Credit Card Processing Firms and Unethical Practices

How to Avoid the Unethical Business Practices of Credit Card Processing Firms

I recently attended a Chamber of Commerce lunch meeting in my hometown, where I introduced myself as a person in the merchant services industry. As those words came out of my mouth, “merchant services” I watched as about 50 small business owners all rolled their eyes and prepared to tune me out for my one-minute elevator pitch. Their reaction then completely took a 180 degree turn when I explained that I do not sell credit card processing, but rather help small and medium size businesses to better understand the industry, as well as get them setup with reputable companies and great rates.

After the lunch was over, it took me an extra half hour to get out of the restaurant because I had a line of local business owners interested in what I do and wanted to know if there was anything that could be done for them.

As many consultants, I started out selling credit card processing before quickly realizing that the entire industry is setup to take advantage of businesses (especially small ones) and keep them in the dark about not only their contracts, but the rates and fees they are being charged. This is generally true of any industry where there are billions of dollars at stake and the regulatory system is non-existent.

The typical processing company business model

Without going into too much detail, the typical credit card processor receives a percentage of each payment processed, which they are free to markup at their discretion above that of the issuing bank and Visa/MasterCard. This is generally called the processor markup. These firms then go out and pay independent sales agents a big commission based on the percentage of markup they can sell above a certain threshold. These sales reps are very rarely trained by the organization, and become the face of the firm.

So what you have is a third party rep with no ties to the processor (other than receiving a commission for a sale) and the more they charge the business for processing, the more money they make. While this is pretty typical with a sales position, the problem is that there is little accountability since the rep is not an employee of the firm. This leaves them available to make claims, statements and promises that are just not true and relieves the processing company of liability since it was a third party contractor that wrote the business.

Not every processing firm operates under this process, but it is very common in many fly-by-night merchant services businesses. It makes it important find reputable outfits like First Data and TSYS that operate above the fold and maintain strong ethical business practices.

What can business owners do to protect themselves from unethical credit card processing firms?

There are a few important steps that business owner needs to take in order to prevent falling victim to any of the unethical processing companies out there.

First, research. There are loads of websites that offer insight into the business practices of these processing companies and will give testimonials from actual clients. You have to keep in mind that most people do not like their processing company so much of the material will be bad. It is important to find a firm that has a lower level of complaints than their competitors.

Second, read the contract. This is where businesses often drop the ball. No matter what the sales rep says, make sure it is written that way in the contract. If it is not in writing, it did not happen. Double-check all of the fee schedules, rates, term lengths, etc. Merchant services contracts often contain fine print that can greatly increase the total cost of doing business. It is important to understand this completely. If you are not sure about something, hire an attorney to review. The few hundred dollars today could save you thousands in the future.

Third, keep a copy of the full contract. I cannot stress this enough. Too often a business owner finds themselves in a dispute with their payment processing company and magically the firm cannot (or will not) produce the original signed contract. They may send over a few pages that contain the signature, but the part in question mysteriously does not show up for months. It is the same as any other important financial document you sign. Put it in a safe place and keep it forever.

Finally, keep records of everything. Do not close your eyes and hope that the money being deposited into your checking account every night is correct. Keep track of it. Most credit card processors will have direct access to your checking account for deposits and withdrawals, so double check everything and hire a bookkeeper if you can afford to.

This post was provided by Eric Stauffer of Card Payment Options, a consulting firm that assists business owners in setting up credit card processing with reputable firms

Related posts:

1. The Hidden Truth Behind Credit Card Processing
2. Credit Card Companies: Crooks or Stand Up Citizens?
3. Unethical Practice: When Is Enough, Enough?