Even if You have a Good Rate – You May Be Paying Too Much

Refunds – Know How Much Your Merchant Account Provider Charges You

Merchants should always ask how the merchant account provider handles refunds (customers being credited back for products they purchased) before signing the agreement. Merchant account providers are refunded a large portion of the interchange rate when the merchant credits the customer. The amount refunded to the merchant account provider varies but on average is at least 1.50%.
There can be some chargeback risk and cost to the merchant account provider for refunds so many do not refund some or all of the 1.50% back to the merchant. However, some merchant account providers will refund that percentage back to the merchant if the merchant meet their risk requirements and are viewed as important enough. Most merchant account providers will keep the refund percentage (because of the risk and cost to them) and only charge the merchant a transaction fee (say 20 cents) for the credited amount. However, some merchant account providers will not only keep the refund percentage, they will charge the merchant the full processing fee again for the credit transaction.

I very recently saw a merchant statement for an eCommerce merchant. The merchant was not only grossly over paying for processing (they were paying 5%), but I quickly noted that they were losing at least an additional $6000 per year just on the refunds processing costs. This merchant processed $100,000 per month and had returns of $10,000 per month. Their merchant account provider was charging the merchant 5% for the sale on that $10,000 in goods then charging the merchant 5% again for the credit on that $10,000 in goods. This merchant was paying $500 in processing for the sale then $500 in processing for the credit. That is $1000 a month for processing with no revenue to show. I did not talk to the merchant so they may be too high a risk (10% returns) and not large enough to receive the full 1.50% refund, but they definitely should not be paying 5% again on the credit transactions.

I am not saying that you should not do business with a merchant account provider that does not refund the interchange because there is a risk and cost to the merchant account provider. However, you shouldn’t have to pay full processing cost when crediting a sale. Bottom line, understand the merchant account provider’s refund methodology and costs when comparing merchant account provider pricing.

Watch Out For Additional Per-Item Fees

Some merchant account providers add additional per item (per transaction) fees in there merchant agreement. In fact, I just did an analysis for a merchant yesterday where the rate was 2.13% + $0.05. The merchant had a relatively low average ticket, so the $0.05 looked appealing. However, the merchant did not realize he was also being charged an “Inquiry” fee of $0.20 on every transaction plus a “Kilobyte” fee on of $0.06 on every transaction. His $0.05 per item fee actually turned out to really be a $0.31 per item fee which was very high for his low average ticket.

Stay Clear of Merchant Account Providers With Punitive Termination Fees

It costs the merchant account provider $100 – $150 to set up a new merchant and $50 to shut down a lost merchant. Therefore, assuming the merchant account provider serviced the merchant as expected, it is reasonable for the merchant account provider to charge a termination fee when a merchant terminates prior to the expiration of the merchant agreement. However, the termination fee really should not be more than $250.

However, some merchant account providers have contracts that require you to pay all of what they are expected to profit off of you should you terminate early, this is called “Liquidated Damages”. In other words, say they expected to make $200 per month off of your processing business. You signed a 3 year agreement so they expected to make $7,200 off of your business. Let’s say you did not like their service or support so you decided to break the agreement after 6 months. Per the agreement you signed with them (and maybe a personal guarantee as well), your termination fee could be $200 x 30 (30 months left in the agreement) = $6,000.

Make sure you read and understand the termination clause on the merchant before signing it. Do not expect the salesperson to know what it says or what it means. I have met many salespeople who never read their own T&C’s much less understood the legal babble within them.

Do Not Believe Your Merchant Statement

Do not necessarily believe the numbers on your merchant statement. As previously mentioned, I analyzed a merchant statement where the interchange rates listed were not the true card association interchange rates. I analyzed a merchant statement where the per item fee listed was 6.2 cents, but after doing the calculations it was obvious that the merchant was being charged 6.5 cent. 0.3 cents may not seem significant, but for this large merchant it was.

One of merchant statement types I continually come across which confuses merchants is the one that does not show all the charges for the month on the statement and in fact may delay showing all the charges for up to two months. I have spoken to salespeople who love this statement because when they sign up a new merchant, that merchant generally does a cost comparison after the first month to see how much money they are saving after switching merchant account providers. Unfortunately, the merchant does not realize that some in that month’s processing cost will not show up on the merchant for up to two months. Therefore, a merchant’s total processing fees for April sales may not show up until the June statement.

Merchants need to make sure that the merchant account provider lists all fees on a single paper or on-lie statement.

Sallow you pride and be truthful when filling out the merchant agreement

Another devious way a salesperson may quote you a much lower rate to win your business is by having “you” manipulate the information on the contract. The most common way to do this is by convincing you that your business and average ticket will be higher than it currently is. Say for example, you currently process $200,000 per year in Visa, MasterCard, and Discover and your average ticket is $25. The sales person may convince you he/she is doing you a favor by stating on the contract that you process $500,000 at $35 average ticket because your business will grow, right? A higher volume and higher average ticket will generally warrant a lower rate. That is mainly because of competition. However, there are also fixed costs the merchant account provider has whether your average ticket is $10 or $100. Therefore, a higher volume and average ticket warrants a lower processing rate.

Should you fall for the deception of stating a higher volume and average ticket on your contract, you will get a lower discount rate “initially”. However, that rate will probably be temporary. The merchant account provider will evaluate your business volume and average ticket on an ongoing basis because they are expecting certain profitability based on the contract you signed. If you failed to meet your contractual obligation ($500,000 per year and a $35.00 average ticket in this example), you are now in violation of the contract and the merchant account provider can drop you or more likely increase your rates to “their” satisfaction. Depending on the contracts terms and conditions, you may be locked in to the contract whether you like “their” new rates or not.

I recently read a complaint blasted over the internet by an irate salesperson representing one of the largest merchant account providers in the United States. According to the salesperson, the merchant account provider is raising merchant rates if they fail to process 90% of the volume stated on the contract. The salesperson is upset because he understands that in these economic times it is not uncommon for a business to be down 10%. He understands that the last thing businesses need in these times is a rate increase. The salesperson also understands that he will be the bearer of the bad news and it may be perceived as lack of integrity on his part even though he has no control over the issue. I feel for merchants and good salespeople in these situations.