I was cruising eBay the other day and came across all these ads for merchant accounts. Here's an example of the standard ad. Check Card 1.12%, Swiped Retail 1.62%, Transaction and Item 15 cents, No Statement Fee for the first 6 months, Free Supplies and a GUARANTEED RATE LOCK. (Whatever that is?) I'd love to see what happens to their RATE LOCK if Visa and MasterCard increase check cards and retail by .20 basis point tomorrow? But with that aside we all know (or at least we should) that 1.12% and 1.62% is just a tad below cost for both those card types and if the 15 cents is a true "total" transaction fee then it's about a break even on Retail and a sure loss on Check Card. I'll tell you one thing, looking at their ad makes me want to sign up. There's only one catch. I know they have to make money. No business can provide anything if they lose money on what they're selling. Because in addition to being below the cost of interchange we know it costs them money to pay staff, keep the lights on, have phone lines, internet and all the other expenses that come with running a company. Yet as I continued to click on the ads in eBay, I could see that they were getting positive feedback and some were getting 50 feeback messages a month. I asked myself how? If I signed up for processing at these rates, I'm quite sure I'd flip when I got my bill. Then it struck me. You only have 45 days to leave feedback after a sale on eBay. So each one of these feedbacks were based on what the merchant thought they were getting and their experience of getting set up for processing. Now it was starting to make sense to me.
By the time any of these people got their first statement, the opportunity to leave negative feedback was expired and in the best case they wouldn't see their first statement for 30-40 days. So I starting thinking about all the ways these eBay ISOs were making money selling the Check Card and Retail categories below interchange cost. I'm going to go over a list of things that would have to bring the accounts back up into the range of 40-60 basis points of profit. If you are unsure of these terms, talk to your sales manager or feel free to give me a call.
3 Tier Pricing
With most of the transaction types in Non Qualified
4 Tier Pricing
With most of the transaction types in Non Qualified
Downgrades
Would have to be HEFTY 2% +
Bill Back
Probably an ERR Billback scenario of plus 1.5-2%
Gross-Gross Billing
Paying 2X for returns here
Access Fee
We don't need to call it a statement fee
Monthly Fee
We don't need to call it a statement fee
Statement Fee
Oh boy waived for 6 months
Minimum Fee
Minimum Discount
Annual Fee
Another way to waive statement fee
Semi-Annual Fee
We don't need to call it a statement fee
Compliance Fee
Or whatever you want to call it
Security Fee
Or whatever you want to call it
** Any other made up fee with an important sounding name.
Here's an example of how this ISO may arrange his buckets to produce more income from a lower priced account. Remember that all the 100 + INTERCHANGE levels are condensed into these 3 categories at the discretion of the processor. Let's look at 2 examples with 3 tier pricing and keep in mind I've kept the numbers simple for example's sake.
Processor A has rates of 1%, 2% and 3% respectively and the merchant processes $10,000 per month.
Processor B has rates of .75%, 2% and 3%.
Who would you pick? Well, if it was apples to apples and all other fees were equal, you'd pick B. But let's see how this could play out based on how each has their buckets set up.
Processor A has the buckets set so 75% of the merchants volume falls into Qual, 12.5% Mid and 12.5% Non, which puts $7500 @ 1%, $1250 @ 2%,
$1250 @ 3%.
Processor B has the buckets set so 50% of the merchants volume fall into Qual, 5% Mid and 45% Non, which puts $5,000 @ .75%, 500 @ 2%,
$4500 @ 3%.
Processor A, with the higher rate, ends up charging the merchant $118.75 to process the $10,000.00. Which is an effective rate of 1.18%
Processor B, with the lower rate, charges the merchant $195 to process the $10,000.00 which is an effective rate of 1.95%.
The difference is $76.25 per month. The low rate processor, by bucket allocation, ends up with the higher effective rate. Keep in mind above is only a short list of ways some ISOs choose to hide their revenue streams from the business community.
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