Guide to The Top Ten Merchant Account Mistakes

Today a Merchant Account is no longer just an option for a business, its a requirement.   Customers expect you to accept credit cards and do not care to know that this form of payment has a cost to the business (actually cash has a cost to a business also- much higher then expected- another story).  With this in mind it is imperative that you stay on top of the true costs of a merchant account.  I have written this report with the experience of over 20 years in the Credit Card Processing industry.  


Action Steps
The best contacts and resources to help you get it done

Tips & Tactics
Helpful advice for making the most of this Guide

• Its hard not to find at least a few of these issues at work with almost all providers. I choose to list the Top 10 in reverse order with number 1 being last..
• 10) Not Getting It In Writing ?A Merchant Account is a contract with an FDIC bank governed by many US banking laws and regulations and Visa/Mastercard rules. By law, all terms and conditions must be spelled out in a contract (this is not to say it is easy to read or understand). Most providers have an Application and a Contract. The Application could be just with the sales office and the Contract with the Bank. If something is told to you by a desperate salesperson STOP, ask for the application and contract and have them point out exactly where it appears in the contract. It is very common for a salesperson to make many statements that they hope you will forget a few months from now. BAWARE of online “applications” that are really contracts, they will ask for an “electronic signature” that obligates you before you see an actual contract, run, don’t walk away from this trick. This mistake can cost you $1000s.
• 9) Rate inflation?All Merchant Accounts MUST have the contractual ability to raise rates, all banks are required to have this ability. The question is wether they do this purely as a profit grab or to cover real increased costs. Visa and Mastercard generally raise rates to all merchants every 2 years. The increase is usually no more than .10-.20. Many providers use this opportunity to grab profits. Some even “Fake” Visa and Mastercard increases to get more money from you. Some providers make it a policy to raise “Bait and Switch” (see number 5) rates a little bit every few months. It is very hard to know if a provider will do this and one should not trust any “customer testimonials”--simply said they violate Federal Bank privacy laws, even if the customer agrees. This mistake can cost $100s.
• 8) Hidden Fees, Added Fees, Account adjustments, Merchant Club Fees and Annual Fees?This is really two parts, “name the fee” and undisclosed fees. The most common “name the fee” (e.g.. Does not reflect a true cost to the provider and they make up a name) is the “Merchant Club”, “Free Supplies”, etc fees-- all the supplies are forever “free”. These programs never make sense for the merchant and are usually added by the salesperson when you least suspect it. No doubt they got a bonus check for selling this program and it can cost you up to $55.00 per month. The undisclosed/hidden/added/etc fees are obviously the hardest to find. They usually hit your account with entries on your statement like “Account adjustment”, “Assessment Fee” and the funny (maybe not so funny) “Standard Fee”. Annual fees run as high as $500 and be charged monthly, quarterly or yearly. The only warning may be a message hidden on a merchant account statement. This mistake can cost $1000s.
• 7) Discount Rate, Transaction Fees?All Merchant Accounts have 2 main costs. 7.1) The Discount Rate, usually expressed as a percent (e.g.. 1.69% when sold to you and displayed as a decimal (e.g.. .0169) in your statement, of course to make it harder to read your statements. There are over 100+ fees levels from Visa and Mastercard usually only about 3 apply. In layman's term: Swiped rate- when a retail merchant swipes a credit card received from the customer. Keyed-in rate this is the rate for mail order and Internet merchants. Surcharged or non-qualified rate for when a merchant receives a non US Bank issued card, a “Business” card or consumer “Incentive Reward” card. It is very common to see merchants set up in the wrong rate code or simply overcharged, see number 6 and 1 below. This mistake can cost $100s.
• 7.2) The Transaction Fee can be between .20 through .80 cents based on the type of account and if there are added “Communication” fees. If you see a very low transaction fee you will always see a “Communication” fee (e.g.. The cost to receive the call from your credit card machine). I have seen “Communication” fees as high as .50 when the transaction fee was .25 cents. Another related fee is the AVS (Address Verification Service) fee this costs providers either nothing or a few pennies they charge up to .75 cents. This mistake can cost 100s.
• 6) Downgraded Transactions?This is the newest profit grab in the Credit Card Processing business. It can be a very complex subject but the basic idea is to state a very low “Qualified” Discount Rate and then “Downgrade” most transactions into a higher rate. I have seen some Merchant Account statements with 100% of the Discount Rate “Downgraded”. If you swipe 100% of your transactions and almost never see a credit card issued by a non US bank usually no more then 10% of your transactions should downgrade. This is a very hard fee to diagnose even by an expert. This mistake can cost $1000s.
• 5) Bait and Switch?This is the old fashioned tell-you-one-price sell-you-another game. It can actually be any rate or fee you pay for your merchant account. I have performed 1000s of rate analysis over the years and have countless times seen advertisements that clearly state one thing and the merchant see another after they sign up. Just be aware that if it seems too good to believe it probably is. This mistake can cost $1000s.
• 4) Free Equipment?This is yet another new way to grab your attention. Free “sounds” good to everyone. Of course there is nothing that is “Free”. In the case of “Free Equipment” you will pay for the equipment many times over in other fees listed in this report. Most providers supply equipment that costs up to $600.00 wholesale. They must get this money back from your account in some way. Many use Long Term Contracts (number 2) and Cancellation Fees (number 3) as the primary way to protect them from losses or charge monthly “insurance” fees. The sad part about this is even if the business closes early the owner is personally libel for all fees. If you read the details of the contract it will be stated that it is a “Free Terminal Placement” with some terms so severe that if the terminal is not returned in “new” condition the merchant will have to pay for “reconditioning” fees. This mistake can cost $1000s