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Credit Card Processing For Business - Secrets Your Credit Card Processor Hopes You Never Find Out


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In my previous article “Rate Reduction Strategies That Work" we discussed ways that small businesses can reduce credit card processing expense from the standpoint of managing and understanding discount rate structure.

Negotiating a ‘low discount rate’ is only half the battle. Savvy merchants understand that HOW the discount rate is manipulated and calculated is often more important than HOW MUCH the rate is. And slick merchant services salespeople realize that by not disclosing these tactics and instead diverting attention to the ‘low discount rate teaser, they can easily fool the merchant into signing off on a lump of coal disguised as a diamond.

Here are several examples of what merchants need to know about credit card processing proposals in addition to what the rate is:

GROSS PROCESSING. NET PROCESSING, or GROSS/GROSS PROCESSING Merchants who do a significant volume of refunds and returns (clothing and gift stores for example) are often surprised and shocked when they realize that when they refund money to a customer, their credit card processor does NOT refund the discount rate fees the merchant paid when the original sale was made. This practice is called “Gross Processing" and is the default setting in the industry; the majority of all small business merchant are set up on Gross Processing.

Even worse, some processors add insult to injury by charging full discount fee on the sale transaction, then again charging full discount on the refund transaction, effectively charging the merchant twice for the same transaction! This is known as “Gross/Gross Processing. " Many an unfortunate small businessperson has naively signed off on a low discount rate proposal, not realizing the catch (there's always a catch, isn't there?) is that the program is “Gross/Gross" and the unsuspecting merchant is being overcharged hundreds or thousands of dollars annually in processing fees.

NET PROCESSING is an option available on some, but not all, processing networks. The concept is simple: When a merchant makes a sale, the processor charges the merchant the applicable discount fee on the sale amount. If the merchant has to refund the sale at a later date, the processor refunds the discount fees paid by the merchant. A premium discount rate is paid for Net Processing, but under the right circumstances it can add big dollars to the merchant bottom line. Not all merchants will qualify for Net Processing, nor will all merchants benefit from it.

DAILY VS. MONTHLY DISCOUNTING How processing fees are paid by the merchant , not just what the rate is, is also an important consideration affecting overall processing expense.

Most processing programs utilize Daily Discounting computation method. This means when a merchant submits a daily batch of business to the processor, processing fees are deducted from the amount paid to the merchant immediately, that very day. There is no ‘float', the merchant pays his fees immediately by having the amount owed deducted from his daily business at once. .

Optional Monthly Discounting means that processing fees are calculated and charged to the merchant only one time at the end of the merchant statement cycle, not on a daily basis. The merchant has full use of his money the entire month; he pays his processing fees one time at the end of the processing period.

The distinction between DAILY and MONTHLY DISCOUNTING affects overall processing costs in many important ways:

  • Merchants with Monthly Discounting enjoy cash flow advantages. By having use of their own cash longer, they have the cash on hand to take advantage of early payment discounts that many vendors offer. They also have use of their own money for normal operating expenses instead of having to borrow from, and pay interest on, lines of credit.
  • Monthly Discounting generally means lower accounting costs. Most small businessmen use a CPA or bookeeper who generally charges by the hour. Monthly discounting only requires one simple calculation by the accountant, which takes far less billable time than the 25-30 indiviidual day-by-day calculations necessitated by Daily Discounting. On an annual basis, this can add up to a significant cost savings.

INTERCHANGE INTERPRETATION In our previous article referred to above, we discussed Interchange rules that result in many (if not most) of a typical merchant's transactions being downgraded to a higher discount rate. These mandatory Interchange surcharges apply to the wholesale processing cost’ charged by Visa USA and Mastercard Worldwide to the processor who in turn re-sells them to the merchant. . They do NOT necessarily mandate what type and amount of surcharge the processor resells to the merchant (although common sense dictates that when the processor is charged a higher wholesale price, he must in turn re-sell at a higher price to avoid operating at a loss). Processors are free to establish their own re-selling policies and pricing, which varies widely from provider to provider.

    What this means to the merchant

  • Different processors may ‘classify’ the same transaction differently. One processor may consider a transaction as “qualified" and charge the merchant the lowest qualified rate, while another processor may define the very same transaction as ‘Mid-Qualified" and charge the merchant a Mid-Qual surcharge even though either Visa or MC wholesales that transaction to the processor at the lower Qualified Interchange rate. The processor simply pockets the additional profit margin. That's how processors are able to get away with offering competitive-looking loss-leader teaser rates-they merely recoup the margin and then some by a variety of means such as this one.
  • Processors are free to establish their own profit margins and mark-ups as they see fit, which opens the door for a lot of ‘game playing’ with rates and numbers. In other words, just because Visa USA mandates a 15% surcharge on a particular unqualified transaction for whatever reason, lets say for processing a foreign card, the processor can use the unqualified ‘excuse’ to mark up their charge to the merchant however much more over 15% they want with no limit. By this means, unscrupulous processors are able to easily pad their margins in hidden areas while making the merchant think he's getting a ‘deal’ by quoting a low loss-leader rate in some rate Interchange category that they know in advance the merchant will rarely if ever encounter in the normal course of business, and making up the difference and more in the padded hidden area.

CONCLUSION: Selecting a credit card processing program on the basis of “who's offering the lowest rate" is is a numbers game the merchant will lose every time. Merchants mistakenly assume that ‘low rate’ translates into ‘low cost’ when in reality often the opposite is true: the lowest rate plan is usually the most expensive! Indeed, frequently a program with a HIGHER discount rate ends up costing the merchant less due to the way the percentages are derived and calculated. There's a LOT more to selecting a processing plan than just “what's the rate?".

Tips to avoid these pitfalls:

  • First and foremost, merchants need to educate themselves. Or, consult a trusted professional who understands how merchant credit card processing works. Merchants who approach the task of evaluating credit card processing programs based only on which has the lowest rates and nothing else are the most vulnerable to processing tricks and scams. .
  • Get sample statements from prospective processors to get an idea of their processing policies. They'll tell the full story on processing policies for the processor in question.
  • Get merchant referrals and call them. If the processor in question is in the habit of playing games, the merchants you talk to will be more than happy to let you know. If the processor refuses to provide references, that's should tell you something as well.
  • Get it in writing! If you want Net Processing or Monthly Discounting, don't assume and don't take the salesperson's word for it. If it isn't on paper, it isn't so.

  • Barry Godofsky operates Automated Merchant Solutions, Inc. , a Florida based Independent Sales Office (ISO) representing several of the largest credit card processing Acquirer institutions in the nation. Please email questions on this article to the author at To apply for a merchant account online, please visit Please view our previous article “Rate Reduction Strategies That Work" at


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