Square up or thumbs down? By Avi Jorisch

More and more contractors are processing credit cards using the ‘Square Up” program – most people think it is cheap, easy to set up, pain free and the only tool on the market that can authorize credit cards using their smart phone. Unfortunately, all of those assumptions are pretty wrong. When reading through the fine lines of the actual program, it seems pretty clear that this product only works for a very small subset of the credit card acceptance market – one of the few things going for Square is that it has a fixed rate, which makes it very easy to calculate what a merchant pays for their credit card acceptance. Unfortunately for the merchant, that rate is very very high. Square is also is convenient but you end up paying through the nose for their service.  Merchants currently using this program should seriously consider other options.

·      Positives: works nicely with existing smartphones; fixed credit card rates make it easy to calculate fees; no monthly fees.

·      Negatives: Extremely high rates, which means merchants are paying far too much; if Square customer has over $1000.00 in sales in a week, Square will hold any money over $1000 and not deposit it into their customer’s account for 30 days; not PCI compliant which means significant exposure to risk.

Square utilizes a fixed pricing program - as outlined in May’s monthly newsletter, any merchant on a fixed pricing plan is simply paying WAY too much for credit and debit card acceptance – period! Square charges 2.75% when a card is physically swiped and 3.50% and $0.15/authorization when a card is not present.

So on an average $10,000 transaction where the card is present, merchant is paying $275; where the card is not present that fee comes out $350.15. In both cases, $9000 is held in “escrow” for 30 days.

Square does not charge a monthly fee or a set up charge because they are making significant money each time a merchant utilizes their program. They are not stupid –they know how to make the big bucks! But making it simple means a lot of people will sign up. And they partner which big merchants like Starbucks to get the word out – but I can assure you they are not giving Starbucks the same rates they give everyone else!

They have put Starbucks on the same plan we advocate for all merchants, interchange plus. Interchange plus is the term used to describe the wholesale rates charged by the credit card associations (Visa®, MasterCard® and Discover®). With over 150 credit cards in the market today, each of them correlates to a slightly different interchange rate.

As the name implies, Interchange plus pricing works by applying a fixed markup fee to the wholesale interchange rates from Visa, MasterCard or Discover cards. This includes two basic fees: one is often expressed in basis points (i.e. bps) and the other is an authorization fee (i.e. every time a business authorizes a credit card).

Getting a credit card swiper for a smart phone is easily available from most credit card processors – don’t be fooled into thinking that Square is the only game in town when it comes to this service.

And finally, PCI compliance is key to lowering ones exposure to risk – see EGIA July newsletter. ALL businesses that process credit cards are required to comply with PCI compliance and the potential penalties for non-compliance are stiff. 

One of the few reasons for a business to go with Square is if they are doing so little volume that the monthly fees are just not worth it – with that said, best to do the math on how much total volume you expect to do because the fees charged on just a few transactions make up for quite a bit of fixed monthly fees. 

Cost-Benefit Analysis of Using Intuit/Quickbooks’ Merchant Services Program - By Avi Jorisch

I have come across many merchant that are processing their credit cards through Intuit/Quickbooks. I always try and educate my perspective clients on the various rate plans offered by different processors so that they can make the best decision for their venture - Quickbooks is (somewhat) convenient but you end up paying through the nose for their service.  Merchants currently using this program should seriously consider other options.

·      Positives: works nicely with existing accounting software; no additional entry needed in to Quickbooks register.

·      Negatives: very high rates through the tiered pricing program, which means merchants are paying far too much; we have found that more often than not those utilizing the program are not PCI compliant as well.

Quickbooks exclusively utilizes the tiered pricing program - as outlined in May’s monthly newsletter, any merchant on a tiered pricing plan is simply paying WAY too much for credit and debit card acceptance – period!

Under the tiered pricing plans, a business is given a qualified rate – generally around 1.69% + a $0.25 transaction fee - for processing.  Businesses generally don’t ask what the mid-qualified or non-qualified rates are. 

