• Nick Bencivenga

Choosing a credit card processor… where to begin?

Accepting credit cards is a ubiquitous part of owning a business these days. Barring a few exceptions, almost all businesses need to accept credit cards, no matter who your customers are. And if you’ve ever shopped around for a credit card processor… well, you know that there are many options out there. Everyone seems to be promising the world! The lowest rates. The best service. The coolest equipment. Free this, none of that, come on down! It’s easy to get overwhelmed, and unfortunately, many processors are counting on that. This industry has a negative reputation for a reason – there are many “get rich quick” processors out there, looking to sign a client, make a buck, then move on. Many businesses “sign on the dotted line” without truly understanding the nature of the agreement they’re entering into, or they don’t know what better options exist! Our goal with this post is to offer a framework for choosing the best provider for your business. There are many options out there, and some processors may be perfect for one business, and terrible for another – it all depends on what you need, and what your goals are! With all of this said, we’ll jump into our criteria for selecting the “best” processor for your business.

Traditional provider vs. All-in-one?


The “all in one” solution (otherwise known as a “Payment Facilitator” or “PayFac”) can be perfect for new or small businesses. These providers offer built-in hardware and software solutions, without any real customization options. Think Square, PayPal, Stripe. You are a “sub-merchant” of the larger company, and you don’t have your own account on-file with the card associations. These PayFacs have built a pricing model and technology that is based on a “one size fits all” model. As such – they have very pretty, simple solutions that work great out of the box! They’re perfect for a brand-new business who doesn’t have a full handle on their long-term needs yet. All-in-one solutions are great for any business who doesn’t have a regular/steady stream of sales, or who has just a few sporadic charges here and there. Typically, these solutions will have lower static fees, and higher processing fees. (Read: if you don’t process anything, you don’t pay anything!) For example – Square has no monthly fee, but they charge 3.5% and 15¢ per sale for a keyed transaction, which is a pretty high rate! So, if you only charge a few sales per month for a couple thousand dollars, this could be a great model. Conversely – if you’re running $25k/month in volume on a bunch of phone-sales… this model will get really expensive, really fast. Having a more transparent pricing model will almost certainly provide some significant savings.


A dedicated (or “traditional”) provider operates differently. When you open an account with a traditional provider, you are opening an account directly with Visa/MasterCard. You are the merchant who’s “on file” and your business is directly processing credit cards, as opposed to going through a Payment Facilitator. The main concern for any business operating under a PayFac account is that your ability to process can be revoked at any time, for almost any reason. Payment Facilitators have much more stringent risk controls because they are managing thousands/millions of accounts under a single umbrella. It’s quite common for PayFacs to simply “ban” certain merchant types, literally overnight. Or, they may determine that a given business has too much risk exposure for them… and simply turn off processing. There are numerous horror stories of established businesses losing access to their ability to process credit cards, due to some back-end rule change that their PayFac initiated. This can be devastating to a growing business. These types of issues are incredibly rare when you work with a dedicated provider. You have a direct merchant account, in the name of your business, on file with Visa/MasterCard. Your account was underwritten for the exact sales you process, and your provider has more knowledge about who you and your business are from the get-go. Barring some serious risk concerns, accounts are almost never just “turned off” like with a PayFac. Usually, in a situation where a merchant has a direct account and may be increasing their risk exposure, the absolute worst-case scenario would be that the merchant’s funding would be held until the risk is evaluated. Their customers could still pay them, and the business wouldn’t be “stuck” unable to accept credit cards. When working with a PayFac, losing the ability to process sales is a legitimate possibility.


Lastly – PayFacs are unfortunately well-known for initiating reserves on a very regular basis, sometimes with little financial basis. See the recent Square policy (here) – without warning, thousands of businesses were hit with 30% reserves on their accounts! That means that if they sell $1,000 worth of goods, Square will “sit” on $300, and only pay the merchant $700. Yikes! This is a far less common scenario with a traditional merchant service provider. Accounts aren't “lumped together” for risk-purposes in the same way. Each account is looked at individually, so a merchant isn’t punished for the actions of other similar merchants.


In short – a PayFac can be great for the right kind of business. If you are low-volume, have limited support needs, or are just opening your business – a PayFac is a great place to start. Typically, merchants “grow out” of PayFacs after they start processing $10k - $15k/month, and when the technology gets too restrictive. You can’t integrate with Point of Sale systems, you can’t work with credit card terminals, you’re unable to utilize advanced website payments, nor can you achieve the lowest rate structures with a PayFac. So typically, there’s an “inflection point” for smaller merchants where the ease of PayFacs stop being attractive, and become cumbersome/expensive. It’s different for every merchant, but we find it usually starts around $10k/month in credit card volume. PayFacs make sense as you start out, and a traditional account becomes more attractive as you grow.

