Know What You’re Paying For
The process of shopping for a merchant account is loaded with potential ripoffs. Not only do you need to avoid getting locked into unfavorable contract terms, but you also have to be wary of pointless add-on services that create more work than they save. As the industry evolves to favor cloud-based services and flat pricing models, it will become even harder for you to understand what exactly you’re paying for.
To make things easier, we’ve compiled the following list of contract terms and products that you should avoid no matter what. These services will be useless to the vast majority of businesses, and some of them are objectively worse than the alternative. As long as you refuse to sign an agreement that contains these items, you’ll dodge the worst traps that sales agents can set for you.
1. Long-Term Leases
This is one of the oldest and most common scams in credit card processing, and the fact that it’s still around long after other pricing tricks have been discarded is a testament to how much money processors and agents make doing it. The arithmetic is simple: right now, you can buy a brand-new, EMV-compatible Verifone VX520 on Amazon for $150 or less. At the same time, there are credit card processors that will attempt to lease you the exact same terminal for $79-$149 per month as part of a four-year, non-cancellable agreement.
What gives? Put simply, providers are counting on you not knowing how much this equipment costs. Only the most elaborate point-of-sale systems will have purchase prices that approach the overall cost of a four-year lease, but processors and agents will get away with whatever they can to boost their revenues on your account. As merchants have begun to educate themselves about equipment leases, some providers have started resorting to less-than-transparent tactics for getting merchants to sign up for them. These tactics include bundling the lease agreement into your terms and conditions, requiring you to sign a lease in order to access a “rock-bottom rate program,” or straight-up glossing over it during the sales process. Don’t fall for it. Buy or rent your equipment whenever possible.
2. Non-Compliant Hardware
The only thing worse than getting stuck with overpriced equipment is getting stuck with overpriced, outdated equipment. Visa and MasterCard declared in October 2015 that any businesses accepting payments through non-EMV-compliant terminals are now responsible for the full cost of certain types of fraud through those terminals. What does that mean for you? Specifically, it means that if your business uses a non-EMV-compliant terminal to accept either:
- a swiped transaction made with a lost or stolen MasterCard, Amex, or Discover card,
- a swiped transaction that results in card data being stolen from the magnetic stripe on a customer’s chip card through your corrupted card reader, or
- a swiped transaction made using a counterfeit magnetic stripe card through your card reader,
then the customer’s card-issuing bank can now seek reimbursement directly from you for the chargebacks stemming from these transactions.
The majority of credit card processors now offer EMV-compliant countertop terminals for lease, rental, or purchase, but mobile options and PC-based options still lag behind in this department. In particular, a large number of processors and agents still claim to offer headphone jack mobile phone swipers knowing full well that these swipers cannot accept EMV payments. If you are a small merchant who relies solely on a magnetic stripe phone swiper with no EMV compatibility, you’re not currently compliant with industry regulations. Continue using that swiper at your own risk.
3. Non-Essential Hardware
Did you think we were done with hardware? Not just yet. There’s one more equipment pitfall to watch out for: unnecessary hardware for your business type. It might seem like a no-brainer to avoid buying things you don’t need, but with the cloud POS industry’s growing reliance on tablets, routers, stands, Bluetooth printers, Bluetooth registers, and other gadgets, you can find yourself dropping a couple thousand dollars on a state-of-the-art hardware bundle when you really just needed a single terminal.
As a general rule, wireless systems will cost more and impose more of an obligation on you to maintain a secure local network. You can usually save money by integrating cloud-based tablet POS systems with your legacy equipment instead of needlessly upgrading everything. Also beware of solutions that clumsily adapt old hardware to specific environments. For instance, wireless credit card terminals that look exactly like countertop credit card terminals but utilize batteries and cellular communication to enable “handheld” use can be purchased for upwards of $400 apiece. Instead, just buy a simple EMV card reader that connects to your mobile phone for a fraction of that cost. In short, go lean whenever possible and keep your costs down. Do note, however, that large restaurants, grocery stores, major retailers, and other busy sales environments are exceptions that often require souped-up hardware designed specifically for their business types.
4. Liquidated Damages
Liquidated damages-style clauses are gradually falling out of favor among merchant services providers, but you can still get stuck in one if you don’t carefully scrutinize the cancellation policy in your contract. A liquidated damages clause is a contractual provision that imposes a fixed fee “or Liquidated Damages, whichever is greater” if you cancel your merchant account contract before its initial term is complete. This bit of legalese enables merchant account providers to estimate the total amount of revenue they have lost as a result of your cancellation and immediately withdraw that amount from your bank account in one lump sum. This amount can total thousands of dollars and can only be described as a punitive deterrent to cancellation.
