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The Truth About Merchant Services

Over the past five years we have worked with many companies and have seen many different scenarios. One thing almost all of them had in common is that not everything went as they had originally planned when it came to credit card processing.

Many limo operators go to their local banks or companies they find online and set themselves up with low rate Card Present accounts; thinking that many of their transactions are going to be swiped. It may be true if you are a shuttle service or you do a lot of last minute runs for hotels where a customer is actually willing to hand you the card right then and there. However, the reality of the situation is that well over 90% of transactions (we see) are not swiped and the operator ends up paying a LOT more than they think they are paying.

To help you understand the concept of swiped vs. non-swiped transactions and how they affect the rate you are paying, I will use an auto loan example. If Limo Guy A who has an A+ credit rating (let's say 780+ FICO) goes to apply for a loan to buy his new Towncar, he will most likely get the best interest rates available on the market. Why? Because there is a lower chance of that consumer not paying on time, or not paying at all. And even though the recent mortgage crisis taught us that FICO scores should not be the sole reason for those types of decisions, financial institutions still rely on those scores more than anything else. Now, if Limo Guy B goes to apply for the same loan with his less than perfect credit score of 675, he will most likely have to pay a much higher interest rate on his loan. It goes back to the old saying -- "The higher the risk, the higher the return". If the credit card was not in your hands, there is a higher chance of fraud, or even the customer saying that something was not delivered as promised -- higher risk.

Merchant Services Providers (MSPs, aka ISOs - Independent Sales Organizations) are essentially banks that loan you money and therefore have to protect themselves from non-performance (by the merchant), non-payment, fraud, etc. I am sure everyone is familiar with the Chargeback process. In this process the MSP has the highest chance of losing money; provided that you, the merchant, are unable to pay the MSP back for a chargeback dispute a customer initiated.

When you accept a credit card, you promise to provide the services as described. The customer pays with their credit card and your MSP arranges for the money to be transferred from the Card Issuing Bank (CIB) to your checking account. The customer generally has up to six months to dispute that transaction and potentially get all of their money back. The CIB will charge the money back from the MSP and they will in turn charge it back from you, the merchant. However, if you don't have sufficient funds to satisfy that chargeback, the MSP stands a chance of losing that money. Therefore, they believe that it is appropriate to increase your processing rate if the amount of risk they take increases.

Now let's apply real numbers to this scenario. Let's say you signed up for a merchant account with Big Town Bank and they set you up with a Card Present account, sold or leased you a credit card machine (aka "terminal") and sent you off to succeed in the business world with a low processing rate of 1.65% and $0.25 per transaction on all Qualified transactions. Not a bad deal you say! Well, it isn't, if you actually swipe all of your customer's credit cards and follow all of the 648 pages of Visa or MasterCard Rules & Regulations. When you don't swipe a card but key it in instead, "fraud alarms" go off over at Big Town Bank and they downgrade your transaction to a Mid-Qualified or even worse, to a Non-Qualified transaction/rate. And your low rate of 1.65% may go up to 2.65% or 3.65% respectively. Keep in mind that this is just a hypothetical example and actual rate increases may vary from one provider to another, but the concept is the same with almost every provider.

The Card Industry has many different classifications of merchants and establishments (i.e. low risk, high risk, etc.) as well as different types of credit cards. An average business owner does not know 1/10th of everything there is to know about merchant services and credit card processing. This is where we come in. can help you analyze your merchant statements and let you know if what you have now is the best option available for your business.

Just knowing that you are in the limo business is not enough. You have to know who your customers are (i.e. corporate or retail) and what types of cards they use. This helps a MSP better understand your needs and requirements.

Most commonly, the following scenarios apply to non-swiped transactions:

  • A repeat customer who asks you to bill the card they used last time.
  • A corporate customer who travels frequently and is billed via Direct Bill/Invoice.
  • A reservation that is arranged by a third-party (e.g. Travel Agency).
  • A reservation that is arranged by a parent or another relative.
  • A reservation that is paid for by multiple persons or in several installments.

If you can fit a large number of transactions you process into any of the above categories, you need to make sure that you have the right type of merchant account. Let us and our partners assist you with this. There is absolutely no cost or obligation.