01 November 2009
Merchant Account Providers-2
Nov 04, 2009
Merchant Accounts & Controlling Costs - Part 2
Chargebacks & Fraud
As we talked about last week, it is important to be aware of possible fees associated with your merchant account provider (MAP). One of the most significant "gotcha" moments occur when chargebacks or disputes are initiated by a customer with their card-issuing bank. Before choosing a particular MAP know what security measures they have in place, attached fees, if any, and recourse available if credit card fraud were to take place. Even if chargebacks arise, you can still win a dispute and retain the funds of the sale if you complied with the credit card's established criteria. Business owners are still liable for associated chargeback fees, generally about $25.
While some chargebacks are beyond your control, you can take certain precautions to try to reduce their frequency. It is easy for you to exercise some fraud preventative measures such as: verify the authenticity of purchases when possible, exercise caution with certain International orders, have a liberal return policy giving direct contact info so they will contact you first rather than opening a chargback or dispute, match the customer’s billing address with the address listed on the cardholder’s account and verify codes on the card, ensuring that the customer is actually the same person as the cardholder. Finally always be aware of the latest credit card theft and fraud scams as well as monthly track all the details concerning credit card purchases.
3-Tier Pricing Program
When obtaining a merchant account, many business owners are not informed of Interchange rates which are fees the merchant or acquiring bank pays to the card-issuing bank for each transaction. Instead, the merchant is presented with a single base rate known as the “discount rate” which can be anywhere between 2 to 4 percent of the transaction. Most MAP’s generally showcase a very competitive “discount rate,” especially those that do not disclose other, higher processing fees. The “discount rate” (also known as the qualified rate) has two less popular sidekicks, the mid or partially-qualified rate and the non-qualified rate. This is where the 3-tier pricing program comes into play.
The 3-tier system is a means to simplify the 125 plus (and growing) interchange categories that have different fees attached based on such factors as type of credit card used, how the card is processed and the nature of the merchant’s business. Instead of applying over 125 plus different fees, the fees are categorized into one of three tiers, Qualified, Mid or Partially-Qualified or Non-Qualified. Once placed into a particular tier, the fees are averaged out with a margin added. This is essentially how a fee is derived for each tier.
• The qualified rate (discount rate) is the best rate available and the one usually quoted by most merchant account providers.
• The mid or partially-qualified rate is higher and includes transactions that are keyed in (not swiped), even swiped transactions where the customer uses certain rewards cards and transactions that are not batched out within 24 hours after a sale.
• The non-qualified rate is the most expensive of the three rates and includes transactions that do not fall under the qualified, mid or partially-qualified rate such as International, government, corporate or particular consumer rewards cards. A transaction can also be downgraded to this rate if the Address Verification System (AVS) is not used, an AVS mismatch where the customer’s billing address does not match the address associated with the customer’s card, or a transaction is not batched out within 48 hours after a sale.
Fees can vary dramatically, so before selecting a MAP (if you have not done so already) make certain to know not only the discount rate, but also the mid/partial and non-qualified rates. In addition, ask the MAP if there is any way to avoid credit cards from downgrading to the more expensive tiers.
Within the last few years, a new pricing program has evolved that in many instances would be more cost efficient than the more widely used “3 Tier Pricing” model. Simply known as “Interchange” Pricing, this newer pricing scheme involves taking the “real cost” charged on each card type (the Interchange rate), plus a “set profit margin” negotiated between the merchant and the merchant account provider.
Why would this pricing scheme be less expensive in the long run?
In most instances, the Interchange Pricing scheme is more cost efficient than the 3-tiered model as long as the established markup isn’t substantial, negating any potential savings. It is imperative that you look at your customers’ payment preferences. If most of your transactions fall under the qualified rate – and your discount rate is stellar – then the 3-tiered model may be the most cost efficient alternative for you. However, if a fair proportion of a merchant’s sales fall under the mid/partially to non-qualified rates, then using the Interchange Pricing model would be substantially less. Please note that more and more credit cards, particularly rewards cards, are downgrading so it’s likely that you’ll need to “upgrade” to a better pricing model. Also, don’t make the assumption that the Interchange Pricing model is reserved only for large companies. Small businesses can also benefit. It’s just a matter of locating a merchant account provider that will work with you. There are so many merchant account providers to choose from that you should settle for nothing less than the best pricing scheme for your business, no matter its size.