·      Qualified rates are only assigned to the most basic credit cards and they must be physically swiped. Only 10-20% of cards actually are considered qualified - rewards cards and corporate cards are excluded!

Mid-Qualified rates are generally 2.5%-3.5%, and additional authorization fees apply.

·      These include debit cards not swiped, rewards card that earn hotel/airline miles

Non-Qualified cards, generally come in at a rate of 3.5%-4.5%.

·      This category includes business cards, international cards, plus basic cards and reward cards not swiped do not fall into the Mid-Qualified category are considered Non-qualified.

·      This is far from the best deal. As I’ve advocated on many other occasions, interchange pass through pricing is the way to go for merchants who want to lower their processing fees and get the best deal.

Interchange plus is the term used to describe the wholesale rates charged by the credit card associations (Visa®, MasterCard® and Discover®). With over 150 credit cards in the market today, each of them correlates to a slightly different interchange rate.

As the name implies, Interchange plus pricing works by applying a fixed markup fee to the wholesale interchange rates from Visa, MasterCard or Discover cards. This includes two basic fees: one is often expressed in basis points (i.e. bps) and the other is an authorization fee (i.e. every time a business authorizes a credit card).

And finally, PCI compliance is key to lowering ones exposure to risk - whether they know it or not, ALL businesses that process credit cards are required to comply with PCI compliance. On the many merchant statements I have reviewed for those processing with Quickbooks, more often than not I find merchants are not compliant. The potential penalties for non-compliance are stiff.  The credit card associations have given themselves the right to fine a merchant (through the issuing bank) fines from $5,000-$100,000 per month for PCI compliance violations. Ultimately, if a merchant is not PCI compliant, the associations can terminate their relationship with a business.

If a business chooses to process credit cards, their processor should work hard to ensure that their merchants are PCI compliant. But ultimately, the burden of that responsibility falls on the shoulders of the individual merchant.

What Your Business Should Know about PCI Compliance - By Avi Jorisch

ALL businesses that process credit cards – whether they process a few transactions a year or thousands – are required to comply with PCI compliance standards. In 2006, the major credit card brands (Visa, MasterCard, American Express, Discover, and JCB) established the Payment Card Industry Data Security Standard (PCI DSS) to prevent cardholder data theft. PCI is an ongoing obligation and annual validation is required in order to ensure compliance.

As merchants think about credit card acceptance, they should also keep in mind their responsibilities as mandated by the credit card associations. Below are a few bullet items to give merchants a better idea of their PCI obligations.

Who Overseas PCI and why be Compliant?

The PCI DSS is administered and managed by the PCI SSC (www.pcisecuritystandards.org), an independent body that was created by the major payment card brands (Visa, MasterCard, American Express, Discover and JCB.).

Why should a merchant strive to comply with PCI? The most basic answer is simple: if not, the associations will levy a fee on a monthly basis for as long as a business is out of compliance! But just as importantly, businesses should want to be compliant in order to ensure that their client’s identity is protected and the business is not exposed to unnecessary legal risk.  By letting your clients know that you are PCI complaint you give them the confidence that their confidential information will be safeguarded.

What does it take to become PCI Compliant

Becoming PCI compliant is not necessarily intuitive and businesses will want to find a provider that can walk them through step by step what to do.  Measures often include, but not limited to the following:

·      Determine your validation type

·      Complete and report an attestation of compliance and Self-Assessment Questionnaire (SAQ) annually

·      Complete and report quarterly results of all external vulnerability assessment scans performed by an Approved Scanning Vendor (ASV)

·      Create and annually update an information security policy

Becoming PCI compliant is required no matter what method a merchant uses to accept credit cards – i.e. terminal, virtual terminal, POS, mobile payments, etc.

Network Scans

A network scan is carried out remotely. It is an automated tool that checks potential risks on the system a merchant uses for credit card acceptance.  The scan is meant to identify vulnerabilities that hackers can abuse to get information from a merchant’s private network.  A scan is carried out once a quarter or every 90 days.

