Key Things to Avoid
There are numerous fees, terms, requirements, deceptive sales practices, and other aspects you as a merchant must avoid in order to protect your business and perhaps your own personal credit worthiness. The “MerchantFeeSavers Guide” goes into great detail on the steps needed to select the right merchant account provider and avoid the pitfalls that have cost some merchants thousands of dollars. Below are some of the most common ones.
Termination Fees Liquidated Damages
We recommend that you NEVER sign a merchant agreement that has a Liquidated Damages clause or a Liquidated Termination clause in the accompanying Terms and Conditions. Some merchant account providers charge the merchant liquidated damages should the merchant terminate the agreement early. Liquidated damages are calculated based on a formula used by the individual merchant account provider and may include risk they took on the account, transaction cost, lost revenue, etc. What does this mean? Say you signed a 3-year contract (3-years is the most typical length in the industry). Also say the merchant account provider’s formula states they deserve to make $2000 per month on your account should you terminate early. If you terminate after 12 months, the merchant account provider will debit your bank account for $48,000 ($2000 x 24 months). Many merchants have unnecessarily paid thousands of dollars in termination fees because they had a liquidated damages clause in their Terms and Conditions.
Rates and Fees Tiered-Pricing
We recommend that you NEVER sign a merchant agreement that has tiered pricing. There are different forms of tiered pricing, but the most common is the three-tier pricing schedule. The three-tier pricing has a qualifying rate, a mid-qualifying rate, and a non-qualifying rate. We have seen numerous merchants lured into what appears to be a very good tiered-pricing rate and not realize that the caveat was it only applied to the 10% to 20% of the merchant’s transactions. Even worse, the remaining transactions were grossly surcharged much higher rates. In our opinion, you show us a merchant on tiered pricing and we will show you a merchant who is paying too much for processing. We recommend merchant only sign up for Interchange Plus pricing. However, you need to do your homework on the Interchange Plus pricing being offered. Some merchant account providers claim to offer Interchange Plus pricing but add non-qualifying fees to certain transactions.
Equipment Leasing Terminals
We recommend that you NEVER lease a terminal unless your CPA says it makes sense from an accounting standpoint AFTER you explain the following to him.
- Many merchant account providers have terminal leasing programs. Lease-to-own and lease-to-buy are the most common. Lease-to-own means you own the terminal after the lease is up. Lease-to-buy means you can buy the terminal after the lease is up.
- The average new credit card terminal costs the merchant account provider around $200 for a dial terminal and $350 for an internet capable terminal.
- The average lease is for 4 years. Leases generally cost the merchant $29 -$79 per month but we recently saw one for $139 per month (keep in mind terminals only cost $200 – $350).
- Salespeople can make more money off the lease than off the credit card processing.
Ask yourself two questions: Does even $29/month for 4 years sound like a good deal on a $200 terminal?If the salesperson can make more money on the lease than the card processing, is the salesperson telling me the facts regarding my processing rates and fees or telling whatever I need to hear to get the lease?
Equipment on the Internet
We recommend that you NEVER buy used credit card processing equipment on-line. Card association regulations, specifically on cardholder security, have been enhanced over the years and some older devices do not meet the new standards. Also, some equipment may no longer be supported by the merchant account provider or the manufacturer.
Some processors will offer merchants a “free” terminal for processing with them. We do not have any issues with providers offering free equipment as long as it does not lock you into a merchant agreement with onerous Terms and Conditions. Keep in mind, your “free” terminal will probably be a refurbished one that costs the merchant account provider around $79. Ask yourself the following when offered a free terminal – “Am I paying additional rates or fees or getting more onerous Terms and Conditions for this “free” terminal. Check your rates, fees, merchant agreement and Terms and Conditions before getting excited about receiving a refurbished terminal. By the way, you will probably have to return your “free” terminal if you leave the merchant account provider that gave it to you.
Surcharging is charging your customers more should they use their credit card to purchase your goods or services. We know many merchants would love to charge their customers a fee for using their credit card to offset the fees the merchants pays. However, merchants are prohibited by the card associations (Visa, MasterCard, etc.) in forcing the customer to pay a fee for purchasing goods and services with their credit card. However, discounts on other forms of payments (like cash or checks) are permitted.
Unrealistic Processing Volume
Every merchant agreement requires the merchant to state their monthly or annual processing volume. Merchant Account Providers use the stated volume and stated average ticket size to project their profits, sales commissions, and other factors. If you overstate your volume you are providing the merchant account provider with a legitimate reason to increase your rates. Say you stated $300,000 in processing volume on your merchant agreement and you only process $250,000. Per your agreement, the processor has the right to terminate the agreement or more likely increase your rate.However, you do not want to grossly understate you’re your volume either. Say you stated you would process $5000 per month and you processed $10,000 in the month. The merchant account provider can hold the funds generally for up to 30 days because they may think the increase volume is fraudulent.Read “MerchantFeeSavers Guide to Slashing Credit Card processing Cost” for details on how to avoid everything from deceptive sales practices to onerous Terms and Conditions and hidden fees.