Before you begin auditioning different MAPs, it would be wise to first construct an outline of what to look for in a merchant account provider to make your search easier. So, what are some of the main attributes you should look for in a merchant account provider before signing on the dotted line? The most critical ones are as follows:
- Full fee disclosure: At first, it can be quite mind boggling trying to decipher the various fees that go hand-in-hand with a merchant account. However, make certain that the MAP takes the time necessary to go over each and every fee that would pertain to your account. Are credit cards accepted both online and offline? What additional fees are involved if I accept both online and offline credit card charges? Become knowledgeable regarding the various fees associated with a merchant account, such as yearly, set-up, application, batch, gateway, AVS, monthly minimum, statement, support, cancellation, discount, per-transaction, gateway access fees, card reject, termination and mid/partially and non-qualified rates or interchange rates so that you can ask informed questions and get straight answers in return.
- Affordable rates: By becoming knowledgeable concerning the different merchant account fees, you would then be better able to compare and contrast proposals. What are the different discount rates and fees for different types of charges (internet, in person, telephone, mail, etc.)? Gain additional negotiating power by asking for sample contracts from each of the MAPs you audition to compare their terms and rates. Also, various fees can be waived without jeopardizing quality. Will a MAP work with you to make credit card processing affordable by waiving a few unnecessary fees such as setup, application, installation or batch fees for example?
- Complete, reliable product line: For example, for on-line transactions, it is mandatory to have a payment gateway. If you conduct business over the internet, you want a gateway that is secure, incorporates numerous fraud-preventative measures, is compatible with most shopping carts and experiences few hiccups or little “down time”. Better yet, there are also merchant account providers that offer customers a virtual terminal and a shopping cart. Make certain that you are quoted a total monthly expense, as some MAPs do not include the gateway into their monthly fee. Can online payments accept cards other than Mastercard and Visa (Discover, American Express, Diner's Club, online checks, debit cards, etc.)? If so, what are the fees and is anything needed to 'activate' those payment methods? Are purchases processed manually or automatically? If manually, is it possible to get automatic processing? Are separate authorizations or permissions needed when setting up an account for different types of transaction (internet, retail, phone orders, etc.)? Is any additional hardware or software required? If so, what is the cost and how do I get it? Retail business owners should look for MAPs that have value-added products such as a gift card program, electronic check processing, check guarantee, etc. Even if you are not initially interested in such services, you may decide to change your business model in the future, especially if a MAP offers these programs at an affordable rate.
- Reputation: You want a MAP with a stellar track record. Perform an on-line search to see if there are negative comments posted concerning the provider. Also, check with the Better Business Bureau to note if there have been numerous complaints made. Taking time to thoroughly investigate the background of a promising MAP could potentially save you a lot of headaches down the road.
- Honesty: When auditioning different MAPs, it would be wise to heed the sage advice, “If it is too good to be true, it usually is”. Don’t be fooled by suspiciously low fees/rates. If a MAP is offering rates that are well below those of other MAPs, it is safe to bet that they have hidden fees. MAPs are running a business, not a charity. If you think you’re getting something for nothing, you are either getting nothing in the way of customer service or something in the way of hidden fees that may end up costing you a bundle.
- Five-star customer service: Is the MAP friendly upon first contact? Do they take the time to answer all of your questions without you feeling rushed or that you are being a burden? First impressions are everything and if they can’t get this right, it is doubtful that they will provide exemplary customer service after you become a client. Also, make certain to inquire about their customer service and technical support practices, toll free customer service number and hours.
- Stands behind their word: This goes hand-in-hand with reputation and honesty. You should be able to secure a 100% money back guarantee on any initial outlay of money (i.e., set up or application fees) to ensure that everything stated by the MAP holds true if you were to become a customer. A reputable and honest MAP would not balk at this request. If they do, it should send up a red flag to look elsewhere.
Starting a merchant account can be a little daunting. However, if you become knowledgeable before you begin your search, you would be in a better position to negotiate, not to mention, you will be getting the best deal possible. Also, remember not to become fixated on cost alone. Customer service as well as the reputation of the merchant account provider is just as important. Ask these questions and establish a mutually comfortable relationship with your Merchant Account Provider from the start. It will help you avoid "traps" and lay the groundwork for a long, solid partnership.
Sources: Andy Lax via StartupNation.com Bobette Kyle via streetdirectory.com
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