Understanding Credit Card Processing

Learn all about the credit card processing Industry and how it works so you can

Improve your bottom line

Presented by Integrity Ventures ALL RIGHTS RESERVED. No part of this report may be reproduced or

transmitted in any form whatsoever, electronic, or mechanical, including photocopying, recording, or by any informational storage or retrieval

system without express written, dated and signed permission from the author.

© Copywright 2006-Integrity Ventures-All Rights Reserved

http://www.creditcardprocessingknowledge.com

Table of Contents

Introduction Chapter 1 Credit Card Processing 101/The basics Chapter 2 Credit Card Processing Entities

Chapter 3 Storefront/MOTO/Internet Processing Chapter 4 Three Different Pricing Models

A. Three Tier Pricing B. Four Tier Pricing C. Cost Plus Pricing

Chapter 5 Debit Card Pricing/On-line and Off-line Chapter 6 Underwriting and Risk Chapter 7 Equipment and Supplies

Chapter 8 Ask the Questions Chapter 9 More valuable information to understand Chapter 10 PCI/DSS (Payment Card Industry/Data Security Standards) Glossary of terms Conclusion Additional Helpful Resources

Introduction

Welcome and thank you for purchasing Understanding Credit Card Processing. The first thing that you will notice is that this report doesn’t have all kinds of fancy graphics or whistles and bells. What you have here is just the facts and figures that you NEED to make an intelligent decision regarding the acceptance of credit and debit cards in your business.

Since this industry is constantly changing, this eBook gets updated as needs arise. You can stay updated on industry topics by visiting us at our MAIN WEBSITE and please, tell others about the benefits you receive from the knowledge you gain here. Let me state, first and foremost…

I AM NOT SOLICITING YOUR CREDIT CARD PROCESSING BUSINESS IN THIS REPORT

It is my desire, with this publication, to give you the specific knowledge you

need to be better able to make informed decisions regarding the acceptance of credit and debit cards for your goods or services that you sell. The reps that are walking through your door typically aren’t providing you with a thorough education…for obvious reasons. In fact, I’d venture to say that many of them don’t have as much knowledge of this industry as you’ll find here. This industry has the potential to provide a very lucrative income for the successful sales rep (I can personally attest to that). The problem is, this is also a very competitive industry. Let’s be honest here…how many “merchant services reps” or “credit card processing reps” have you had walk thru your door in the past thirty days? Two, five, ten or more? How about the phone calls or emails that you are pestered with offering “guaranteed lowest rates”? Because of the long-term residual (there’s nothing like “residual income” ….sell once and continue to be paid, monthly ) income opportunity, the industry continually attracts new reps. For the most part, they get their half day worth of training and then their new sales manager sends them to the streets. They pound the pavement for days, weeks or months and, typically, experience about a 90% rejection rate. How many have walked thru your door that you haven’t been

willing to even talk with? Consequently, after a lot of failures, the new rep decides to look for an easier job elsewhere. Then, a new group hits the street hawking the “deal du jour”. And, the cycle continues on and on. Thus, the reason for this eBook…it’s my way of giving back to merchants, like you, that have been such a blessing to me and my family over the years.

It’s tough enough being successful in business these days especially with the state of the economy that we’re in currently. The last thing you need is for some processing company needlessly getting deeper into your pockets than is absolutely necessary. Let’s face it, you absolutely need to accept credit and debit cards in your business or you’re losing sales. But, the rates you’re paying should be fair and reasonable based on your type of business and how you typically transact business. Hey, the provider of the services is entitled to make a profit as well relative to the services and risk that they have….don’t you agree? However, if you don’t take the time to become more knowledgeable about this industry and the services you are paying for, you’re operating at a disadvantage. It’s time to get EDUCATED!!!

So, you may be asking yourself, what makes me qualified to provide this

information to you? Well, let’s just say that I am a well-seasoned professional in the industry so I am providing you with some “insider” info. Actually, let me correct that….I “was” in the industry but now, at the ripe old age of 63, I have retired. I still handle my huge existing clientele that spreads from Washington state to Florida. But, I’m not actively looking, or needing any more new business at this point in my life because, quite frankly, but, rest assured, if you seek or desire my assistance, I’ll be more than happy to accommodate you.

For my many years in this business, I was employed by one of the largest,

primary, single source, direct processors in the industry (you’ll see more of what that means elsewhere in this eBook). In the years that I have been involved in this industry, it’s become very apparent how little the majority of merchants really know about how the credit card industry is structured and how to minimize their costs. It’s not your fault though because most reps quite simply don’t want to take the time to educate you so they can make more money off of you.

