Wednesday, May 16, 2012

When Does It Make Sense To Switch Credit Card Processors?

As a field sales rep in the credit card processing industry, it is important to understand when it is really in a merchant's best interest to switch processing companies. It is even more important for the merchant to be aware of when it is the proper choice. Let's be honest, a sales rep wants the merchant's business. The merchant should simply want what is best for his or her bottom line.

Fear of Change

Most merchants suffer from the same basic phobia with regard to anything involving their banking situation. "If it ain't broke, don't fix it" seems to sum up the excuse for retaining the status quo. To a certain extent, this is reasonable thinking. Functioning processing that gets funds deposited where they are supposed to be is the primary concern of many merchants. A processor that has done this for some time is a known commodity and therefore is also in the merchant's comfort zone. This does not  necessarily mean it is the correct option for the merchant.

When deciding whether to make a change away from a company that has been successfully processing on behalf of a merchant, there are always a few considerations:
  • Contractual obligations or cancellation fees
  • Ease of transition
  • Guarantee of rates and fees
  • Terminal purchase, lease or rental
  • Reprogramming time requirements
  • Customer loyalty or working relationships
  • Fair treatment
  • Company perception
  • Trust
And the list really can keep growing quite easily. 

Contractual Obligations

When a processor is going to assess cancellation fees for early termination, that cost has to be looked at in the context of proposed savings. Will it be worthwhile to convert to another processor if the savings will be completely nullified by the expense of terminating the agreement? Not likely, at least in the short term. In such cases, I recommend that a merchant waits to switch until the end of the contract term. Often times a merchant services provider can still be encouraged to modify their rates to be more competitive even if they have a high cancellation fee in place to prevent the merchant from leaving, but be wary that any rate modification may result in even higher rates and fees if not examined carefully.

If the costs of termination will be absorbed within a month or two of the transition, then clearly the merchant will come out ahead by month three. My goal has always been to ensure that by the second month a merchant is experiencing a net-positive over their previous processor. If this is not clearly going to be case, the scale must be carefully weighed.

Ease of Transition

Some merchants have a very easy set up. They don't own or lease their terminals, so all they have to do is ship them back when they cancel service. A new provider may also be providing a fresh terminal, pre-programmed and ready to go. This is by far the easiest way to transition. It's basically just plug and play. No time down for the business and it almost does not matter when the switch occurs. If that is the case, then the five minutes of set up time is hardly going to register and certainly won't disrupt the merchant's flow of business.

Reprogramming of existing equipment is a great option for saving some costs and allowing the merchant the control of owning their own terminal. However, it could easily take 45 minutes or more to download an application into the terminal over a phone line (and many IP capable terminals still must be downloaded the old-fashioned way by dialing in). Ensuring that this will be a possible option for the merchant is important to do up front. No one likes surprises, and signing up for a service that is going to require everyone to show up at a truly inconvenient time to go through the process won't seem like a good way to start the processing relationship. Merchants need to know what will be entailed with  any reprogramming so that they can weigh in any time commitment or time of day issues with regard to customer volume. Remember, once reprogramming has begun, a terminal is completely out of service until it has been re-loaded with the processing company's application (and properly tested). If there are multiple terminals at a business, reprogramming them one at a time is a smart choice if this must be done during business hours, because at least one will be operational. However, it is always best to try and schedule this for off-hours.

If there is a POS system in use, the transition becomes decidedly more complicated. Some POS systems can be easily reprogrammed by the merchant, simply by accessing a menu option within the system. Many POS systems, however, require a third-party to be involved. Essentially, this means that someone is flipping a distant switch to re-route the digital data from one processor to another. If a POS system is going through a gateway of any sort, someone reprograms that gateway. The actual process of reprogramming is not actually very time consuming, since reprogramming a POS system often means just typing in two long numbers that show the system where to direct the data. The complicated and time consuming part is getting it properly coordinated with the parties involved. In some instances, there must be an individual at the POS system, another at the POS provider's headquarters and even another at a gateway office... Generally speaking, however, once everyone is in place, it can be accomplished with a few minuted of email or over a phone. Then, like magic, the data is going in a new direction and savings are being accomplished with ensuing charges.

Guarantee of Rates and Fees

The upside to a merchant agreement (aka, a "contract") is that you know the terms of your service and you have a schedule of fees to reference. This is a good thing. One of the complaints that I have heard from many merchants is that their rates continued to rise. Locking the rates and fees for the term of an agreement is an essential protection.

