CREDIT CARD PROCESSING PART 3 - THE OTHER STUFF

Here is a list of questions we have learned to ask when shopping for credit card processing:

1. Who are the gateway and processing companies?

2. What are the setup fees?

3. What is the monthly fee?

4. What is the statement fee and does it increase with low volume?

5. What is the discount rate?

6. What is the fee per transaction?

7. What is the monthly minimum?

8. What are the contract term and the early termination fee?

7. How long does it take the for the funds to appear in my bank account after approval? (Usually 48 hours. However, some processors only deposit funds every 14 days!)

8. Whom do I contact when I have questions or problems?

The PayPal Model

PayPal, ProPay, and 2checkout are third-party processing services. These companies accept online credit card orders on behalf of you or your company. Like processors, they charge small setup fee, a per-transaction fee, and a discount rate per transaction. Unlike processors, you do not have to open a merchant account and you pay no gateway fees, monthly fees, or statement fees. If you are just starting out and you only do credit card sales online, you might check out these services to see if they meet your needs until online sales take off.

We have a relatively low volume of credit card transactions overall. However, because we accept credit cards from direct retail sales and from our wholesale customers as well as online through our shopping cart, we cannot use PayPal. These services are intended for online shopping cart sales only.

CREDIT CARD PROCESSING PART 2 - THE MONEY

The Reseller

Resellers make their money from software you probably don’t need, monthly software “maintenance” fees, card processing supplies, card processing machines, and probably commissions from the gateway and processing companies they represent.

Most resellers charge a “setup” fee. I don’t know if this is a reseller charge, a gateway charge or a processor charge. I think it all depends on the underlying agreements between the reseller, gateway and processor.

Some resellers can also help you install a shopping cart. We build and maintain our own websites. We had no shopping cart experience, and one of the benefits of going with our first reseller, Merchant Express, was that they provided a shopping cart and installed it for us for a nominal fee. When we switched processors, we were able to do the necessary recoding of the shopping cart ourselves in a few minutes.

The Gateway

That “monthly fee” that is quoted when shopping for credit card services is the gateway company’s fee. They do not make their money any other way. As I mentioned previously, it may be possible to negotiate directly with gateway for a lower rate. This fee is usually $15 to $20 per month.

If you work directly with AuthorizeNet, they charge a setup fee. Because we had an existing account (we had to close that one due once again to Pipeline Data Processing’s terms), we could open a new one at a steep discount.

The Processor

The processor sets your per-transaction fee. This fee is usually a set amount per transaction (e.g., 10 cents per transaction) plus a “discount rate”. The discount rate includes the fee the credit card companies charge and a bit on top of that for the processor. The discount rate varies according to the number of transactions processed per month. From what I can gather, it appears that the transaction fees vary not because of the amount the credit card companies charge, but because of the amount the processor charges on top of that.

Many processors have a monthly minimum. So, if you have a very low volume of transactions, you will most likely pay the monthly minimum instead of an amount per transaction. You need to do some math to determine whether you will get hosed by the monthly minimum requirement versus having enough transactions to get the regular per-transaction free and discount rate. If you only take credit cards online, not in person, the way out of the minimum monthly trap is to use a service such as PayPal that does not require you to open a merchant account with a processor. I will talk more about the PayPal model in part 3.

Credit card companies and processors also charge different fees for different types of credit cards. I have never delved into this matter and I don’t intend to any time soon. Apparently, for a very high-risk, unsecured card, the fee per transaction can be around $10. I have asked around, and I have found no vendors who had incurred such a fee, so it’s probably pretty rare.

Another fee the processor charges is the “statement fee.” I don’t know why you are charged to receive your statement every month. We no longer pay a statement fee with our new processor, Nova. Our old statement fee through Pipeline Data Processing worked out to $19.99 per month, which is astronomically high. I don’t recommend Pipeline Data Processing for a number of reasons, mostly having to do with money. Statement fees tend to run from $8 to $12 per month.

Still another fee the processor charges is the dreaded early termination fee, same as your cell phone provider. Before you sign up for services, it is important to know what the contract term is and what the early termination fee is. We were recently hosed by Pipeline Data Processing (3 years and $300), but most are not this drastic. Our current agreement is 2 years and a $95 early termination fee.

CREDIT CARD PROCESSING PART 1 – THE PLAYERS

In the world of wholesale and retail, there is an alternate universe. This is where credit card processing resides. Right alongside cell phone service. We just recently switched our processing services. It was ugly. I resolved to finally demystify credit card processing for ourselves, and vowed to share the information with everyone I could as a public service.

I am sure some of you had this system down pat within 10 minutes, understand it intuitively and wonder what all the fuss is about and why I am devoting blog space to credit card processing. Some others of you will worship the ground I walk on after this little series. I will update credit card processing on the blog as I learn more, but I think I now have the basics down.

I have posted the separate blog entries at the same time so that you don’t have to wait for the information. This first part will introduce you to all of the players involved in processing a credit card transaction. The second part will cover fees, and the third part will cover the questions we have learned to ask when shopping for credit card processing, The PayPal system, and anything else that might be helpful.