Penalties for noncompliance
The credit card associations have given themselves the right to fine a merchant (through the issuing bank) anywhere from $5,000-$100,000 per month for PCI compliance violations. Ultimately, if a merchant is not PCI compliant, the associations can terminate their relationship with a business. Generally, penalties are not made public or publicized but being blacklisted will terminate a business’ ability to accept credit cards.

Complying with PCI when a merchant signs up for credit card acceptance can help the business both reduce risk exposure and avert potentially costly consequences. 

Reducing Your Credit Card Merchant Services Fees – Part II By Avi Jorisch

As I wrote about in part I of this series, there are a number of ways to accept credit cards – e.g. online terminals, stand alone terminals, phone authorizations, swipers, point of sale systems, etc – and various processing plans on the market that can have a significant impact on a merchant’s bottom line.  The different pricing plans are not only extremely different from one another, but can also be misleading for anyone processing credit cards.

In the first article I explored two of the five plans on the market; here I’ll describe the remaining three.

Generally, when a merchant processing quote is requested, the processor is not incentivized to explain how credit cards fees are levied.  Wholesale rates are charged by the credit card associations (ie. Visa, Mastercard, Discover, Amex) – there are approximately 150 cards on the market today and each of them has a slightly different interchange rate, the proceeds of which go directly to the credit card associations. Processing fees are charged above and beyond the interchange rates assessed.

Qualified Rate

A popular plan on the market is to present a “discount rate” or “qualified rate”, generally between 1 to 3.5 percent (I’ve seen this be as high as 5%). All transactions come in at this flat discount rate. Merchants hear that number and think that is what they are paying overall. What merchants are not always told is that there are ADDITIONAL downgrades for most credit cards authorized, including rewards cards, corporate cards, etc.  The processor highlights the competitive “discount rate,” especially those that do not disclose the other downgrades that apply.

Merchants on this plan often gleefully explain they are paying x percent, when in fact their net effective rate is much higher. All merchants accepting credit cards should do the math to determine their net effective rate (NER). The NER is calculated by dividing the total fees by the total amount processed. The NER is the actual measure of how much a business is paying for their merchant services.

Flat Rate

As the name of this plan suggests, the rate charged on all transactions is flat. This is essentially the Square/Paypal model (the subject of a future column).  Merchants are charged a flat rate for cards that are physically swiped and a different rate for cards that are not physically present. While this plan is simple to compute, and merchants know (theoretically) exactly the fees they pay for authorizing credit cards, it does keep a tremendous amount of margin in the processor’s pocket.  

There are instances when this type of plan is beneficial, but that is not the case for most merchants.

Bill-back and Enhanced Bill-Back Pricing

The bill-back pricing plan is one of the most confusing on the market and least competitive. It is almost impossible to determine what a merchant is actually paying. This structure is great for the processor since it keeps a lot of margin in their pockets – but not competitive for those authorizing credit cards.

Bottom line, here is how the plan works: It is very similar to the qualified rate plan described above with one big difference.  As in the qualified rate plan, there is a flat rate charged on all transactions – this is clearly outlined on the monthly merchant statement. The ‘bill-back’ charges are the additional downgrades. But here comes the kick in the pants: the downgrades are assessed on the following month’s billing statement.

For example, May’s processing statements has the bill-backs from April’s processing transactions. In order for a merchant to determine their true cost, they would need to analyze statements over the span of two months.

The enhanced bill-back plan works the same way with one small difference – there is an additional fixed percentage mark-up labeled ‘enhanced’. In plain language, enhanced is simply extra margin for the processor.

You can easily recognize a bill-back plan on your statement if you see language that looks as follows: e.g. May BB or June EBB (BB and EBB is short for bill-back and enhanced bill-back).

Not only is this plan far from transparent, it is not competitive.  Merchants should try and stay away from this type of pricing plan.

