America lauds itself as the land of the entrepreneur, where the market rewards risk takers and compensates them proportionally, but one glance at the system shows that this is a myth. Our tax code is conceived in a manner that allows people like Paul Ryan to claim that we have the highest corporate tax rate in the world without being completely wrong, but it’s still deceptive. Corporations with armies of lawyers and accountants are able to find discounts in an endless number of loopholes, while smaller mom and pop shops wind up paying the full fare, making up for the shortfall created by our corporate overlords.
The tax code is one example of our two-tiered economic system. I spent a year working on the frontlines of another, literally putting a price on my soul: Merchant services.
The definition is simple, even if the actual business is anything but:
“Merchant services is a category of financial services in the United States that is used by businesses. Merchant services are authorized financial services that allow a business to accept credit card or bank debit card transactions using online ordering or point of sales systems.
Basically, merchant services is the middle man between your customer’s bank and your bank. If you operate any kind of business that wants to accept debit or credit cards, you cannot do so without opening a merchant account first.
It is not something we hear about very often, but every single one of us interacts with merchant services on a daily basis, and the entire industry is rotten. I will not single out the company where I worked for obvious legal reasons, but more importantly, because they did nothing out of the ordinary (and truthfully, were one of the better ones). The best comparison would be the steroid era in baseball: if you’re not cheating, you’re losing. If you run a business, this piece is specifically targeted at you, as I owe a debt to the community, and it is my duty to help shine a light on this labyrinth of half-truths designed to defraud everyday Americans.
Learn the Game, then Beat the Game
This summary does not include aggregators like Square or Paypal. They have a different business model that is much more hands off than a merchant services company. You pay one (high) rate and don’t have to worry about much else. Go with them if you have a small business that is not pulling in a lot of cash. If you consistently process more than $3,000 per month, merchant services companies will save you more money.
Most places do not advertise their full prices online. When you call to inquire about rates, who you are speaking with is trained to give you little information about what you actually are going to pay. They will either pitch you blended pricing (one rate for all credit and debit card transactions) or more likely split pricing (separate rates for credit and debit) along with a monthly fee. You ordinarily wind up paying about the same rate with either.
Some of the less reputable merchant services will advertise 0% split pricing on debit card transactions, but that is only part of the story. There are two debit card rates you could pay. If the customer enters their PIN, those transactions cost the merchant 0% $0.25. If the customer does not enter their PIN and simply signs the receipt, you will pay around 0.4% $0.20 (online transactions have higher rates, but for the purposes of this column, we will only use the rates for in-person transactions*). As you can see, this is just the start of a very complicated dance that you have no choice but to be a part of.
(Quick side note: if 70% of your transactions are face to face, in-person pricing will save you the most money. If 30% of your transactions are keyed in or done online, online pricing will be your best bet. Most companies will guide you in this direction, but there are some firms who financially incentivize their salespeople to add as many fees as possible. One sales rep called us asking for a job during a Saturday shift and I spent the next hour hearing about a litany of dirty tricks.)
Next they will pitch the credit card rate, and this is at the center of the scam because not all credit cards are created equal.
Banks charge merchant services companies The Interchange Rate, which is what all pricing in the industry is based around. VISA and MasterCard both publish their Interchange Rates, so you can get an idea of the true cost of various cards, but the number of people in the world who truly understand what those links contain can probably be counted on two hands. The most important thing to know about The Interchange Rate is that the banks will charge processors anywhere between 0.05% and 3% on any transaction.
The Interchange Rate reflects the risk in processing any card. Debit cards have very little risk because if you do not have the money in your account, the transaction will not go through. The industry used to issue a larger surcharge on debit cards until the Durbin Amendment in the Dodd-Frank bill capped it at about 45% less than average. Credit cards are a bigger liability than debit because fraudulent transactions are usually larger.
As far as which credit cards are most expensive, it depends on the rewards and the issuer. The simple rule of thumb is the better the perks, the more expensive the card, which is why you see so many merchants that do not accept American Express. Business cards are riskier than credit cards because theoretically anyone working in the company can use them, thus making it more difficult to trace fraudulent transactions to their source. International cards carry the highest Interchange Rate as they bring the most risk.