Some providers have tweaked the concept of liquidated damages to make it more specific. These liquidated damages-style fees often charge a fee of “the average monthly fees billed to the merchant for the three months immediately preceding cancellation, multiplied by the number of months remaining in the initial contract term.” This has the same effect of charging you for the life of the contract, but it avoids the vagueness of the term “liquidated damages.” You should still not sign any contract that contains it. In fact, you should avoid agreeing to any early termination fee if possible, but liquidated damages fees are especially insidious.
5. Automatically Renewing Contracts
Merchant account providers have never been good at saying goodbye, and automatically renewing contracts are their preferred way of putting off a farewell for just a little bit longer. The standard contract length within the industry is three years (although month-to-month agreements are rapidly becoming more popular), and providers will usually include language on those contracts that automatically renews them for one, two, or three more years immediately upon expiration. In most cases, the only way to prevent this renewal is to notify your processor at least 30 days in advance that you intend to cancel. If you fail to do so, they will consider you to be under a new contract, and you will almost certainly incur early termination fees if you insist on cancelling.
The easiest way to avoid automatically renewing contracts is to insist on a month-to-month contract with your provider. Some long-term contracts are justifiable and unavoidable, such as in cases where a provider supplies free equipment up front, but even those contracts should revert to month-to-month agreements upon completion of the initial term. In any case, you should be sure that you fully understand the cancellation process and the potential costs involved before you sign up for a new merchant account.
6. Enhanced Recover Reduced
Enhanced Recover Reduced (ERR), also known as “billback” or “enhanced billback,” is a billing method that some providers use to break a merchant’s monthly transaction fees into two billing cycles. Here’s how ERR works: your provider charges you a flat rate (for example, 1.5%) for all transactions this month regardless of what each transaction actually should cost. Then, at the end of this month, your provider assesses what you really should have paid for all of those transactions and charges you for the difference on next month’s bill. Next month’s charge is usually just one big fee, making it impossible for you to know exactly which transactions exceeded 1.5% and which should have received lower rates.
It’s hard to think of a good reason for this billing method except to obscure the transaction fees you’re paying. The two separate billing cycles are almost impossible to reconcile and can give you a false impression that a new provider actually did save you money during your first month. Some processors will automatically place their merchants on ERR billing, while others will give you the option. Choose standard billing instead, or just make sure you are on interchange-plus pricing or interchange-zero pricing so that your provider’s markup remains fixed and predictable.
7. Unfamiliar Marketing Programs
The surging popularity of e-commerce has merchant account providers scrambling to offer new internet marketing services to merchants searching for a wider online audience. These services are usually available for an additional monthly cost and can include email marketing campaigns, search engine marketing, search engine optimization, and online reputation management. The basic goal of these tools is to advertise your business on other websites, ensure your website’s prominent placement in search results, and prevent negative online reviews from deterring potential customers.
The only problem with these tools is that unless you have a strong understanding of online advertising works, you can’t verify that you’re getting your money’s worth. Internet marketing is an incredibly complicated field, and incompetent, outdated, or lazy efforts can hurt rather than help your business’s online presence. It might sound nice to have someone else handle your business’s online marketing, but it’s also an easy way for marketing firms to overcharge you in exchange for making basic modifications to your website and ad campaigns. Some merchant account providers are now partnering with online marketing companies such as Womply and automatically opting merchants into monthly marketing programs for $29.99 per month. Make sure that you only pay for such a service if you know exactly what it’s going to do for you.
8. Sign-Up Gimmicks
Another marketing tactic in the industry is the use of “meet or beat” guarantees, free gift cards, “no obligation” trial periods, or “free” equipment deals to motivate merchants to give a new merchant account provider a try. These incentives might sound nice, but providers obviously wouldn’t dangle them unless they expected to retain most of the merchants who apply for them. And they also know that many new merchants are unaware of how hard it is to extract their businesses from merchant account contracts. It’s therefore possible that you may find yourself caught up in an undisclosed equipment lease or long-term contract in exchange for a $50 gift card, which is hardly a worthwhile trade.
Even if you try to collect on a meet-or-beat pricing guarantee, you may find that the small print of the promotion makes it extremely hard for you to meet the terms of the offer. As a general rule, you’re better off seeking a provider that consistently saves you money through transparent pricing and quality products rather than a provider that tries to entice you with front-loaded incentives.
That’s Not All!
As long as you steer clear of these eight payment processing services and contract terms, you’ll greatly reduce your risk of overpaying for merchant services. However, the industry is always coming up with new ways to profit off of your business. Be sure that you understand exactly what you’re paying for before you sign any new contract, and check your statements from time to time to make sure nothing new creeps in. For a full breakdown of common tricks and fees used by sales agents, download “Fee Sweep” today.