Old technology encourages confusing payment fees

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The payment processing industry doesn’t exactly have a reputation for transparency. For years, pricing figures have been incomplete, inaccurate, or unorthodox — not only for merchants, but also for salespeople selling to the merchants.

How did confusing pricing become a habit in the payment processing industry? Many providers rely on legacy technology systems that are inherently limited with respect to itemizing and describing fees. Further, many providers compete only on the basis of price because they don’t have anything unique to offer. They have outdated technology and mediocre service, so they focus on price. This approach has led to reduced pricing throughout the industry. And while lower prices are generally good for customers, they lead to undesirable pricing behaviors.

Processors often use confusing billing tables to upcharge merchants that aren’t as sophisticated as some big-box stores and don’t have the time to dig into statements and compare them to interchange tables.
This is due to legacy system limitations, as well as intentions to obfuscate.

By mischaracterizing certain transactions or altering the interchange qualification tables, processors are able to covertly upcharge their customers. It’s especially difficult for small merchants to notice because it requires counting each transaction and determining what type it is — something you expect the processor to be doing for you.

Even though discount and tiered pricing is a legitimate practice, it can allow processors additional ways to overcharge their customers. In this pricing method, transactions are grouped into two or more tiers based on their underlying interchange rates. This method is simpler for businesses to understand because they may see only two rates on their statement instead of dozens of individual interchange rates.

Card brands assess fees in addition to interchange to cover a variety of costs. These can include network operations as well as marketing expenses. Fees for dues and assessments are charged to merchant account providers, which then pass the costs along to their customers.

Because some providers assume customers won’t verify rates, they often pad the percentages charged to boost their profits. The item may be described on the statement as a straight pass-through of an assessment from a payment network, but the processor may add to the true cost.

While it isn't a deceptive practice to charge fees, it is deceptive if it's described on a statement as the pure fee from the payment network, when in fact, it also includes a markup kept by the processor.

An extra penny or basis point may seem small, but depending on your revenue, these hidden fees can cost merchants hundreds or thousands of dollars annually. To avoid getting overcharged by a payment processor, ask these three questions before beginning a partnership:

How are interchange fees displayed on your monthly statement? A business should be able to see a clear description — along with the number of transactions, sales, volume, percent rate, and transaction fee — that was applied to each interchange category. This way, a business can easily compare the statement to true interchange rates.

What differentiates the processor from competitors? As a business owner, ask your potential processor, "What can you do for me besides lower my costs?" Essentially, what sets this processor apart from the others? Make sure the processor is addressing a business need relative to you. Can it get your money faster? Does it integrate seamlessly with your point of sale system?

If a payment processor doesn’t have a differentiated offer, it’ll be forced to reduce prices to win your business. And companies that routinely resort to low prices will be tempted to mark up interchange to maintain profitability and revenue growth.

How is the processor able to price so low? If a processor offers pricing that stands much lower than its competitors, it may be too good to be true. It doesn't hurt to be skeptical. If the stated rates are surprisingly low, it's possible the processor is padding fees elsewhere. Request example statements and do the math. Some salespeople have been known to claim they have special rates with Visa and Mastercard. This is a huge red flag: Nobody does.

With so many payment processors engaging in deceptive pricing tactics, here are a few ways to protect yourself and your business:

Ensure communication lines are seamless with your processor. Make sure the processor's representative is easy to reach and welcomes candid communication.

Get clear and defined exit language. It’s a common industry practice to have early termination fees and charges. Processors may charge a hefty fee if you leave before the term of the agreement is completed. However, some contracts allow for termination with advanced written notification.

Don’t settle for less than full-disclosure statements. You’re probably never going to go through transactions and fees for fun, but it’s never a bad idea to be in possession of all transaction data for your business. Ask for an example of monthly statements and online reporting before you sign up.

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