Good Business

Everything you ever wanted to know about choosing a merchant processor … but were too confused to ask
by : 

Jacki Smith

July 1, 2011
Good Business

You can see them coming from across the street with their clipboards and brochures—another merchant processor salesperson has come to call, promising you better rates and lower fees. Of course, they want three to five years of commitment from you, often for a pittance of savings. But to know that, you have to wade through the fine print, tiers of ratings, and lists of fees, all helpfully spelled out in six-point type on a five-page contract. If you’re a busy retailer, that’s a daunting task, but informing yourself about this sometimes confusing topic is the only way to know whether they are selling you something really good … or a bill of goods.

Credit cards are a racket—literally!

MasterCard and Visa are two different conglomerations of banks that work together to issue credit to consumers, set the rates, share the risk, and share credit information with each other. Together, they set the base merchant processing rates and transaction fees as part of the “interchange.” The interchange rates can be found on the Visa website: They are rated by industry, type of card, and risk factor. Higher-risk transactions like e-commerce purchases will have a higher rate, while lower-risk transactions, such as in-person purchases in supermarkets, will cost significantly less.

Merchant processors are what you might think of as classic middle men—they are resellers of interchange rates, and they make money by setting their own rates above those of the interchange. There are only seven merchant processors in the U.S., with thousands of other Independent Sales Organizations (ISOs) reselling at a second and third level, adding their piece of the pie to what you pay in fees. Some ISOs have great programs at great prices, and some resellers are very high-priced, so the devil is in the details, which are uncovered by the questions you ask.

Start by asking the right questions

It’s not always about the answers you get to your questions—sometimes what you ask can persuade the salesperson to be more up-front with you. To get the ball rolling in the right direction, the first two questions for any sales rep are:

1. Are you an interchange reseller or an ISO?
2. Can you provide me with a copy of the interchange rates and your markup over them?

Once you reference the interchange and ISOs, you are now seen as “in the know,” and a smart salesperson will start with their best deal and open with honesty. If they don’t know what the above questions are, move on to the next salesperson. If they breeze over these questions as though they are unimportant, they are hiding something you likely will pay for later.

Most resellers or ISOs will offer a variety of packages, and whatever makes them the best commission is what they tend to push, so be prepared to dig past the attractive surface and into the hidden details. For example, some will try to sell you on a low rate of 1.05% to 1.5%. What they may not tell you is that to qualify for that rate, the card needs to be a non-rewards card, the customer needs to be present to swipe the card, and he/she needs to ride in on a rainbow pony trailing glitter and stardust. (OK, that last part is a bit of an exaggeration … but not by much.)

Rates, tiers, and fees, oh my!

Typically, resellers will present their rates in a three-tier system, but one of the newer trends is a “one-rate” or “flat-rate” program, which brings us to the third question you should ask:

3. What system do you use to determine your rates?

The most common rate system is the three-tier system, in which transactions are divided into three categories: In “qualified” transactions, the customer is physically present, the card is swiped, and the card is “standard,” meaning it doesn’t have a rewards program attached to it.

Mid-qualified transactions likely will constitute the majority of the cards you accept—and their rate is about 1.5% to 2% higher than a qualified transaction. They are similar to a qualified purchase in that the customer is present, but you key in the card number, such as with a rewards card or business credit card. The mid-qualified range is where merchant resellers make their money, so watch this rate carefully.

Non-qualified transactions usually involve rewards cards, business cards that require more information than provided, e-commerce transactions, or keyed transactions with no address verification. Non-qualified transactions are usually 2% to 3% higher than qualified. Watch the fine print on your contract—in some instances, forgetting to batch your transactions within their specified time frame can cause all transactions to become non-qualified.

Transaction fees on a three tier system should be set and not variable with a cost of $0.15 to $0.30 per transaction. Transaction fees on customer returns can be much higher, so get in writing what a return will cost you in fees. (Just another reason to do only store credit for returns!)

Batch fees and monthly fees (sometimes called “additional fees”) also should be set and not variable. Beware of resellers with no monthly fees—they will make that cost back in a higher rate for the mid- and non-qualified transactions.

One-rate or flat-rate programs are the latest trend, in which you get charged one flat rate on all your transactions. The rate is usually 1.01% to 1.7% depending on your credit score and type of business. This applies to qualified, mid-, and non-qualified card transactions. The selling point on this system is its ease of use, but remember, merchant processing is complicated, and making it easy is a bit suspect. Surcharges are applied to mid- and non-qualified transactions, typically .25% to 2% of the transaction. It’s just another way to package the three-tier rates.

OK, I know about rates and fees. What’s next?

The rates, of course, are your first consideration in choosing a processor, but you should ask a few more questions before signing up: How fast is your account funded, how long is the contract, and what type of equipment do you need?

4. What is the funding delay?

You can receive funds into your back account in as little as 24 business hours, but a delay of 48 business hours is an acceptable standard. Just make sure it’s not 72, because at that point, the company is just holding your money for their own gain.