So when you’re talking to your salesperson, they will most likely pitch you only one credit card rate – around 1.6% + $0.20 per transaction. You should then ask how they can afford to pay the Interchange Rate while only charging half of its peak. If they do not disclose any additional rates, hang up, you are seriously getting scammed. The good companies will not outright lie at this point, but they will downplay the additional rates, called the mid-qualified and non-qualified rates. These exist in both blended and split pricing structures. Some of the most successful salespeople I worked with avoided those by simply saying “they are specialty card rates, and you don’t need to worry about them.” These are specialized rates, but you certainly do need to be concerned with them.
Typically, the mid-qualified rate is 2.6% $0.20 per transaction and the non-qualified rate is 3.6% $0.20 per transaction; a 62% and 225% increase on the initial quote.
So what cards are the mid and non-qualified rate applied to? Most likely, about half the cards you run. Some lines of business can elicit specific types of cards, but on average, you get a fairly even split between debit, non-rewards credit, rewards, and business cards. The “credit card rate” that you will be pitched at first does not apply to the credit cards people want to use. The credit card companies depict rewards cards as their gift to you, but in reality, America’s merchants are paying for your double miles, cash back, etc…Most rewards cards fall into the mid-qualified tier, so your true credit card rate will almost never be the advertised 1.6%.
The non-qualified rate is usually applied to business and international cards, and if you run a B2B business, you absolutely must let your salesperson know up front, as you will exclusively pay the top rate. The day I decided to quit was when one of my merchants called me livid after receiving his first bill. We charged him more than twice the rate I pitched him over the phone, and as a result, he missed a mortgage payment on his house which doubled as his home office. So what is a B2B sales business to do? Inquire about a different method of pricing called Interchange Plus, which was only available to big corporations until a few years ago.
Every single B2B business should be on this pricing structure (as well as most businesses that have an average transaction above $10). It’s more difficult to pinpoint your exact rate, but you will always pay less because the tiered structure that the industry pitches has maximum profitability built into it. Interchange Plus is much closer to the true rate of the card.
All you do is pay The Interchange Rate plus a markup – usually about 0.3% + $0.10 per transaction. At my company we were trained to avoid pitching that structure as much as possible, only pivoting to it once someone really pushed back against our rates, and many less profitable processors do not even offer it as they cannot make enough off it to keep their doors open.
Other Landmines to Avoid
B2B businesses will still pay more in credit card processing fees than a typical brick and mortar shop no matter the pricing structure, but simply doing a little extra work and pushing your salesperson can save you thousands of dollars. What I want to stress more than anything is to simply do your homework. The industry is designed to perpetuate half-truths, but many merchants incentivize these companies to lie. Roughly half the businesses I signed up in my year there didn’t process a single transaction and never cancelled, gifting us the monthly fee and the monthly minimum every thirty days.
The monthly minimum is usually $25, and many salespeople will tell you that so long as you process $25 every month, you will not pay that penalty. However, they usually leave out the key word in that phrase: “so long as you process $25 in fees every month, you will not pay that penalty.” If you process at least $2,500 per month, you probably do not need to worry about this fee that every single processor charges and downplays.
If someone says a terminal is free, it’s not. You either pay way more for shipping and handling than you should, or you get a free terminal and a multi-year contract. You should never lease your credit card machine as there are a plethora available all over the web and you will always pay more to lease one than to buy it outright. I had one merchant send me their statement and we discovered that as a consequence of renting their equipment, this processor had roped them into a three-year deal both on the merchant account and the machine, with $1,000 cancellation fees on both. There has never been a situation where renting equipment was beneficial to the merchant; it only serves to enrich the processor.
Some shops promise that you will pay no PCI fee, and not all are lying, but most are. At my job, we were paid commission on accounts that stayed open through 60 days. If someone closed their account on day 61, it would have no effect on our paycheck. PCI fees are usually assessed annually, so lying about it carried virtually no risk for us salespeople (unless someone actually read the application which clearly stated an annual PCI charge – the industry provides everything you need to know on the application, and then pays salespeople to distract you from it). This fee is assessed by VISA and MasterCard, and if you do not pay it, your merchant services company will have to, and given how thin the margins of profitability are in the industry, very few will foot the bill. Expect to pay around $100 per year for this service that does actually have value, as it helps protect you from being on the hook for fraudulent transactions.
