Common Mistakes When Negotiating Credit Card Processing Rates and Fees
This is the first article in a series on common mistakes I see merchants make when negotiating rates and fees or analyzing the offers from different providers. You can read part 2 here.
1. They assume the terminology used by competing salespeople is the same
Two salespeople can offer the same rate; say 0.10% + $0.10 over interchange rates and pass-through fees. This type of pricing is known in the industry as “Interchange Plus” pricing. Despite offering the same rate and the same fees, provider A can cost the merchant $1,000s more per year than provider B.
The reason is there are no enforced standards on the definition of “Interchange Plus” pricing in the industry. When some salespeople say “Interchange Plus” they mean the markup they are offering (say 0.10% + $0.10) is over the interchange rates published by the card companies (Visa, etc.) and the actual pass-through fees charged by the card companies. This is the definition I teach merchants to use.
However, when some salespeople say “Interchange Plus” it means that their markup is above the interchange rates and some of the fees charged by the card companies. Other fees charged by the card companies can be inflated by the provider. Another salesperson may say “Interchange Plus” and it means the fees charged by the card companies are passed through to the merchant but the interchange rates can be subject to surcharges by the provider. Still other salespeople may say “Interchange Plus” and have fees like “Visa Handling Fee” which look like card company fees but are actually a form of surcharging by the provider.
The same lack of standards also applies to Tiered pricing plans. There are many variations of Tiered pricing. However, the most common is the 3-tier plan with tier 1 being the Qualified rate, tier 2 being the Mid-qualified rate, and tier 3 being the Non-Qualified rate.
Two salespeople can offer the same 3-tiered pricing plan; say a Qualified rate of 1.5%, a Mid-Qualified rate of 2.5% and a Non-Qualified rate of 3.5%. However, here again Provider A can cost the merchant $1000’s more per year than Provider B. The reason being there are no enforced standards that define the card types in each tier. For example, a regulated debit card could be in the Qualified rate for one provider and in the Non-Qualified rate for the other provider. Also, one plan may include the card company fees in the tiered rates and the other may not.
Keep in mind that I only mention the Tiered rate plan for educational purposes. If you have read my articles over the years you know how much I dislike tiered pricing. I believe it exists to benefit providers not merchants.
2. They don’t fully understand the cost to exit the contract or pricing addendum
Never sign a contract or pricing addendum until you have the Terms & Conditions in your hands (they are generally in a separate document and not on the contract) and you fully understand the MAXIMUM penalty for terminating the contract early. You need to read the termination policy versus just asking the salesperson. Most salespeople have never read their own T&C’s and those representing providers with a very punitive early termination fee may miscommunicate the facts.
Many providers do not have an early termination fee. They believe that their processing cost and service will maintain the merchant relationship. Other providers may have a set early termination fee of say $250. In many cases this type of termination fee can be waived although the salesperson may be reluctant to do so as he may lose his bonus on sales that do not have a termination fee.
The most punitive type of termination fee is the one with a liquidation damage clause. The liquidated damage clauses vary by provider. However, it may read something like this – “Merchant agrees to pay the greater of $500 or 50% of the average monthly processing fees paid by the merchant times the months remaining on the contract.” Unfortunately, many merchants find out the hard way that exiting the contract or pricing addendum early will cost them $1,000s.
I not only believe that merchants should avoid signing contracts that have liquidated damage clauses but I also believe merchants should avoid providers that have these clauses in their contract and are not willing to waive them.
Merchants should also know the length of the contract, the renewal policy, if termination is required in writing, and the minimum number of days before the expiration date in which the termination notice must be given to avoid a penalty (generally 30-90 days).
3. Match-the-Rate does not mean Match-the-Cost
Merchants often receive an offer from a competing salesperson then turn around and ask their existing provider if they can match the rate. It’s a practice I don’t like because the salesperson may have spent a great deal of time and money to put forth an earnest savings analysis only to have the merchant use it for their own benefit. However, I also don’t like this practice because it can be somewhat of a game for the existing provider especially when the merchant is currently on a Tiered pricing plan and wants the provider to match salesperson’s Interchange Plus pricing. Asking the existing provider to match the rate is a bad practice for all the reasons mentioned in point #1 above. It’s also a bad practice because many providers surreptitiously add rates and fees to the new Interchange Plus pricing that were “supposedly” included in the Tiered pricing.
