Understanding Merchant Accounts Introduction 87% of US businesses accept credit cards, and the rate is constantly growing. Businesses MUST have a merchant account to process credit cards, simple right? Wrong. I’ve worked in this industry for five years and know that sales reps, and companies outright lie to business owners regarding rates. Business owners are mostly uneducated on how merchant accounts work, and can’t tell what they are really being charge until their first statement. Even then it’s confusing with the verbiage of the statement. After viewing this document, you should have a great understanding of how merchant accounts really work.
What Is A Merchant Account? First, you need to understand what a merchant account is. A merchant account is a type of bank account that allows businesses to accept payments by payment cards, typically debit or credit cards. A merchant account is established under an agreement between an acceptor and a merchant acquiring bank for the settlement of payment card transactions.
The Truth Behind Merchant Account Pricing. Where do the rates come from? • Rates come directly from Visa and MasterCard. • The name for this rate is called Interchange. • The Interchange rate is the same for EVERY provider in the US. View Visa and MasterCard Interchange rates - MasterCard Interchange and Visa Interchange. Let’s look at how common rates are built. Example 1. Transaction Type: Card Swiped Normal Visa Consumer Card: 1.5400% + $.10 Visa Acquiring Free: .0925%
Cost for this transaction: 1.6750% + $.10 These are considered to be based rates. Let’s take a look at another example. Example 2. Transaction Type: Visa Rewards Card Swiped. Visa Based Rate: 1.6325% + $.10 Rewards 1 Surcharge: .11% Cost for this transaction: 1.7425% + $.10
But You’ve Been Offered A Low Rate But you’ve been offered a 1.19% rate? The merchant account provider would have lost $179.42 on your account! We call this a “Hollywood Rate”, it has a great looking face, but with out all the makeup it’s terrifying. Here’s how it works. The 1.19% rate is for swiped, regular, consumer card transactions. There are other rates such as “Mid-Qualified” transactions, usually in the upper 3.25%. Card transactions such as swiped rewards cards and keyed in regular consumer card can fall into this category. There is another rate for “non-qualified” transactions, usually sitting at 4.25%(Rate varies) Card transactions such as corporate cards and Visa EIRF falls into this category. That low rate you were offered is actually going to cost you more, if you aren’t aware of what’s going on. It’s very simple. They make all of their profit by padding the surcharges from Visa and MasterCard. The majority of merchant account providers offer tiered pricing, which offers a “lower” rate, but they are padding cost. Always remember that there are TWO rates you need to focus on. Base rates, and surcharge fees.
Before You Sign That Contract. Make sure you read ALL of the small print before giving them your John Hancock. The industry standard is a three-year contract with an early termination fee, these fees can range anywhere from 300-1k+. Don’t let them pressure you into signing right now, take you time and read over everything. This will cut your chances of getting played.
Who Should I Use Then?
There are plenty of great processors out there who aren’t in the business of padding rates. These businesses use a pass through model, which is perfect. They don’t pad fees into the interchange, you are just charged for the interchange + their rate, BUT you may be charged for PCI fees. What is PCI? The Payment Card Industry Data Security Standard (PCI DSS) is a set of requirements designed to ensure that ALL companies that process, store or transmit credit card information maintain a secure environment. It is important to note, the payment brands and acquirers are responsible for enforcing compliance. PCI compliance applies to ALL companies. Who I Recommend
Payjunction (A+) Sort of a new player in the industry, they have been in business since 2000 and offer a “one of a kind” product. Dubbed ” The Trinity System,” it allows merchants to collect credit card payments in a variety of ways using an a single, integrated solution. Merchants can use Trinity to accept face-to-face payments through a virtual terminal (with optional USB Card Reader), online with a hosted shopping cart (or through thirdparty carts using PayJunction’s gateway, using any phone by typing the information into an automated system, or using a smartphone app and attached card reader. The Trinity System also includes the ability to generate sales reports as well as search transaction history. Additionally, PayJunction has a PCI compliant token based system that allows merchants to re-charge or refund cards automatically without needing to re-type or reswipe the card. This token system also includes a nice automatic recurring billing feature for merchants with subscription or membership-based businesses. All of Trinity’s features are included in the system, so merchants can change or add features as needed without having to contact PayJunction or pay additional fees.
PayJunction Sales Tactics & Marketing Strategy | A+ PayJunction does not use any deceptive marketing or advertising tactics that are apparent to me. The company relies primarily on recruiting independent resellers to market and sell its services. Normally, this practice results in numerous merchant complaints due to unscrupulous agents; however, PayJunction seems to have tight controls over the sales/underwriting process as evidenced by a low amount of merchant complaints.