An agreement does not always guarantee that rates cannot go up, however; getting familiar with the fine print is always a good practice. Virtually every contract will have a clause built in that allows for rate hikes when associated with increases from Visa or MasterCard. While such rate hikes are designed on one level to prevent the card processing companies from taking a loss, they are quite often used as an excuse to increase profits and may be applied across all card types even when the rate hikes actually only affect a small number of card types. Worse yet, sometimes these increases are used to justify increases in the points assessed against "Interchange-based" accounts, which would not be adversely affected from a profit-loss perspective by the processing company. (*For more on this, read about the difference between tiered processing and Interchange-plus structures.)

Working with a sales rep who will walk a merchant through the terms is always a bonus. Many (possibly most) merchants do not know all their terms and have never read the agreement all the way through if they even have a copy. If a sales rep is also willing to monitor the interests of a merchant over time, re-evaluate the merchant's needs and be the merchant's eyes and ears in the event of unnecessary rate hikes, that is a truly valuable asset for the merchant to have. If a merchant has been on an Interchange-plus agreement and has still experienced rate hikes (i.e., moving from 15 basis points up to 18 basis points because of an "increase" from Visa and MasterCard), then the increase is unjustified because the increase is already part of the Interchange costs that the merchant is paying. The "plus" part, the basis points that the processor uses to mark up for profit, does not compensate for any loss by the company, but merely adds to its coffers.

At the end of the day, the sales rep may be a merchant's best ally, but there is no substitute for reading the fine print.

Terminal Purchase Vs Lease or Placement

Do not sign an equipment lease for a card terminal. Repeat: do not sign an equipment lease. Unless a business has absolutely horrible credit that it needs to rebuild, there is no excuse for leasing a terminal. These items can be purchased brand new for several hundred dollars most of the time, refurbished and perfectly operational for much less, and often provided free as an incentive (a placement that the merchant does not own or occasionally a simple gift for processing with a particular company); leases on the other hand often cost merchants a thousand dollars or more over a three or four year term.

The equipment lease is often slipped in during the signing of an agreement, when an unscrupulous sales rep decides to try making an extra bonus commission and the tired merchant is just going through and applying signatures to pages that he or she believes have all been explained and filled out properly. I've heard this story enough to believe it happens with some frequency, but merchants mostly get stuck with the lease because it would cost more in time and money to fight them in court than it does simply to pay them off. My personal advice is that the moment a sales rep suggests a lease as a good option, you consider ending the interview. It may come up that it is the best option for a merchant under very rare circumstances, but certainly not as the cheapest or easiest way to get a machine.

A placement is a nice carrot that processing companies offer. It's a free terminal provided for the merchant's use, but usually a placement has certain pricing minimums that need to be met in order for the machine to be quickly paid off. These minimums are not bad in most cases and a placement is, in fact, usually the easiest and most cost effective way for a merchant to get a terminal. However, if a merchant owns a terminal, those minimums are not necessary and sometimes a more favorable rate can be reached. The value of this varies quite a bit, but the higher the merchant's sales volume, the more it matters.


As stated previously, a merchant needs to consider the prospect of reprogramming existing equipment and how this affects daily operations as well as whether the existing equipment is re-programmable or if it would need to be replaced.

In most instances, stand-alone terminals that are only a few years old will not be a problem to reprogram. However, if the equipment was leased or provided as a free incentive to the merchant, there is a chance it is "locked" by the processing company that provided it. This is a way that the processor may render a terminal essentially useless by other processors, effectively blocking their ability to access the root operating system of the terminal. Sometimes this lock can be removed, other times the only solution is to swap terminals. Many merchant services companies will do this for free or for a small fee, but knowing the terminal status before hand is a must. Merchants need to know whether they own their terminals free and clear or, if they are not certain, they need to verify whether there is any lock that needs to be removed.

Most POS systems are available to reprogram, however a "data node" may be required for the system to communicate with independent providers. Some manufacturers enter into deals with a narrow group of "approved" merchant services companies to include their access with the POS service, allowing for less competition for the merchant's business and therefore potentially higher rates and fees. For small volume merchants, the convenience of a specific POS system may well outweigh the slight additional cost of the processing service. Most of the time, however, a little advance research could end up saving the merchant quite a bit off their bottom line. The additional cost of "opening" a POS system to a third party processor will often pay off quickly.

Some POS system providers charge excessively high fees to reprogram their machines, however, leaving many merchants paying inflated fees rather than the cost of changing because it would take over a year to make the money back in savings. A proper analysis and cost projection will make this quite clear early on. I have seen fees of $1200 or $1500 to simply switch the processor on a POS system, though more often it is less than $500 and sometimes costs nothing. It all depends upon how the software is set up and what the deal is with the company that provided it. Every merchant should know this information up front.

Another consideration at this point might be whether the merchant is interested in completely switching platforms. Perhaps it is time to move away from a stand-alone terminal into a full POS system or even a mobile processing platform that works on phones or tablets. With more choices appearing all the time, working with an agent who knows the full spectrum of options available and can provide service wherever the merchant needs it becomes increasingly important.