Processing a credit card transaction involves five to six different entities:

1. The reseller

2. The gateway

3. The processor, and possibly a separate billing company

4. The credit card companies

5. Your bank

I will now attempt to explain each of these entities, in order of their importance, not as listed above.

The Processor

This is where it’s at. This is the company that receives your credit card transaction request from the gateway and then passes the transaction along to the Credit Card Interchange (a network of financial entities that communicate to manage the processing, clearing, and settlement of credit card transactions) for approval and payment, receives the approval, and then transmits approval information back through the gateway to your terminal or computer. The part up through receiving all approvals takes about three to six seconds. Getting it into your bank account takes from 48 hours to 14 days, depending on the processor. Go figure.

The Gateway

Just as you sign up with AOL or Comcast or some other company to access the Internet, so you sign up with a gateway company such as AuthorizeNet or LinkPoint to access the credit card processing “Internet”. These companies take your transaction information and forward it to the nether regions for processing. They do not process anything or take a fee per transaction; they just receive your transaction information and pass it along to your processing company.

The gateway company also sends confirmation emails to the customer (you can customize them) and emails confirming the transaction to the merchant. Your shopping cart is hooked up to the gateway so that when a customer enters financial information on your website, it is automatically sent to the gateway and on to the processor, the merchant receives an email notice of the transaction from the gateway, and the customer receives a customized email confirmation.

There are several gateway companies and some processing companies have their own gateways. It seems that most resellers utilize AuthorizeNet. If you know of any others, please add a comment to share your information with others.

Because of our low volume, when selling retail we use a manual credit card imprinter and then enter the transactions on the computer later. To enter the transaction, we go directly to the gateway (AuthorizeNet), sign in and then enter the information directly to AuthorizeNet’s system via Virtual Terminal on their website. The transaction then goes into the system and to our processor, Nova, for the actual processing. More information regarding software and entering transactions is below in the Reseller section.

The Reseller

This is the company that packages credit card processing and gateway services and sells you those along with all of the other retail kitsch that comes with processing credit cards.

Instead of having to look for a separate gateway and processor on your own, the reseller does that for you. Most resellers represent a certain gateway/processor combo. The reseller takes your information, opens accounts with the gateway and processing companies on your behalf, sells you software you most likely don’t need, sells or leases you machines of various kinds, supplies those little Visa/Mastercard signs and stickers, supplies credit slips and other supplies, and handles your questions, problems and complaints. As far as I can tell, the reseller usually only represents one gateway/processor company combination.

It is important to note that the reseller usually does not set the fees for credit card processing, nor does it actually collect them. Resellers typically have deals with the processors and they can offer special fees or deals to you, the merchant, based on these underlying relationships. The reseller makes its money on things like processing machine sales and leasing, software for entering the transactions, monthly fees for software maintenance and upgrades, shopping cart services, and miscellaneous other fees and services.

A word about software. If you enter your transactions manually online, I am going to discourage buying software to enter your transactions from your reseller. Why? Because it’s expensive and unnecessary in most cases. The software a reseller sells does exactly the same thing that AuthorizeNet’s Virtual Terminal does--sends the information into the gateway--and Virtual Terminal is a free, web-based application (see previous information). Resellers have quoted us $149 to $230 for the software and most want a monthly “maintenance” fee of $8 to $20. Once your account is set up through AuthorizeNet (you can create an account directly with them or through a reseller), you should be able to access Virtual Terminal and use it. I don’t know if other gateways have similar systems available.

Merchant Express and Costco are the two resellers with which we have experience. Resellers are all over the web. This is a commission-driven business, so beware of the person on the other end of the phone. You will most likely end up with someone who resembles the stereotype of the used car salesman. Many banks are now contracting with resellers and their associated gateway/processor. That way, they can still offer credit card processing to their business customers without having to maintain their own complex, expensive processing/gatway apparatus.

Purchasing Services Separately

We just discovered that you can put together your own package of gateway and processor, if you dare. I was recently able to go directly to AuthorizeNet, set up a new account and then because of our low volume, get a monthly fee quote directly from AuthorizeNet that was $5 per month lower than what the reseller was quoting. I then had to get a couple of codes and numbers from the processor and enter them into my account information on the AuthorizeNet website to allow the processor and AuthorizeNet to talk to each other, and it was relatively easy to do. I probably won’t be purchasing services separately anytime soon, but I mention it for those of you who might want to try to do it.

Now that I have succeeded in giving you a mother of a headache, I will end with a quick summary of what actually happens when you swipe a card or enter a transaction on your computer:

1. Card is swiped and information is transferred to the gateway company. Alternatively, information is entered directly into the gateway.

2. Transaction information is sent to the processor.

3. The processor sends the information on to the Credit Card Interchange.

4. The approval/rejection information goes back to the processor.

5. The information then goes from the processor back to the gateway.

6. Acceptance/rejection information is transmitted from the gateway to the merchant.

The above all happens in about 3 seconds.

7. After about 48 hours to 14 days, money is deposited into the merchant’s bank account.

For a graphic representation, here is a website that you might find helpful:

www.authorize.net/resources/howitworksdiagram