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. LimoMerchant.com 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.
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