PayJunction Fees, Costs & Contract Terms | A+ An executive of the company informed us that pricing of PayJunction’s services can vary based on a merchant’s business type and processing volume, but the standard rates are 0.75% + interchange (With free equipment) and 0.50% + interchange (Without free equipment). The Trinity System application itself is free of charge. Additionally, Trinity’s payment gateway and virtual terminal can be used with processors other than PayJunction in a similar fashion to that of Authorize.net’s services. PayJunction also offers a month-to-month service agreement with no cancellation fee or PCI compliance fees, which is ideal for most businesses.
PayJunction BBB Report | A+ As of the update of this review, the Better Business Bureau (BBB) is showing PayJunction as accredited and awarding the company an “A+” rating. The BBB is reporting four complaints filed in the last 36 months regarding product/service issues. All but one complaint, which was filed in 2010, have been resolved to the merchant’s satisfaction.
Bottom Line The company’s “Trinity System” is one of the best web-based credit card processing systems that I’ve seen. PayJunction has very few complaints for its time in business and offers month-to-month contracts, no cancellation fees, and no PCI Compliance fees. As always, merchants are encouraged to fully read and understand their merchant account agreement before signing with any merchant services company. Learn more by visiting this page. Contact the gentleman their for more information.
Square (C+) Signing up for the company’s payment processing service is simple: iPhone, iPad, and Android users simply fill out a quick form, download the Square app, and then await the arrival of the Square up reader in the mail. The Square credit card reader plugs into the headphone jack of the phone or tablet, thereby making it a mobile credit card terminal. In fact, Square’s model has been so successful that it has attracted big name competitors.
Other Square Services Since the launch of its card reader and mobile app, Square has rolled out several other payment services for both business and personal use. Square Register is a point-of-sale (POS) system that provides extra features not included in the company’s mobile app, including analytics, sales reporting, staff management, and a customizable item library. The service, which is free to download and optimized for the iPad, also allows merchants to set up loyalty programs and send digital receipts. Square Market is an online store directory for Square merchants. Merchants with an existing Square account can create an online profile for their store within the Square marketplace for free. They may then sell their products through the Square market for the usual rate of 2.75% per transaction. Square Wallet is a mobile wallet app that allows users to pay with their smartphones at Square-enabled businesses. The service is free for customers and links to their credit card to make payments. Square made a splash in 2012 by signing an agreement with Starbucks to make Square Wallet an available checkout option at all Starbucks locations. Square Cash is a direct peer-to-peer cash transfer service that is linked to a user’s debit card. Square Cash sends payments via email and allows for free transfers of funds between users. The service is not targeted at business owners, but they may use it to make payments outside of a business setting.
Square Sales and Marketing Tactics | C Square markets its pricing with a straightforward and easy-to-understand message (covered later in this review); however, the company fails to mention anything about its fund holding and risk mitigation policies in its marketing materials and advertising placements. These policies have been reported to cause significant problems for many merchants, and some have even complained of large financial losses.
Due to the importance of these policies, and the fact that Square fails to make merchants aware of them prior to account setup and prior to running transactions, many have complained of misleading marketing by the company. Hence, we have lowered Square’s grade in this section to a “C-” rating.
Square Costs & Contract Terms | C-‐ The Good One of the most appealing aspects of Square is that, unlike traditional credit card processors, Square credit card processing has only one fee: the processing fee of the transaction. There are no other fees that are typical of credit card processing, such as activation fees, monthly fees, gateway fees, PCI Compliance fees, downgrade fees, and early termination fees. Square has no additional monthly fees whatsoever as well as no monthly minimum processing fees. Square now offers a single pricing option for all merchants: pay a flat rate of 2.75% for swiped transactions and 3.5% + $0.15 per typed transaction. The company formerly offered a plan that included a flat monthly fee of $275 and 0% on swiped transactions up to $250,000 in processing per year, but this plan will no longer be available as of February 2014. Although the company’s transaction rate is higher than the “Qualified” rate of most traditional merchant accounts, it is comparable to the “Mid-Qualified” and “Non-Qualified” downgrade surcharges that about 80% of most transactions experience with a traditional merchant account anyway. The rate is, however, much more expensive than the Interchange Pass-through rate pricing model.
The Not-‐So-‐Good Square does not verify the credit history of its customers prior to approving an account, so it sets a few limitations to avoid potential losses to fraud. Square has had 729 complaints filed in the last 36 months with the BBB.