Reducing Your Credit Card Merchant Services Fees - Part I - by Avi Jorisch

Most businesses never think about the complexity of the merchant services world as they authorize credit cards.  There are a number of ways to accept credit cards – e.g. online terminals, stand alone terminals, phone authorizations, swipers, point of sale systems, etc. In addition, there are different pricing plans that are not only extremely different from one another, but can also be extremely misleading for the merchant. 

Most businesses cannot be bothered to take the time to understand how the industry works; they just want to make sure that funds end up in their bank account. But ignorance can seriously affect your businesses bottom line and it is worth the little bit of time to ensure you are getting the best possible deal.

In the following series of articles, I’ll try and demystify the industry and educate merchants on the most cost effective way of accepting credit cards. There are approximately five plans on the market today - in this article I’ll go through two of the most popular pricing plans. Next month, we’ll describe the other three.

Interchange Pass-Through

Interchange plus is the term used to describe a the pricing model where a fixed markup is applied directly to interchange fees published by Visa®, MasterCard® and Discover®. Interchange rates are the wholesale fees charged by the credit card associations. With over 150 credit cards in the market today, each of them engenders a slightly different interchange rate.

The current interchange fees can be found in Visa and MasterCard’s Web sites:

Visa interchange rates
MasterCard interchange rates

As the name implies, Interchange plus pricing works by applying a fixed markup fee to the wholesale interchange rates from Visa, MasterCard or Discover cards. This includes two basic fees: one is often expressed in basis points (i.e. bps) and the other is an authorization fee (i.e. every time a business authorizes a credit card).

The type of card authorized (debit, credit, rewards, corporate), whether it is processed online or physically swiped and other variables determine the interchange change rate. The “plus” component of the interchange-plus pricing plan is fixed regardless of the interchange rate.  The interchange rate, plus the processing component will determine the total cost of the transaction itself. 

This type of plan is the most transparent and cost effective pricing plan – every business should ask their processor to be on this type of plan. Being on this plan gives businesses the wholesale rates the credit card associations charge plus a fixed mark up fee – but for those of you on interchange plus plans, beware of less reputable processors who mark up interchange fees!

Being on this plan almost always reduces the fees businesses pay for merchant processing and reduce their net effective rates (NER). The NER is calculated by taking the total merchant fees and dividing them by the total amount processed, less American Express if it is billed separately. 

EGIA has rolled out a very competitive interchange plus plan for its members that is extremely competitive and we have found reduces significantly the net effective rate of those members currently processing credit cards.

Tiered Pricing

Any merchant on a tiered pricing plan is simply paying WAY too much for credit and debit card acceptance – period!

Under the tiered pricing plans, a business is given a base teaser “qualified rate” (say 1.69% + a $0.25 transaction fee) for processing.  But what most businesses don’t know to ask is what are their mid-qualified or non-qualified rates.  Think of three buckets – a “qualified”, “mid-qualified” and “non-qualified” bucket – and the processor determines which cards go into which category and charges the businesses accordingly.

Qualified rates are only assigned to the most basic credit cards and they must be physically swiped. This means of course that any time a card is not physically present your rates jump up. Even when cards are swiped, businesses will find that only 10-20% of cards actually are considered qualified - rewards cards and corporate cards are excluded!

As a general rule of thumb, debit cards not swiped, rewards card that earn hotel/airline miles are generally considered mid-qualified.  Mid-Qualified rates are generally 2.5%-3.5%, and additional authorization fees apply.

Business cards, International cards, plus basic cards and reward cards not swiped do not fall into the Mid-Qualified category are considered Non-qualified. These generally receive a rate of 3.5%-4.5%. Naturally, additional authorization fees apply

We see merchants all the time that are on this plan and think they are getting a great deal, but actually end up with higher processing costs. 

We have found that bookkeepers and accountants like this pricing plan because it is easier to understand and read on a merchant statement – unfortunately, this increases profits for processors and ensures merchants do not get the most competitive rates possible. Savvy businesses always ask for “interchange plus” pricing.