Feb 25, 2011

At SingleHop we are well aware that a large portion of our customer base is made up of small to medium size businesses, in many ways not unlike us. With this in mind we have asked some industry experts to shed light on tricky subjects that all businesses our size need to grapple with sooner or later.

First off is the CEO of one of SingleHop’s Tandem reseller program partners, Louis Honick. Louis heads Host Merchant Services the premier provider of credit card and payment processing services for web hosting companies and their customers. Lou got his start in the hosting industry as the founder of HostMySite.com, growing it from a two person operation in 1997, to an industry leader with 240 employees and over 100,000 customers at the time it was acquired by a private equity firm in June of 2008.

Accepting credit cards has become a necessity for most businesses today.  Unfortunately, navigating the landscape of the merchant services industry can be challenging to say the least.  The most common questions I hear from potential merchants are “What will my rate be?” and “How much does it cost to accept credit cards?”  The real answer to this question is “it depends” although understandably that isn’t what most business owners want to hear.  American Express is pretty straightforward, but also expensive, at around 3.5% for most hosting companies and related businesses.  However Visa, Mastercard, and Discover are each known as card associations that each have their own rate sheets known as Interchange Reimbursement Fees.  These fees make up the majority of what you pay to your processor and they vary greatly depending on the card type accepted.    You can learn more about Visa and Mastercard Interchange rates at the following URLs: http://usa.visa.com/download/merchants/october-2010-visa-usa-interchange-rate-sheet.pdf & http://www.mastercard.com/us/merchant/

I should warn you that Visa is the best place to start. Their rates and categories are much simpler by virtue of the fact that there are fewer of them.  This means that the cost to your processor varies depending on what type of card your customers use.

So to price a merchant account, your provider is going to do one of three things.  You can get a flat rate, generally comprised of a discount (percentage) and a per item (transaction) fee.  Unfortunately, to get a flat rate, you end up with a rate high enough to cover the highest possible Interchange category.  While the idea of a flat rate sounds appealing, it almost never represents a good deal for the merchant.

The second option is tiered pricing.  The most common type of tiered pricing is called “three tiered” with separate rates for qualified, mid-qualified, and non-qualified transactions.  Each tier contains a number of Interchange categories.  The Interchange rate for qualified cards on swiped transactions is currently around 1.54% plus 10 cents per transaction. While this gets you more granular pricing depending on the type of card, mid-qualified and non-qualified cards (typically business and rewards cards) often have surcharges ranging from anywhere from 1-3% over the “qualified” rate for standard non-rewards, non-commercial credit cards.  Although this pricing is scheme is better than paying one high rate for all card types, each tier still is generally priced high enough to cover the rate for the most expensive card in that category.  And what’s worse, it allows many processors to quote a “qualified rate” that seems very low only to hit unsuspecting customers with very high surcharges that are difficult to understand on their statement.   There are other variations of tiered pricing that add tiers for debit cards or delete the “mid-qualified” tier.

Finally there is Interchange Plus pricing, which is exclusively how we quote at Host Merchant Services.  Interchange Plus, also known as Cost Plus, pricing gives the customer a fixed rate over published Interchange Fees.  This pricing format is normally quoted as a discount rate (percentage fee) along with a per item or authorization fee.  For example, we offer all SingleHop resellers a rate of 25 basis points (0.25%) and 10 cents per authorization over Interchange.  The great thing about Interchange Plus pricing is that you always know exactly what you are paying to your processor to services your account.  Think of Interchange, and all the associated fees, as an unavoidable cost.  No matter who you process with, you have to pay these fees.  They may be labeled differently, or wrapped up in a confusing pricing tier, but one way or the other, you are paying Interchange fees.  By understanding the markup you pay over Interchange, you know exactly what you pay to your processor and exactly what is going to the card associations.  That allows you to make a decision on whether or not the markup seems reasonable for the service you get and choose your processing partner accordingly.

Of course there are other things to consider when selecting a merchant services partner.  How is the customer service and support?  Do they offer a 24×7 helpdesk?  How long do they take to fund my account?  Are they holding a reserve or delaying my funding?  Are there other monthly, quarterly or annual fees required?

Is there a term commitment, and if so what is the early termination fee?  If there is a term, does the company have the right to raise my rates indiscriminately during this time? Surprisingly companies often sign into a term commitment and can’t get out without a large termination fee.

Do they support a gateway that is compatible with my billing system?  Will their systems and supported technologies meet my needs?  Do they offer an affordable PCI-DSS compliance program?

Overall, there is much to consider, but if you find a provider that offers a competitive rate, helpful service, and technology that meets your needs, without locking you in long term, you probably have a good partner!

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