Loyalty and Relationships

When it comes to considering a switch of merchant services companies, this is a potentially tricky point. Obviously, if a merchant has a personal relationship with an agent who has provided their service, and if that agent has been helping them deal with issues, it is probably going to be good Karma to continue working with that agent even if there have been some issues along the way. The important thing is to know that you have an agent actively working on your side. Face time means a great deal. And ultimately, if a merchant is presented with an amazing rate it is always good to be able to sit down with an agent that you know and trust to figure out if it really is a better deal and, if so, how it can be met. Many times I have seen figures that have been offered to merchants I service and have been able to show them quite easily where, in fact, they would end up spending more with the "better" deal. Other times I have tried to make accommodations if possible. 

Ultimately, with some merchants who need more hands on time, there needs to be a fair amount of give and take, and understanding the true costs of processing and where savings can be made is essential for this decision making. 

Most sales reps do not maintain any sort of relationship with their merchants, nor will they advocate on the merchant's behalf. In such cases, there appears to be little cause to consider customer loyalty (with the merchant being the agent's customer in this case). Perhaps a particular processing company has been very helpful to the merchant. If the company has proactively lowered the merchant's rates without having been asked by the merchant to do so, that would be an amazing thing. If the company has merely provided quality customer service that they are being paid by the merchant to do, that is nice, but it is also to be expected of any service company. And it is a reason why any reputable processor offers a "trial" period of processing before the contract becomes binding. With a minimum of 30 days to test the service, make sure that deposits are hitting within the standard 48 hours and test the response of customer support with any random questions, a merchant should know whether they feel comfortable with their new choice or if they want to switch back. (As a side note, if a merchant services provider has lost a merchant as a customer, they will often bend over backwards to get them back as long as they have a history of being profitable. Waiting to cancel an account until the merchant knows that they are fully satisfied with the new service is also a smart bet because it makes re-setting the service that much easier.)

Fair Treatment

Every merchant want to know that they are being treated fairly. One reason that many merchants choose to switch is that they do not feel as if their processor had been completely honest with them. Full disclosure is supposed to be available, but if a sales agent has not gone the extra mile to provide it, merchants will be unhappily surprised by things that may be written in black and white but still do not seem obvious. 

Fair treatment is a two-way street. Sales agents need to treat their merchants fairly, but they should also be compensated fairly for their efforts. It is not inappropriate for a merchant to ask how an agent or sales rep makes money off the service. Some reps work only for bonuses, some only for residuals and a very few might actually be on salary. The way a rep gets paid has a great deal to do with how they are going to price a merchant, especially if the rep is expecting to make a high bonus up front. This sort of sales rep is going to work hard for the up-sell, because bonuses are generally only awarded for higher rates and full-contract terms (including inflated cancellation fees). Knowing how the rep is compensated gives the merchant insight into how the deal will be presented. It does not mean that an agent won't offer the best terms, but the dialogue can be honestly opened up in this way. 

Ultimately, if merchants know that Visa and MasterCard are charging a minimum of 1.80% or 1.89% respectively for their qualified swiped credit card rates, it helps them to see what kind of a deal they are getting overall and where a profit, if any, might come to the sales agent.

Company Perception

Unfortunately, many processors get a bad reputation online because of certain sites that host un-moderated consumer complaints. Even more unfortunately, many of these complaints may well be justifiable. However, there are certain patterns that emerge which can help determine whether the complaints are broadly applicable to a company as a whole or whether they are really an issue of either a bad sales rep or a merchant who has simply misunderstood their own responsibilities.

It never hurts to check out a processing company's profile with the Better Business Bureau. The best place to look is on the proper state site for where the main headquarters is located and ensure that the branch being examined is, in fact, the one with the corporate address. Many merchant services companies have associates or local sales branches that use the company name but are not, in fact, THE company.

What does the BBB rating tell a merchant?

The best thing that can be ascertained by a Better Business profile and rating is whether the company takes responsibility for resolving complaints. Certainly, any company that allows a C rating should be avoided. But even an A+ rating does not mean that there are no complaints. What it does mean is that the company has proven itself with longevity, that it has established it is capable of providing service and that it is committed to resolving customer issues. This is hugely important. The BBB profile can also indicate something about the volume of business a company handles. Pairing this information with how long the company has been around (or at least how long the company has had a BBB profile) is a good indicator of what the processor's future looks like. It is probably obvious, but companies with thousands of customers (in this case, the merchants) are much more likely to have complaints against them then very small processing companies. If a merchant services company appears to have a large number of complaints, consider their overall client base and figure the percentage. Thirty or even ninety complaints a year might not amount to much of anything in the big picture for some companies, representing only the tiniest fraction of their client base.