Square states that there is no limit to the amount of money that can be accepted per transaction or per month through its service – which is only partially true. Instead of setting processing limitations and denying transactions once users reach their limit, which is something most other processors do, the company relies on other tactics to
mitigate potential losses due to fraud. These tactics allow merchants to accept an “unlimited” amount of credit card sales, but with a catch. Until November 2013, Square placed holds on funds of card-not-present sales for 30 days if more than $2,002 was charged within any rolling seven-day period. This meant that if merchants keyed in $2,100 in sales within a seven-day period (either in a single transaction or in multiple transactions), the extra $98 ($2,100 – $2,002 = $98) would be held by Square for 30 days. This policy generated much confusion among users because Square did not provide any warning before the $2,002 limit was reached. Square now claims that merchants can process transactions of any type and any size without having to worry about a processing limit, but this is not entirely accurate. The primary tactic Square currently uses to limit fraud is much less transparent than its rolling reserve policy and is the reason for the company’s low score in this section. Square appears to rely on undisclosed algorithmic “risk factors” to place automatic holds on transactions that it deems suspicious. The system appears to flag a high number of legitimate transactions and can cause serious problems for some merchants. Numerous complaints have surfaced that Square has randomly and without explanation, or notification, placed lengthy holds (exceeding 30 days) on their funds – even with swiped transactions. Additionally, numerous merchants report that Square never notified them of the hold, or the reason for placing it, and they only discovered it only when they stopped receiving deposits from their sales. Square’s policies regarding fund holding and risk mitigation are murky at best and make the service very risky for higher volume merchants. It appears that the company needs to do a much better job of educating merchants about the types of transactions that have a risk of being held, issuing a warning prior to letting them run transactions that will be held, notifying when transactions have been held, and communicating with the merchant through the hold process. Since fund holding can greatly impact a merchant’s operations, the grade for this section will remain low until Square improves the system.
Bottom Line Square is definitely on the right track with providing an easy credit card processing solution with no long-term commitments and no monthly fees. The service is proving to have some major drawbacks for higher volume merchants because of murky fund holding policies and poor customer support. It appears that Square is best suited for individuals who have an occasional need to accept a credit card payment, such as with babysitting and flea market users. The service does not appear to suit very well merchants that have either a high volume of credit card sales or sell high-ticket items.
Stripe (B) Founded in 2010, Stripe (stripe.com) is web application that allows merchants to accept credit card payments through their websites. The service is particularly tailored for web developers who want the ability to customize the application according to their specific desires. Stripe is similar to Braintree Payment Solutions, but without any setup fees, monthly fees or monthly minimum charges. Interestingly, the company has also received investment capital from the founders of another competitor, PayPal.
Stripe Sales & Marketing Tactics | B Stripe appears to rely primarily on its website to market its services. The company specifically caters its advertising to web developers who would like to add a payment application to their websites. Stripe appears to quote its rates transparently and truthfully on its website. However, the Stripe website does not prominently list any explanations of its cash reserve and account cancellation policies, both of which appear to be responsible for merchant complaints on this site and elsewhere. Any merchant who is potentially considering doing business with Stripe is encouraged to read the company’s Terms of Service, located here, with special attention paid to section B, item 5 and section C, item 12.
Stripe Costs & Contract Terms | C Stripe’s costs and fees are fairly straightforward with the company charging a flat pertransaction fee of 2.9% + $0.30, regardless of card type or locality. The company does not charge a fee for refunds or failed payments; however, there is a $15 Chargeback fee. Overall, Stripe’s pricing and business model resemble that of the mobile credit card processing company Square, but for online businesses. Like Square, the company’s standard policies regarding fraud prevention and prohibited business activities appear to be cause for complaint among several merchants. Two specific problems have been consistently reported in the complaints shown below and on other consumer protection websites. In one scenario, merchants apply for processing with Stripe and are informed that they are approved and ready to go. After processing one or multiple transactions, these merchants find that their payments have been frozen and their accounts canceled due to their business’s engagement in prohibited activities of some kind. These cancellations appear to take effect with little or no warning, and merchants report difficulty resolving the unprocessed payments in a satisfactory and efficient manner. In the second case, merchants express confusion over their payments being held in a reserve account. This is a common fraud prevention practice that we don’t tend to penalize processors for, but it seems that Stripe does not effectively communicate its reserve policies to merchants or warn them when a reserve amount might be withheld. Merchants should be aware that Stripe reserves the right to “change the Payout Schedule or suspend payouts to your Bank Account should we determine it is necessary due to pending disputes, excessive or anticipated excessive Chargebacks or refunds, or other suspicious activity associated with your use of the Service or if required by law or court order,” according to its terms of service.
Bottom Line Stripe rates as a better-than-average merchant services provider according to our standards. Stripe’s transparent pricing model appears to satisfy the majority of its clients, while its reserve policy, cancellation policy, and customer support are responsible for most of the company’s complaints. Merchants are encouraged to
carefully read Stripe’s terms of service before signing up for credit card processing through this company.