5. How long is the contract and what are the penalties for early termination?

Industry standard is three years with a flat fee ($50 to $500) for early termination. Make sure this contract locks in your rates for the entire three years, and when the period is up, negotiate your rates to stay the same or go lower. After the three-year mark, if you don’t renew the contract, your rates can increase without your approval or even knowledge. Companies that offer you a merchant account with no contract are likely to raise your rates continually during the course of your arrangement without having to inform you.

Read the fine print on the early termination of your contract. Some companies will try to charge you the average of the fees they collect from you, multiplied by the months remaining on your contract. This can add up fast—$200 a month in fees over 12 months is $2,400! Also ask under what circumstances you can terminate your contract without penalty; look for a clause that voids the termination fee if processing rates are raised within the contract term. Then pay attention to your merchant statement every month.

6. Will my equipment work with your system?

Unless your equipment is more than five years old, it should work with any merchant processor. If you need a new terminal, be aware leasing it will cost you three to four times the outright purchase cost. And free equipment from your merchant processor also will cost you in the long run, either in the processing fees, monthly fees, surcharges, or a longer contract with greater penalties.

The type of equipment you need varies depending on the details of your business. From wireless terminals to complete point-of-sale systems, you should choose your equipment based on how you run your business and not the other way around. The choices today are amazing—you no longer need a dedicated phone line and can run your charges through an internet connection. You can even get card readers for your laptop and Bluetooth devices for your smart phone.

My head is spinning. Is there more?

Once you’ve waded through the details of rates, fees, contract terms, and equipment purchases, you may feel like you have found the best deal possible. But there is more to consider:

7. Tell me about your technical support line.

You can get the best of everything, but if the merchant processor’s customer support is terrible, you risk losing sales when your terminal goes down—usually at the most inconvenient moments. You want a 24-hour call center, 24-hour equipment replacement, and a back-up system, which most likely will be carbon slips, an imprinter, and a voice authorization phone number to call. Have the sales rep show you the back-up system, and for your sake, write it all down.

8. Do you do e-commerce or have an online gateway, and how does it work?

Even if you don’t have a website, you may sell at a festival or need to process cards on the internet if your equipment is broken, and you don’t want suddenly to discover your merchant processor can’t help you with that.

Merchant processing for e-commerce has an additional set of questions to challenge you. When you are processing credit cards from your website, you have to take into consideration security, gateway, compatibility, support, and higher processing rates. Since e-commerce is considered a higher fraud risk than in-person transactions, the rates start at the non-qualified level and can go up 1% to 1.5% from there.

Payment gateways ensure the card being used has a valid number, verify the address of the cardholder, and can charge it or get approval on it immediately. Your merchant processor will recommend or provide a gateway for you, and you will have to make sure it is compatible with your website’s shopping cart. Expect to pay a gateway fee, anywhere from $10 to $30 a month. Some merchant processors will offer it to you free, but the cost of it is probably bundled into another fee.

A few big players on the internet specialize in payment gateways. is one of the biggest. They do not offer merchant processing, but most merchant processors are compatible with their service. Wells Fargo is another big player, but they provide their own merchant accounts.

PayPal, the giant we all know, functions as both the merchant processor and the payment gateway. Since PayPal is so big, it makes its own rules. Unlike a traditional merchant processor that deposits the funds into your bank account within two business days, you have to request the funds from PayPal be transferred from your PayPal account into your bank account, which can all take up to five days to complete.

If you sell online, offering PayPal as an option is a necessity, and it is flexible where merchant processors are not. If you have a bank account, you can get a PayPal account, no matter how small or new your business is, or what your credit rating is. They are able to do this because they charge a higher processing fee and get to hang on to your money for longer.

Are we there yet?

Before you make your final decision on a merchant processor, get several quotes and ask lots of questions; a sales rep should be happy to talk to you as many times as needed to get the sale closed. Don’t forget to check the Better Business Bureau ( for any complaints, and Google any reviews on your chosen company before you commit.

Quick Tips

American Express (AMEX) is the most expensive card to accept, and with some merchant accounts it pays the slowest. One thing to consider before you turn down an AMEX card is that American Express users, on average, spend 2.5 times more than a non-AMEX purchasers. The AMEX merchant processing rates are about .05% higher than Visa/MasterCard, depending on your merchant processing reseller.

There is no law that forces to you to accept a credit card for low sales. It may be a condition of your merchant processing contract, but it is not illegal. A tasteful sign by the cash register requesting that transactions under a certain amount be paid in cash does not usually breach that contract, but make sure to read the fine print.

Credit or debit? If you offer a pinpad for your debit card customers, ask your sales rep what amount the sale needs to be for the debit card to cost you less than a credit card. Most merchant processors say transactions under $30 cost you less if they are credit purchases, and transactions over $30 are less expensive as debit purchases with a pin number. Debit card purchases with a pin number may have a lower rate but also a transaction fee. This lower rate will benefit you on larger purchases, but the fee may make the smaller purchases less profitable.

Jacki Smith is the founder and enchantress of Coventry Creations (, in business for nearly 20 years. Her favorite saying to her customers is “Your success is my success,” and she lives it every day.