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Credit Card Processing Salespeople use this scam to take advantage of small business owners. Learn how to recognize this sleazy trick.
Today I want to talk to you about one of the mistakes that small business owners make in choosing a credit card processor. It’s about understanding the pricing structure.
There are three types of pricing structures;
1. Flat rate,
2. Tiered rate and
3 Cost plus.
I want to tell you a real story that explains how not understanding the differences between these three different structures can get you in trouble.
One of my long-term clients called me and said… “You know I get telemarketed all the time. I finally decided to invite one over and listen to what they have to say and I would really like you to be there with me.” So, I went down and started out playing dumb and we waited for the salesperson to come in. A nice young looking woman came in exactly on time and she starts saying how she can offer my merchant 1% the same rates as Walmart. You know most merchants are really between 2% and 3%. There is no one percentage she was trying to make. The customer feel like she was only going to pay 1%, but really she was talking about cost, plus 1%. I piped up and said, are you talking about cost plus 1%? She said, who are you and my client introduced me as her credit card processing salesperson and she froze up and turned around and just walked out the door and left. Well, the two of us cracked up laughing.
Here’s a perfect example of how salesman can scam you by not understand, you understanding how the credit card structures work.
So, let me give you a little more detail to review first of all the card issuing banks. Create a whole chart of rates depending on the risk of the card debit cards have the lowest rate because it’s coming out of a checking account. There’s not much risk then, there’s regular credit cards which are a little bit higher rewards cards have a higher rate because the bank has to buy an airline ticket and the highest rates are with corporate cards because there’s the most fraud with corporate cards so all processors are working off the same wholesale cost. On top of that the brands visa mastercard, discover and mx have to make some money so they have a fee that’s set on top of that. Everybody works on the same costs. Don’t let anybody tell you they have the lowest rate, because they don’t. Everybody works off the same wholesale rates, so let’s talk a little bit about these pricing structures so you can be more educated first. There’s flat rate pricing that’s like paypal, square, and stripe. It’s 2.9 and 30 cents, pretty much standard. That’s a flat rate pricing. But remember what i told you about debit cards? They have the lowest wholesale interchange rate so if you are taking a lot of debit cards in your business you do not want a flat rate pricing.
The second type of pricing is called Tiered, it’s similar to flat rate but they bucket everybody into three tiers or not everybody but the different types of transactions into three buckets, both flat rate and tiered. The processor has to have that rate high enough to cover all the different kinds of cards in that scenario or in that bucket.
The third type of pricing structure is called Cost Plus, it’s the absolute wholesale rate plus the brand fees, plus a percentage for the processor. Yes, the processor has to make money. They’re servicing your account for you but the question is how much are they charging you.
I hope this helps you to approach the salesperson next time you’re looking to switch credit card processing you’ll have a little better understanding to beat the credit card sales person at his game.
If you’re a small business owner there are more resources below or just give us a call at 505-296-2847.
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