Rates, fees, terms


This is where many merchants get hung up, and rightfully so! Everyone wants to pay the lowest rate – but there are many aspects of pricing, and it’s easy to get lost in the trees and miss the forest. As mentioned above, if you work with a PayFac, you’re almost certainly not getting the lowest rates. They offer a “flat rate” model, which is appealing at low-volumes. But as your processing volumes increase, that simplicity starts costing money. If you’re paying 2.6% on $25,000 every month, that works out to $7,800 per year in processing costs. Shaving a half of a percent off of your fees (0.50%) would yield your business an extra $1,500 every year, or over 19% off your total costs! The bigger your monthly volumes get, the more significant small rate changes become, which is why it’s so important to have a solid understanding of all pricing models before you sign up for anything.


It’s rare that flat-rate pricing is beneficial for the merchant. To understand why, we highly recommend reading through our Interchange FAQs to understand the basics. But to briefly run-down: interchange is the “base cost” of all credit card sales. It’s what we, the processor, pays to process the cards you accept! Think of it like a buy-rate, or a wholesale cost. It’s what every provider pays. Interchange is something you can’t really control, it’s based almost entirely on the types of cards your customers hand you. What this means is that every provider has the same underlying costs for the sales you run – the difference is how much we charge you above interchange. Just like when you buy a new car, you know that every dealer in town paid the same price for the cars on their lot – our industry is the same! When you run a credit card, it doesn’t matter who your provider is. It costs every provider the exact same amount. The only difference is how much they charge you! This is HUGE. This gives you power! Since you know that we ALL have the same interchange costs, you can choose to operate on an interchange-plus pricing model. This model discloses all margins that you’re charged above interchange! It’s the equivalent of going to a car dealership, and seeing both the factory cost and the dealer markup on the car’s window. You get to know exactly how much the dealer is making on any given car. This gives you the ability to “shop around” and find the cheapest margins! Same deal here. When you get an interchange-plus pricing model, you can see your provider’s margins in advance. You can also compare margins between interchange-plus providers. AND strongly recommends choosing a provider who offers interchange-plus pricing. It’s the de facto standard of “fair pricing” in the merchant services world, since it allows you to review your provider’s margins on a monthly basis and keep them honest. Almost every single “major merchant” in the world operates on a variation of interchange-plus, because it’s transparent and fair.


Even outside of being on an interchange-plus model, it’s important that you review a full fee-schedule. ALWAYS ask a potential provider for a full breakdown of all recurring and per-instance fees. If something isn’t obvious, ask! A good provider will be happy to explain each fee, when it occurs, and how to avoid it. A truly good provider isn’t “scared” of sharing their rates, because they’ll have nothing to hide. We highly recommend shopping any prospective rates between multiple firms, too. Although we post our rates publicly (here), many providers don’t. That means that their first offer isn’t always their best.


Another thing to consider is the term of your agreement. It’s unfortunate, but many providers actively deceive merchants by offering super-low upfront rates. (These are often called “teaser” rates). But, unbeknownst to the merchant, their agreement will also have a long-term component with a large early-termination fee, sometimes thousands of dollars! So once you’re signed up, the deceptive provider simply raises your rates after a few months. They know you’re “stuck” – if you leave, you owe them a few thousand dollars in penalty fees, per the contract you signed. So effectively, you’re forced to take their rate increases until the end of your term, ouch! The easiest way to avoid this is to simply never sign a long-term agreement that forces you to stay. Ensure that your agreement gives you an “out” that doesn’t cost you anything. Our opinion: if a provider is “forcing” you to sign a long-term agreement with steep termination fees… that’s typically indicative of nefarious dealings. A good provider should be willing to have you month-to-month, because they are confident in their ability to serve your account with integrity and aren’t “afraid” of losing it.

Customer Service

This should go without saying. You want a provider who’s going to pick up the phone, and advocate on your behalf if there are any sorts of issues. If you sign up with a PayFac… you can wave “bye-bye” to customer service. Their business model is based on not having a phone number. Everything is email-based, and issues routinely stretch into the multiple-weeks time-frame to get resolution. When you sign with a big PayFac, you are literally one of millions of customers. Typically, your account, no matter how big, will be considered “small potatoes” to these firms. As such, any sort of issue can become a serious nightmare! Contrast that with a traditional provider – they’ll provide tailored and personalized customer service. The traditional provider is directly responsible for your hardware, your billing, your pricing, etc. They’ll have a customer support team that picks up the phone. Even a “bad” traditional provider will typically provider better customer support than a PayFac. What should you look for in customer support when comparing companies? We recommend asking:


· Will you have a dedicated account representative? There’s nothing more frustrating than having to call in multiple times to support and re-explain your problem over and over. Having an account representative ensures you have a direct line of contact to a person who knows you and your business. This can prove invaluable during technical support issues. An account rep doesn’t want to waste their own time, so they’re incentivized to fix your issue as quickly as possible. Plus, they know you! There’s usually a more personal connection and motivation to quickly resolve your problems. Also… isn’t it nice when your vendors know your name? · Is there after-hour support? What happens if your terminal/system needs help late at night? Most companies have 24-hour technical support, and we recommend ensuring that your provider has a solution for you if systems go down late at night.