Contracts are another tricky area. Technically everyone has a contract since that is just the name of the agreement between merchant services and merchants, but the key is if they have an early termination fee. This brought another moment of disillusionment with the industry.
I worked for a sales office on the east coast, but the processor who owned our sales outlet and handled all the transactions was located on the west coast. One day, I was speaking with a customer who said that one of our more notoriously scummy competitors told them they did not have a contract. I instructed them to get me a copy of their agreement so I could show them the exact wording stating they did in fact, have a contract. Once I got my hands on their application, I saw that their legalese read the exact same as ours – word for word, save for one key detail. Ours stated that we had a $0 early termination fee, while our competitors carried a $400 early termination fee.
MSP’s (Merchant Service Providers) set up ISO’s (Independent Sales Offices) to sell their accounts. So even if you sign up through So and So Merchant Services, your money is actually being handled by Megalithic Processor. As soon as you open your account, the sales office has virtually no control going forward, and you will have to call the processor for any disputes.
Given my experience, I believe that some sales offices must be set up to defraud people with the hopes that they will pay the early termination fee, then get set up through another sales office owned by the same processor. When I quit, my boss told me that the company had 75% year over year employee turnover (and despite being in a soul-sucking industry, it was a good place to work), so you can be certain that I am not the only aggrieved former merchant salesman.
The Larger Context
Capitalism is all about transactions. The more transactions completed, the more the economy grows. Our economic elites pitch a vision that economist Umair Haque has derisively termed “Growthism,” where all other concerns about the economy are dismissed so long as the GDP is swelling. It does not matter who the expansion benefits, so long as we get to say that the economy gained every quarter, and everyone should be satisfied.
But everyone isn’t happy. Despite consistent growth for nearly a century, the economy does not work for a majority of us, and this is the source of Bernie Sanders and Donald Trump’s popularity. Lifetime politicians in the D.C. bubble never seriously pushed the two-tiered economic narrative because they were one of the chief beneficiaries of the upper tier. Bernie Sanders and Elizabeth Warren changed that, and as a consequence, Hillary Clinton has adopted much of their verbiage in order to stave off a revolt. The culture around the economy is rotten, and merchant services is emblematic of the virus at the heart of it.
Merchants get screwed every day, paying rates they never were told about, but this is not entirely the fault of the credit card processors. Frankly, if you call up any salesperson in any industry and take everything they say as gospel without questioning it, you deserve to get ripped off. If I’m getting paid per sale, I am incentivized to not tell you inconvenient truths; however, lying to your face constitutes a crime. It is the merchant’s responsibility to uncover the entire picture, and far too many people that I spoke to had no interest in doing their due diligence. Many would give me unrealistic projections of what they could expect to make from their business, and were excited to just get this process over with and didn’t even read the application. This is small scale Growthism: “just give me my money, all other consequences be damned.”
We are undergoing a culture change as it pertains to our economy. We used to think that corporate America had our best interests at heart since we were their primary source of revenue, but globalization provided them with an influx of cheap labor, providing more avenues to squeeze profits out of their businesses. The result is a culture that values money more than people. Merchant services defrauds mostly small businesses (roughly two thirds of my merchants processed less than $10,000 per month) all for the benefit of large, sprawling processors operating in the shadows.
So I want to take this small moment to call upon America’s small business owners to help set this developing revolution in stone. Comb over your monthly statements, and call to question your processor if you see something off. If you’re starting a new business, play sales offices off of each other as their advertised rates can be changed with the approval of any manager, especially if you provide a competitor’s offer. Fight back against Growthism and help to build an economy whose benefits to the populace are calculated in more than just dollars and cents. Public opinion has shifted in favor of the economic interests of the plebeians, and now it’s time to back it up with concrete actions.