Three signs you have a bad processor

by Neil Moncrief on June 23, 2009

Let’s face it. Every processor is going to do things to make you unhappy from time to time. But that doesn’t necessarily mean you should leave them. For instance, all processors have to earn a profit, so don’t expect to find one with no fees whatsoever. (As an e-commerce owner myself, I had a goal to pay $1 million in credit card fees. Can you imagine the sales I would have needed?) And all processors have to respond to chargebacks by debiting your account, so don’t blame them if a customer files a complaint against your business.

Basically, as long as your processor is giving you outstanding customer service and charging reasonable fees, I’d give them the benefit of the doubt and stick with them. But there are several practices that you should never have to put up with – clear indicators that your processor is more concerned about their own profits than your success. This post focuses on three of the most blatant examples. If you find your processor is engaging in any of these practices, it may be time to move on.

#1 – Double-Dipping

I don’t know of an industry term for this practice, so I just refer to it as “double-dipping.” Here’s how it works. You expect to pay a discount rate on every credit card sale your business makes. (I didn’t say you like it, just that you expect it.) Using round numbers, let’s look at a $1,000 transaction with a 2% discount rate. Your discount will be $20.  As long as you factored in an adequate margin and your customer remains happy with the purchase, you’re in good shape.

But in reality, some customers won’t be happy, and they will return their purchases for a refund. (It’s hard to blame the customer, because we’ve all had to return something.) Many processors actually charge you a second time when you issue the refunds. With those guys, you’d pay 2% on the sale, and another 2% on the refund. Now, you’ve paid $40 in fees, and you have absolutely nothing to show for it. It doesn’t seem right, does it?

Most processors (at least the good ones) will calculate your discounts based on your gross sales alone, disregarding any refunds you issued. Double-dippers, on the other hand, charge discounts on gross sales plus refunds. (Notice, I didn’t say gross sales minus refunds. Charging discounts only on “net” sales would be great, but that’s not gonna happen.) Some processors use complicated statements to disguise the DD practice. But you can download my free whitepaper, “Digging for the Truth in a Deceptive Merchant Statement“, where I explain how to recognize when you’ve been victimized.

#2 – Daily Discounting

For me, the process known as “daily discounting” is even worse than double-dipping. Instead of taking your money, these processors steal your time and your sanity! As business owners, we all want to be in control of every aspect of our business, including our books. If you’re like me, you balance your business’ checkbook religiously, always looking for errors. This process is complicated enough already, but it’s nearly impossible if your processor takes discounts on a daily basis.

Monthly discounting is the industry standard, so most processors wait until the end of the month to take their fees. Let’s look at a typical business day ($1,455.68 in total credit card sales and an average discount rate of 1.79%) to understand how each method affects you:

Monthly discounting – You record your daily deposit of $1,455.68 in your checkbook. Then, in a day or two, that exact amount appears in your bank account. When your bank statement arrives, that amount is shown again as a daily deposit. It’s easy to reconcile your bank statement because the deposits all match. The discount due for that daily deposit (1.79% x $1,455.68 = $26.06) will be combined with the rest of that month’s discounts, and will be debited from your account during the first few days of the following month. In essence, you get your money right away, but the processor waits until the next month to get theirs.

Daily discounting – You record your daily deposit of $1,455.68 in your checkbook. A day or two later, a deposit for $1,429.62 appears in your bank account. Your processor deducted their $26.06 in fees before they paid you. When your bank statement arrives, $1,429.62 is shown again as a daily deposit. Your checkbook and your bank statement both show your month’s deposits. Unfortunately, none of the numbers match, and trying to reconcile your bank statement becomes a guessing game, at best.

Daily discounting should be reserved for businesses with poor credit histories that are considered high risk. But some processors subject all their clients to this practice just so they’ll get paid faster.

#3 – Monthly Minimums

Monthly minimums rarely have any affect on larger businesses; it’s the small start-ups that suffer from them. During the seven years that I sold shoes online as co-owner of 2BigFeet.com, we used several processors. Most of them subjected us to monthly minimums. Even though we always paid more than the required minimum discount, it still made me mad just knowing the minimum was there.

For obvious reasons, processors like big businesses with large credit card volumes. The more money you make, the more the processor makes. Some processors have a problem with merchants who have occasional slow months; those processors don’t like to see their own revenue drop. To insulate themselves against those times, some processors impose a minimum monthly discount. And if the merchant doesn’t process enough credit card transactions during a given month to reach the minimum amount in discounts, the processor will debit the merchant’s account for that amount anyway.

This practice really only hurts small or seasonal businesses such as lawn maintenance, water sports, hunting reservations, etc. Most average-sized businesses have no trouble meeting the minimums. Nevertheless, it just doesn’t seem right to penalize a business that’s obviously had a tough month already.

I know from personal experience that running your own business is tough. You need your credit card processor to be on your side – working with you, not against you. If you’re using a processor who engages in any of the above practices, you deserve better. There are some outstanding processors available to you, and I’d be happy to recommend one if you’ll give me a call.

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