Evaluating Payment Processors

Posted: June 18, 2012 | Updated: December 6, 2022

Payment processing can be confusing even for the experts in the industry. The system seems to be purposely designed to be difficult to understand even the most basic things, like what exactly your rate is and what fees are associated with accepting credit cards.

But accepting credit cards has become a necessity for businesses today. People are shifting toward a paperless society quickly, and online shopping has become a staple to even the most resistant consumer. As a business owner you need to become an expert on payment processing and do so quickly if you wish to keep ahead of the curve and not get burned by hidden fees and surcharges that cut directly into your profits.

Which credit card processing company should you get your merchant account from? Credit card processing fees, transaction fees, statements fees, PCI DSS fees, annual fees, all pile up. And these fees vary a lot from processor to processor.

Today, The Official Merchant Services Blog is going to give our faithful readers a quick and effective guide on how to compare and evaluate credit card processing companies.

Not All Processors Are Alike

There are many processors that offer merchant accounts and let small, medium and large businesses accept credit cards in brick and mortar locations as well as online through their website. There’s even a huge push today for mobile payments — letting merchants accept payments directly through their mobile phone from just about anywhere. With the wide variety of options, business owners may feel overwhelmed when trying to find the processor that suits them best.

Finding a processor and getting a merchant account isn’t easy.

For starters, the card associations — Visa, MasterCard, Discover and American Express — all have their own rate sheets know as Interchange Reimbursement Fees. These fees make up the majority of what a merchant pays to their processor and they vary greatly depending on the card type accepted. The rates and categories are complex, and confusing to follow for just one of the card companies. All of them together combine to make a maze of fees and categories that most merchants get lost in.

Second, many banks don’t offer merchant accounts directly to small businesses, so those businesses need to go through third party providers for a merchant account. These third party processors have different fee structures among themselves and different rules. So business owners face a lot of confusing variety from both the card association as well as the processor.

To add even more layers to this, businesses that process credit card orders online need to pass their transactions through an online gateway system. Whatever shopping card software is used has to interface with that gateway, so integration from shopping cart to gateway to processor is extremely important.

So let’s dig right in and see what’s what from the processor side of things.

First: Their Rates and Fees

For payment processors, a variety of things about you and your business can influence the discount rate and various fees they charge you for accepting charge cards as payment. Some of those factors include:

  • The number of years you’ve been in business
  • The percentage of your sales that are made over the phone or the internet
  • The type of business you are in
  • Your personal credit rating
  • The average dollar amount of each sales transaction
  • Your monthly sales volume

Keeping all of that in mind, discount rates tend to range from 2.24 to 3 percent for home run and small businesses that accept Mail Order/Telephone Order transactions. These transactions are higher risk and carry higher fees. To find out more, read our knowledge base article on MO/TO.

You’ll find in your search for a processor, however, that many processors advertise discount fees less than 2 percent. These lower fees are for swiped transactions — sales made by running the customer’s credit card through a machine. These card present transactions are more secure and much less risky so fees and penalties tend to be much lower. And online transactions through secure payment gateways also carry less fees and penalties than card-not-present transactions. Keep all that in mind when comparing pricing and rates between offers from payment processors.

Another key to rates and pricing was touched on before by The Official Merchant Services Blog when we compared Tiered Pricing to Cost Plus Pricing. To recap, Cost Plus Pricing tends to end up costing the merchant less because the merchants don’t get dinged for higher surcharges from other rate buckets. So a tiered pricing rate offer will seem lower than it actually ends up being.

Second: Other Fees

The discount rate isn’t the only fee to consider when comparison shopping. Business owners should also consider the application fees, the initial cost of equipment, per-transaction fees (a fee you pay on top of the discount rate for each transaction you process), monthly minimums that affect your fees, voice verification charges, address verification fees (if extra), monthly statement fees and any other added costs a processor will charge you. Something to always keep in mind, processors are very flexible in how they present your proposal and they could offer you a much lower discount rate with a higher per-transaction fee if your average ticket price is low but your transaction volume is high.

Also pay close attention to the cost of equipment and/or software for processing the transactions. Equipment can vary in cost between different processors by hundreds of dollars, even for the exact same piece of equipment. Merchants should try their best to not lease equipment or software. Buy the items outright. By leasing a credit card terminal you lock yourself into a term-contract that may not be something you can cancel without a heavy penalty. And you pay more for the item than its actual cost in the long run.

Third: Read the Fine Print

Be sure to read all application forms and contracts presented to you very carefully. Read all of the small print. Some processors will attempt to charge you if you want to stop processing charges through them in less than two or three years — termination fees. That termination fee can also be completely separate from any penalties you incur when canceling a lease of a terminal. If you plan to do a lot of MO/TO, pay careful attention to what the contract says about the percent of transactions you can process as phone orders (non-swiped). What the salesman says to you during the pitch process may not be what the application actually says because the offer is being given to you at a best case scenario and isn’t taking into account details like added surcharges for card-not-present transactions. At the end of the day, the contract carries the weight over the salesman’s pitch.

Also take into consideration what conditions the company can terminate your account and whether or not there are monthly minimums and maximums. Much of the juggling between different rate buckets in a tiered pricing proposal hinges on being able to surcharge you for details like exceeding a monthly maximum or failing to reach a minimum.

Fourth: The Application Process

Some companies will eagerly attempt to send a representative directly to your place of business — including your home if that’s where you do your business from. Part of this is to pitch the services to you in person. But another part is to be present on site, and to take a photograph of your location. This is part of the application process and is done to verify that you are at the location you say you are. Some other companies can do online site surveys or accept photos and information you yourself provide.

During the process of applying for a merchant account you should be prepared to furnish these items to the company:

  • A copy of your business license or certificate of doing business
  • Your driver’s license
  • Profit and Loss Statements
  • Copes of previous years’ tax returns
  • A photo of your office

All processors require two-way access to your bank account once you are accepted. This allows the processor to deposit funds into your account and also allows them to withdraw funds if there are chargebacks.

Comparison: Host Merchant Services

Just for comparison’s sake, here’s quick rundown of Host Merchant Services in the context of the tips we just provided you.

Host Merchant Services offers cost plus pricing. This is transparent pricing where we show and explain all of the fees you are charged. The company also guarantees to offer you the best rate, claiming that if the company can’t save a merchant money they will give them a $100 gift card for their time. And the company guarantees that it will not raise its merchant’s rates. Ever.

The company has no hidden fees. Host Merchant Services also cuts off a lot of the fees that other processors charge — there’s no annual fee, no application fee, no monthly minimums, and the lowest PCI Fee int he industry.

The company provides free equipment — both a credit card terminal and receipt paper.

Host Merchant Services provides customer support for integration of payment gateway services. The company has a variety of gateway options that will integrate with almost all of the shopping carts out there — and will help its merchants get integrated. HMS also offers its own in-house gateway with no transaction fees and full AP for custom integration with any software package.

We leave you to draw your own conclusions regarding the Host Merchant Services offer.

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