Merchant Service Processing: What You Must Know!

Most merchants need to accept credit cards in one form or another to survive in the current payment environment. Here are some tips to achieve the best merchant service relationship possible.

1) When negotiating merchant service contracts it is critical that you as a merchant help the provider price you fairly and accurately. If you have a history of MATCH or termination it is critical that you reveal this to a potential new processor. The odds are overwhelming that they will evidently find this out and if you have not been forthcoming this can lead to termination under the fraud statutes.

2) You need to tell the provider what you are selling. Also, are you are going to be selling your product or services in the card present or card non-present environment. Specifically identify the average ticket of the items that you are going to sell and the expected volumes that you are going to produce. Many merchants believe that they will look better if they inflate these numbers. Nothing could be further from the truth! The processor is only looking at you as a risk that needs to be controlled. If you inflate or alter the numbers on which the relationship is based upon, it will only spell trouble for you.

3) Before you make any judgment about a relationship, obtain at least three separate bids. Make sure that you understand exactly what is being presented. The language that is being used by one provider may be completely different from the language used by another provider. Require that all terms be defined in writing. If the person that you are dealing with is unwilling or unable to do this, you should cease further negotiation with this provider or provider representative.

4) From a pricing perspective many variables that must be defined. You must understand the basis of the pricing schedule. For example is the pricing based on an interchange program, interchange plus, two-tier, three-tier, four-tier or other variant? The qualified rate must be specifically defined, as well as all supplemental charges and downgrade charges. Are the penny costs for authorization, settlement, and communication separated out or included in the pricing as a bundled or blended rate?

Many merchants assume that the application is the actual contract for processing. It is not. The full contract runs many pages–up to 20 and should be read and understood in their entirety. There are areas that must be focused on these include termination events, hold and reserve requirements, cancellation clauses, renewal clause, supplemental penalties, access to other bank accounts and many others. This contract represents the lifeblood of your business and must be treated in a serious manner. Many merchants are cavalier and simply sign these application/contracts without any attempt to understand the content and meaning of these documents.

With that said, one can ask the question, “Why should I bother reading and understanding these documents if there is nothing that can be changed?” A legitimate question but the answer will surprise you. Many of the issues of significant content can be negotiated.

Understanding a merchant service statement
Understanding a merchant service statement is a daunting challenge. There are a number of guiding principals that should help. First and foremost always ask questions! Demand that the statement is explained to you. If the explanation is unclear and hyperbole appears to be the given answer, do not be complacent.

In approaching the statement, take an orderly approach. Initially verify that the statement is yours. Make sure that the MID (merchant identification number) on the top of the statement is correct. Verify that all of the pages are present and that they all reflect the same period. Understand the reference period of the statement. Many merchants assume that the statement represents a calendar month or the same cycle as the bank month. They do not most statements end the transaction period several days before the end of the calendar month and thus make reconciliation more challenging.

The statement plan is a summary of the processing relationship. It describes the qualified or base charge that you are being assessed. It tells you how many of each association type of transaction (MasterCard and Visa) that you have processed in the given period of the statement. It may also report the non-association transactions such as American Express and Discover. (Both American Express and Discover will provide their own monthly statements in addition to the statement that you receive from the processor. This area of the statement will also report the number of credits that have been processed) by card type as well as the average ticket by card type.

The next section of the statement is a detailed transactional history. This also varies significantly from processor to processor. Common elements are batch reporting, settlement reporting, the number and type of downgrades, and supplemental charges associated with their specific downgrades.

Following this there is a fee section, which includes a critical number that must be understood and appreciated: the chargeback count for the given period. Chargebacks can lead to the listing of the merchant as a high-risk merchant or ultimately placement on MATCH or finally termination. This number should not be taken lightly; the chargeback ratio to total forward transactions should be memorialized in a trend analysis.

The cost of merchant service processing is a subject of great angst amongst merchants and rightly so. You can improve your position significantly by seeking qualified assistance in this vital but arcane world. The largest merchants carefully evaluate their processing relationships on a continuing and ongoing basis. You should as well.

Ross Federgreen is founder of Port St. Lucie, FL-based electronic payments consultancy CSRSI.

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