Originally posted – Feb 27, 2012
One of the most exciting new developments in the self-service laundry industry is the concept of credit card acceptance for laundry services. Recently, many companies, both old and new, have announced products to help the laundry owner capitalize on new technologies and add this convenient form of payment to their operations.
As with many new technologies, understanding all of the concepts and implications of these new systems can be challenging. This technology is no different. One of the most confusing concepts of accepting credit card payments is the way that the fees are calculated. This article will help you to understand the terms and how the charges are derived, while also providing ideas on how you can help to keep those fees to a minimum. To help decipher some of the coded language used in the credit card industry and make it easier to understand, cashless industry expert Ryan Carlson helps shed some light on this daunting topic.
Merchant Account
As the retail business owner, you are a Merchant. A Merchant Account is a special account that is established for the purpose of depositing net proceeds from credit card sales into a banking account of your choosing. When this account is set up, you agree to the specific fees associated with accepting credit cards. When you set up a merchant account, you do so with a Merchant Provider. Different merchant accounts have different charges, so it is important to understand the fees associated with these accounts. Carlson uses a helpful analogy just about all of us can understand: “Think of a merchant account statement much like your statement from the telephone company. The amount you end up paying at the end of the month is rarely representative of the price quoted on the advertisement that was mailed to you. This is where you will need to find out the ‘effective rate’ when speaking with a merchant account provider. They may be hesitant to share this with you, but this is critical when learning what your actual fees are going to be.”
Getting your money from a credit card purchase is actually quite simple. The merchant account deposits your daily credit card sales, minus any agreed-upon fees, and the deposits are typically made on a nightly basis. First-time merchants sometimes worry about having to wait until the end of the month to get paid. This is not the case; the money is deposited in your account each night.
Interchange Rates
One of the most common (and confusing) terms in the world of credit cards is interchange rates. This term refers to the fees that the issuing banks charge to complete a credit card transaction. “This is much like the ‘invoice’ price of a vehicle that a car dealership pays to an automotive manufacturer before it’s marked up for resale,” Carlson explained.
In a perfect world, these fees would be easy to determine and straightforward. However, this couldn’t be further from the truth. The interchange fee for a specific credit card is largely determined by the type of credit card used. You might think that an issuing bank provides and pays for the perks associated with the credit cards that they offer, but they do not. Who pays for the reward programs, cash-back offers and other incentives? The merchant does (that’s you), and it is done through these regulated interchange rates. The better the customer advantage program is, the higher the interchange fees are. In other words, when a customer uses a “Super Platinum Airline Miles with 2% Cash Back”card, the rates that you are charged are higher than a standard debit card.
An interchange rate typically has two elements, a transaction fee plus percentage rate. For example, a credit card might charge 10 cents per transaction plus 1.65 percent of the total. So, for this example rate, a $10 sale would result in 10 cents (transaction fee) plus 16.5 cents (percentage), or 26.5 cents total (about 2.6 percent of the total).
If the interchange rate is calculated on a higher sale, the overall percentage is less. For example, if the transaction was $100 and we used the same interchange rate as above, the fees would be 10 cents (transaction fee) plus $1.65 (percentage), or $1.75 total (1.75 percent of the total). With this pricing structure, you can see how it is in your best interest for the credit card transactions to be higher, rather than lower. This will result in a lower overall percentage of fees paid per transaction. (This is why you sometimes see signs posted in small shops, such as: “$10 Minimum for Credit.” )
Three-Tier Pricing
In addition to the type of credit card, the interchange rate is often determined by the level of verification that is used when accepting a credit card. The first (and lowest cost) tier is called a qualified rate and is typically defined as the way the majority of the credit cards will be processed. In a normal retail sales environment, this is usually when the physical credit card is swiped in the terminal.
The second tier is called a mid-qualified rate and is typically an exception to the “standard”way a credit is accepted or the type of credit card used. For example, if you key in the credit card number (rather than swiping it) or a customer uses a special credit card like a rewards card or business card, the transaction is categorized as a mid-qualified rate. Transactions of this type incur a higher interchange fee.
