It’s hard enough to wrap your head around the idea of merchant service providers taking a percentage of your sales for the ability to take payments other than cash from your customers. You might understand that as a service payment processing won’t be free, but never-the-less there is still a sharp pain felt at the end of every day knowing that a percentage of your hard-earned money won’t make it to your bank account. If you’re a high risk merchant, that pain is even a little sharper. High risk merchants have a hard enough time simply finding a high risk payment processor they can rely on to process payments without being taken to the bank. However, this doesn’t mean that merchants can’t mitigate the risk of being taken advantage of by understanding some of the key areas in which they should have a certain level of expectation from their merchant service provider. Below are five key areas to payment processing that should raise a red flag in your mind so that you can recognize if and when your merchant service provider is underperforming and overcharging.
1. Required Reserves
Reserves are not required for every account and for those that do require a reserve; it should not necessarily be a permanent fixture in your business model. Reserves are a percentage of processed funds held in an escrow account as protection against the risk liability of your merchant account. This is usually associated with chargebacks as they are the primary way merchant service providers incur heavy monetary losses. In general, most merchants have up to six months to file a chargeback after a purchase. This is in most cases at least a non-refundable cost to the merchant of $35 or more dollars plus the entire amount of the transaction in question is held until the chargeback is resolved. If a merchant disappears or goes out of business it is the merchant service provider that incurs those losses. Low-risk merchants should never have a reserve and high risk merchants need to be evaluated on an individual basis. There are two types of reserves merchant service providers prefer:
- Standard Reserve – A set percentage of all money processed is held in escrow for the entire lifespan of the merchant account. This hold can exceed the lifespan of the merchant account for up to six months from the date the merchant account is closed for whatever reason.
- Rolling Reserve – A set percentage of all money processed is held in escrow for the entire lifespan of the merchant account. This hold can exceed the lifespan of the merchant account for up to six months from the date the merchant account is closed for whatever reason. However, funds are released after 180 days. For example, anything held in reserve from processing on day 1 will be released on day 180. Anything held in reserve from processing on day 2 will be released on day 181.
Most merchant service providers prefer a reserve over a rolling reserve as a rolling reserve is an accounting nightmare. Merchant account reserves can also be:
- Capped – A dollar value is set and collected over time through a set percentage. This is usually one month’s worth of processing volume. Once this set amount is collected, that collected amount is held in escrow and the reserve percentage is no longer collected. For example, if you have a five percent reserve with a $25,000.00 cap; five percent of all transactions are held in reserve until that $25,000.00 cap is reached.
- Uncapped – There is no set dollar value and a percentage of funds are collected and held in escrow over the lifespan of the merchant account. For example, if you have a five percent uncapped reserve; five percent of all transactions are held in escrow.
If your merchant service provider says you must have a reserve it would be wise to check with another merchant service provider that has tenured experience with high risk merchants. If they have the same sentiment then you are ok, but if they don’t you will need to shop around a little to make sure you are working with a merchant service provider that understands your business and can provide the right solution without forcing you into unnecessary reserves and impeding cashflows.
2. Settlement Times
Settlement times are pretty straight-forward. Most low risk merchants will settle in one business day and high risk merchants in two business days depending on when a merchant batches out. However, this could be delayed if a transaction is flagged by the processor for suspicious activity. If a transaction is flagged there is no set timeline as to when those funds will be released and too many flagged transaction can get your merchant account shut down. A good merchant service provider will recognize these issues and reach out to you to fix them before this happens unless you quickly and egregiously run flagged transactions. If you are experience settlement times longer than the aforementioned without prior notice or flagged transactions then you need to consider switching to a merchant service provider that can delivery on these times because there is no reason your money should be held for extended periods of time.
3. Incompatibility and Technical Issues
Some merchant service providers utilize proprietary software or gateways that force e-commerce merchants to use a specific shopping cart or retail merchants to purchase all types of POS equipment or other hardware in order to be able to process payments. They try to make you believe you need to have an all-encompassing solution only because it is profitable for them if you fall into their sales trap. Granted some merchants need an all-encompassing processing solution, but most don’t. Furthermore, if you have leverage such as existing processing volume and clean processing history you should be able to negotiate some kind of discount if not free equipment. A good merchant service provider will have multiple solutions for hardware, software, and gateways so that you can integrate and process with ease and as little stress a humanly possible. They will also have expert technical support on hand that knows how to integrate accordingly as well as fix any other technical issues that arise.
4. High Rates & Fees
Not everyone can pay the lowest rates and fees. High risk merchants will pay more than low risk merchants but this doesn’t mean that they deserve to be raked over the coals with unreasonably high rates or excessive fees. And in some cases merchants are made to believe they are high risk when they are not. Merchants need to shop around and makes sure there is consistency in the price points being offered and if something sounds too good to be true; it probably is. Merchants should speak to potential merchant service providers to identify who best understands their business and billing model. Merchant service providers that are registered as an independent sales office (ISO) are best as they typically eliminate a middle-man. Registered ISO’s will also not play any games or try anything funny as they are bound by rules and regulations that could destroy their business if not adhered to. Going with whoever offers you the lowest rate might not always be the lowest because the rate they give you and your effective rate can be very different. An honest and trustworthy merchant service provider will show you how to get your effective rate so that you can understand exactly what you are actually paying.
5. Customer Service & Credibility
It’s good to do some online research in order to find out what the popular opinion is of the merchant service provider you are considering. However, you shouldn’t believe everything you read. As previously mentioned, a credible merchant service provider should be a registered ISO. They are held to certain standards that protect merchants from being taken advantage of. More so, merchant service providers that are accredited members of the Better Business Bureau (BBB) with an A+ rating show that they go the extra mile to make sure clients are satisfied. Those companies typically have strong customer service and support centers that are comprised of ultra-responsive experts that have a customer-centric mindset because they understand that customer satisfaction is the single most important aspect to long-term success.
As a merchant you are obligated to investigate any company you choose to do business with and have an expectation of service and experience. You need to take responsibility for not performing due diligence in order to feel comfortable knowing you are working with a trusted merchant service provider. However, a trustworthy merchant service provider will make you aware of the aforementioned areas of concern as well as other that specifically pertain to your business. They want you to succeed and understand that you success is their success so they will do everything in their power to assure you have a painless processing experience.