· Do representatives operate on a first-name basis? This sounds silly, but hear us out. After being in this industry long enough, we’ve learned that there is nothing more frustrating than getting “generic” responses from “support”. You want to know who’s talking to you! You want to be able to actually pick up the phone and talk to the person who’s assisting you via email/chat. If your provider can’t offer that, it may be indicative of slow response times, bureaucratic support policies (that waste time), or a lack of dedication to the customer experience. We know from experience that the last thing you want to get is a canned-email from a nameless representative, forcing you to “start over” on your support journey. We strongly recommend sniffing out your prospective provider. Call them randomly during the day, see if they pick up! Email their support team and see how they answer back. Chat them on their website, do they quickly respond? These are indicators of your future support experiences.

Networks/Compatibility


This is bit more challenging to discuss, because there are many requirements that go into any one merchant’s particular setup. But in short – a good provider will have access to numerous processing networks, and not “force” you into one. There are dozens of major networks out there, and by and large, they’re all similar. Depending on needs, certain networks can provide specific advantages, such as:


· Faster funding timelines, or later batch-out times

· Support for large single transactions (over $100k)

· Integration with specific terminals, gateways, or POS systems

· Access to specific products/features (cash advance, 3rd party integrations, etc)

Since every merchant has unique needs, it’s not always imperative that your provider work with numerous processing networks. But in our opinion, it’s a very big “plus” for your provider to do so. It gives you options down the line – if you need to switch networks (for any reason), you already have a relationship with your provider and a switch would be simple/easy. You wouldn’t have to find a new firm! Also, you’ll have access to more products/services than you otherwise would. Think about signing up with a new cable provider – wouldn’t you want a provider who has access to EVERY channel? You wouldn’t want to sign up with a provider only to learn that they don’t offer sports, or movies, or pay-per-view events later, right? It’d be a huge annoyance to learn that a simple feature isn’t even offered at the provider. Same thing with processing – by choosing a provider who has access to numerous networks, you’ll ensure that your business has the same access. You won’t be “stuck” wishing you had some fancy new product/service down the line, because your provider will have access to it! We recommend asking any potential provider, “What networks do you work on? Which is your favorite? Why? What happens if I have issues, can I switch?” Their reply should discuss the numerous options they offer, and why they recommend the solution they’re recommending. If they only have a single solution… that may indicate they aren’t offering the newest/best technology, or they don’t have access to it.


In the same vein, we recommend asking any potential provider about their POS (Point of Sale) and terminal integrations. A good provider won’t only offer one single solution. They may have a favorite, but a good provider will offer multiple terminals, POS systems, and gateway options to meet each client’s unique needs. If your provider only offers a single hardware option, that indicates that they’re likely shoehorning their customers into the only product/service they offer. That doesn’t bode well for the merchant! In our opinion, a provider should be offering numerous solutions, because they recognize that not all merchants are the same. Some businesses only need a quick/simple payment terminal, while another may truly need all the bells and whistles. Those merchants have different requirements, and both would be under-served by utilizing a hardware solution that is “good for everyone”. Your provider should have your best interests at heart, and should take the time to listen to your needs and craft a solution that’s specific to your business. Not only will this save you money and time, but it’ll also ensure that you have a system that actually meets your needs (as opposed to buying something simply because your provider didn’t have anything else to sell you).

Owners / Management / Culture


We all know this already, but you vote with your dollars in America. Anytime you choose to purchase a product or service (as a consumer or as a business), you’re making a choice. You’re making a choice to support the business you patronize, with your money. We strongly encourage any business who is choosing a provider to research the ownership. Research well. We’ve alluded to it above, but the merchant services industry is fraught with deception, greed, and unethical behavior. To be clear, there are plenty of good companies out there doing the right thing. But unfortunately… there are also plenty who actively operate with an indifference to ethics. They actively lie to merchants, raise their prices, make promises that can’t be fulfilled, and say whatever needs to be said to “get the deal”. These companies are relatively easy to avoid if you take the time to weed them out. We strongly recommend researching the owners of any company you intend to work with. Look them up. Google their name, read reviews of their old firm. Find them on LinkedIn. See what companies they used to represent. It’s surprisingly easy in the merchant services world to “re-brand” your company, just to avoid negative publicity. By taking the time to research the firm you’re considering working with, you can save yourself a lot of headache down the line.


In Summary

Payment processing gets a bad rap in general, and there’s good reason for it. But don’t let that stop you from finding an ethical provider. One of the best things about this industry is that it has a “level playing field”. As a highly-regulated industry with a lot of self-regulation by the card-associations, all firms operate on the same footing. We all have the exact same buy rates and fundamentally, we all have access to most of the same products/services. This creates parity amongst pricing and service expectations, which is a great thing for the merchant. It means that any player, big or small, can offer a competitive service and price for credit card and payment processing. That means that businesses have access to more options when searching for a new provider. Excellent! With great power comes great responsibility, though – choosing a great provider is a critical part of running an efficient business. We strongly recommend spending the time to choose an ethical, transparent, and price-conscious provider who can serve your business as you grow and evolve.