Banks as Merchant Services Providers

Many merchants have strong feelings about banks. I have spoken to merchants who feel that the only safe way to process is through their own bank, even when that bank sources processing to a third party. I have spoken to just as many (probably more) merchants who feel that banks cannot be trusted and they just want to deal with a company they can rely on to do the job. There is no way to get around dealing with banks, of course. Banks have to be used to process every transaction and often two or three banks end up getting involved. It is a heavily regulated industry and there are many different responsibilities divided among many entities that appear designed to keep everything honest and neat. In practice, the system may well be over-complicated and include too many fingers in the pie, but a neutral processor is a valuable component of this system and generally functions well in its role. A big advantage of independent processing companies over those with bank branding is generally a willingness to be more competitive on pricing, but they essentially all perform the same service.


This ties heavily to the company perception issue: does a merchant trust banks or processing companies in general, and specifically can an agent instill trust in the processing company that he or she represents. More than those issues, a merchant will need to determine a level of trust for the agent of sales rep who is working to convert that merchant.

Trust is a personal thing, a combination of gut instinct and previous experience. Without that trust in place it is difficult to find a "want" to switch processing companies. Merchants who are presented with clear financial indications that they will save money still avoid conversion when they do not trust the agent being worked with or the institution being presented. 

I have lost potential clients because they looked up some anonymous review online and decided that the company I was representing was not to be trusted. Early in my experience with this industry, this proved very helpful to me because I was also determining that the company in question was not to be trusted and I soon disavowed my affiliation with them. However, I have had potential clients come to the same conclusion about other companies that I have represented which were dedicated to honest customer support. Sometimes it is a matter of a disgruntled client or former associate screaming as loud as they can to be heard even when they, not the processing company, were in the wrong. Figuring this out is not always easy, and even good companies with a healthy corporate culture can have some unscrupulous operatives who make everyone look bad.

Knowing that even the biggest and most respected companies have complaints against them may or may not assuage anyone's fears, but at least it might put some things into perspective. On the other hand, understanding what kind of complaints are being made against some generally good companies can also bring a sense of perspective to things.

Typical Complaints

Going over the many types of complaint boards on the Internet, patterns seem to emerge that affect even the most upfront processing companies. Here are a few of the more prominent ones.

Termination of the agreement

It is surprising to me how many merchants do not read their agreements or discuss this aspect with the agent prior to signing a deal. And it is also surprising to me how many merchants do not pay attention when given this information in detail. But for some reason, it turns out that a lot of merchants have no idea what the terms of their contract are. If there is a cancellation fee that they did not know about it is for one of two reasons, mostly the second: either they were not told by their sales rep or they did not read their contract. It seems sensible that anyone signing on for a financial service would read the terms of their contract, and this may be one of the things that separates successful businesses from failed businesses and certainly is indicative of growing pains for some small start-ups. But a seasoned merchant should never make this mistake. Know the terms of a contract and what cancellation fees may be entailed and how long the contract is in effect and whether it auto-renews. Usually, this is the case: terms are three years, termination fees are between $250 and $2,000 and the contract will auto-renew in one year increments if not given 30 or 60 days notice to cancel. Seems like a lot to digest. These terms can often (not always) be negotiated prior to signing.

Misrepresented rates

I have seen many merchants complain online about a rate bait and switch, but generally the reason seems to be that the merchant thought they would only be charged the qualified rate and nothing more, which is clearly not the case for anyone who has approved a schedule of fees. There are times that the merchant is clearly doing all phone orders with keyed transactions and complaining that the rates are twice what was quoted, which may be true if the agent sold them on qualified rates and promised those would apply in spite of a contract stating the cost of downgraded charges.

Merchants must know the actual rates that will be charged. Too often it is a surprise and merchants are often lured in with extremely low qualified rates when they have mostly mid- or non-qualified charges with inflated rates levied against them. 

As a business owner, research is a part of life when it comes to ensuring the best services are being utilized. Credit card processing is a necessary utility, just like a phone line or internet connection or the power company or the security company or whatever else may be unavoidable for a particular business. There are things we need to operate at a profitable level whether we want to hassle with them or not. For most merchants, taking credit cards is just part of the cost of doing business.

When it is the right time to change service providers will vary from merchant to merchant. Just as phone companies and Internet providers and even power companies will lobby for new business, the increasingly competitive merchant services industry is constantly knocking on doors and making "better" offers. If the service is going to be the same but the cost is going to be less, it makes sense to take the better offer. That is the logic we apply to virtually every utility company out there. But we know that sometimes these other factors figure in to the decision. In the end, it is always a personal decision. Laying the many factors out on the table, separating the logical from the emotional, delineating areas of trust and loyalty, and perhaps most importantly going over the many details that need to be properly attended to for a smooth transition can help the decision making process dramatically.


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