The third tier is called a non-qualified rate and is typically a further exception to the way that the credit is accepted. For example, if the credit card number is typed into the terminal and the address verification fields (or other requested information) are not provided, this will result in this type of qualification. A transaction also can be charged as non-qualified if the credit card acceptance terms are not followed (like not settling a daily batch within the allotted time frame). Non-qualified transactions are charged an even higher interchange rate.
Due to the Durbin Amendment legislation (more on that later…), the Three-Tier Pricing model now only applies to standard credit cards. Bank debit cards (sometimes called “check cards”) are no longer affected by this tiered pricing model.
ISO (Independent Service Organization)
An ISO is an organization that essentially serves as a “middle man”to process the credit card transactions through the issuing bank. Doing such, they also get a “piece of the pie.” Ironically, their charges are typically referred to as discount rates, add-on rates or a pass-though. These fees are typically smaller than the interchange rates portion and, unlike interchange rates, are not regulated. These fees can be higher or lower, depending on the organization’s determined rates, and may be subject to negotiation.
Junk Fees
These are fees charged by the credit card processor that may be listed as annual fee, statement fee, customer service fee or PCI compliance fee. When choosing a credit card processor, you should try to identify these fees and negotiate them down as low as possible. As you can imagine, these fees can really add up and result in a large sum of money out of your pocket on a monthly basis.
PCI Compliance
The Payment Card Industry Data Security Standard (PCI DSS) is a standard for systems that transmit credit card information to the processing agencies to reduce fraudulent transactions. All hardware and software solutions that are used in conjunction with the transmission of credit card information should meet the compliance requirements set forth by the Payment Card Industry Security Standards Council.
This layer of PCI DSS regulation could impact overall fees, but it is important to make sure that any solution considered meets this compliance. PCI compliance is important to ensure the solution that you purchase today will remain a viable solution into the future. Companies who have verified compliance with the PCI DSS standard are easily identified on the PCI website at: https://www.pcisecuritystandards.org/approved_companies_providers/vpa_ag….
Durbin Amendment
The Durbin Amendment was a last-minute addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and went into effect on October 1, 2011. This government reform had a drastic effect on the way that the interchange rate is determined for debit cards. As with most laws, its ramifications are complicated, but one of the results of this act is that it lowered processing rates on debit cards. Although this appears that it will help merchants by lowering fees, some are skeptical that the banks may just charge higher fees in other areas to offset revenue losses.
I would recommend that you call your existing merchant account provider (or one that you are considering) and ask them about Durbin and how their rates have been adjusted. If they are not able to provide information on adjusted rates, you may want to shop around to find a provider that will.
Unfortunately, complicated merchant account statements can help to mask the fees you are being charged. Although it may seem like a daunting task, spending some time looking over the statement and asking questions about all of the fees can help to increase your understanding and limit these charges. Don’t be afraid to negotiate to get fees reduced or eliminated. As with many services, the threat of switching to another provider can get results.
All in all, accepting credit cards and the associated headaches are nothing new to small-business owners. Change is never easy, but as a small-business owner, the ability to keep up with new industry developments is one of your greatest assets.
“A typical coin laundry business is small and nimble enough to make changes in the way they do business, unlike larger companies that always seem to be behind the curve,” Carlson explained. “It’s not just a matter of putting your head in the sand and hoping that credit cards will go away – because it’s just going to get more commonplace, even in the coin laundry industry.
“Banks and other financial companies are finding ways of getting cashless forms of payment into the hands of even the poorest among us. The ‘unbanked’ will get plastic in their pocket either through prepaid Visa cards or through direct-deposit accounts setup for monthly unemployment assistance, government medical assistance, state aid programs and Social Security.”
Learning how credit cards work sets you up to succeed. If you decide to take the plunge and find a way to accept credit cards at your business, remember that you’re in the driver’s seat – credit card programs are a commodity and somebody else is always willing to save you a few bucks, just like saving money on your car insurance.
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