have heard of fees as high as a couple of thousands of dollars. Wells Fargo told me there was no cancellation fee and then after I changed they sent me a bill for $700. They can lock you into a long contract but not into a rate. So they can lose money on you for the first year and clean up in subsequent years.

These are just a few of the tricks that a processor can employ. They have to make money. I don’t begrudge them that. But they know that no one is going to change processors just to pay the same amount. I am satisfied with my processor. I am changing because I couldn’t get good answers on the EMV chip readers and interaction with my POS. They did delay my payments a couple of times, but other than that the service has been great. That is another sales tool that doesn’t work for me, but is legitimate. Since all of your customer information is going through the processor they can offer data and analysis to help improve your sales by marketing better. They could offer you equipment or software like a new POS in order to get you to change. All of these might be worthwhile exploring. Take my advice on the equipment. DO NOT LEASE.

So now that you have a better understanding of how all of the pieces work after reading this abbreviated explanation, (I did leave out AMEX and MasterCard), who would I recommend?

I am going to give 2 recommendations. The first is AdvoCharge. Why? Because they seem to be the only one who will tell you their pricing up front. The most common sales tactic is to ask for your last 3 merchant statements to demonstrate how they can save you money. Why can’t they just tell you what their pricing is? The second recommendation is Gravity Payments. Although they did get a little salesy with me it was more about how they educated me, listened to me, and then offered me a path to get where I needed to go. They loaned me some equipment at no cost. I can try their solution on one of three registers and then when I decide that it will work I can easily transition all of my payments to them. That is trust I need.

If you are a fan of big banks then I can recommend Chase with Paymentech, I will absolutely not recommend Bank of America or Wells Fargo. Both of those cost me over $1000 unnecessarily. What equipment would I recommend? I have no idea. Maybe another post.



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