Quite often, when I offered my services to perform a competitive rate analysis, merchants handed me their current processing statement…unopened. They have given up trying to figure out the complexities of how they are being charged and simply just focus on other parts of their business. All they do is deduct the total fees due from their bank account each month and feel they are just paying

“too much”. However, now, more than ever, it is becoming more crucial for you to understand this “expense” in your business.

In recent years, industry trade journals have indicated that for the first time ever, “payment for goods and services utilizing a credit or debit card, has exceeded payment with checks or cash” (Green Sheet). Consequently, it can represent a major expense to your business however, with the knowledge enclosed, I pray you will quickly discover ways to help you to reduce those expenses.

The good majority of my income is based on residual income from my existing, and growing client base. Consequently, it has always been important to me, and my family, to continue to grow and maintain the number of accounts that are in my portfolio. That way, my income continues to grow. I learned early on that the best way to approach this business is to educate my merchants and form a kind of “partnership”. My focus has always been to develop mutually rewarding long-term relationships. My clients know that I have their best interest in mind when putting together a program for them. I provide just the services they need that will be of benefit and nothing more and at a fair and reasonable rate.

If you are in business, you know that this is a very competitive business and likely have several credit card processing reps a month stop by, phone, fax or email your place of business. They approach you in many different ways but mostly try to convince you that they have a “better deal”…but do they really? To me, it’s all about relationship and that’s what makes the difference. I’ve always made it a point to stay in contact with my merchants. This is accomplished, either in person (for my local clients) by phone or email. They know that I care about them as individuals and it’s not just about a paycheck.

Have you ever thought to ask for a rate review from your provider? It’s not likely they will call you and say, “hey, we’d like to lower your rates for you”. Through my regular contact with my merchants, I’m always looking for ways to reduce their rates, eliminate fees or suggest different techniques or processes that may help reduce their costs or increase their sales. As a result of my active participation on their behalf, when the competition comes knocking on their door, my merchants send them packing because they know they are well taken care of.

The purpose of this guide is to educate you so that you will know as much, or more in most instances, than the rep that knocks on your door trying to lure you away from your current provider or set you up with a new account. As in anything

in life, the better educated you are regarding any subject, the more intelligent your decision making process will be. With that in mind, let’s get started Chapter 1

Credit Card Processing 101

Let’s face it, if you’re a merchant providing any kind of products or services, you pretty much need a merchant account to accept credit and debit cards or you’ll be missing business. In just the past few years, payment for goods and services by credit cards has surpassed payment using checks or cash. So, it obviously now becomes even more important to understand this business, how it functions and minimize your costs. The purpose of this report is to educate you on the different types of pricing models that exist and to help you to determine which one is best suited to your type of business and the way that you typically transact business.

First, let’s take a look at the industry itself and get a better understanding of

what happens when a customer uses plastic to pay:

Step 1: Cardholder uses a Visa or MasterCard to purchase goods or services in your establishment. You swipe it or hand key it into your credit card terminal or POS software. The processor sends the credit card transaction to the card association (Visa or MC),which in turn sends the request for credit card authorization to the card-issuing bank.

Step 2: The issuing bank accepts or declines the transaction and electronically sends the message back through the card association. The card association contacts the processor with the credit card authorization, and it is then sent back to you, the merchant, through your POS terminal (this transaction typically takes less than 10 seconds). You deliver the goods/services to the customer. The merchant settles, or batches, their terminal at the end of the day, the processor finalizes the credit card transaction with the issuing bank and the funds are transferred into the merchants account typically within 48 business hours.

Step 3: Merchant pays bank (your credit card processor) a “discount fee” for

its services. These fees are billed either once a month on the total volume or, in some cases, it is billed daily from each batch total (this is called daily discounting …an accounting nightmare…good for the processor but bad for you).

Step 4: Merchant bank (again, your credit card processor) pays interchange fees (these are wholesale costs to the processor charged by the member banks of Visa and MC) directly to the Issuing Bank of the cardholder that made a purchase from you. Interchange helps cover the banks cost of issuing cards and collecting payments. This will be discussed further in later chapters.

Step 5: Issuing Bank charges its customer for the purchase and collects

payment. As you can see, it is a pretty simple process but many merchants have never given it much thought and their provider has not taken the time to educate them. But honestly, do you really care about the processes or, as I imagine, is it more about the costs that interest you? I thought so!

The majority of the fees that are collected from you, in the form of your “Discount Rate” by your provider, go directly to the card issuing banks (in the form of “interchange fees” (as discussed above in Step 4) of the cardholder. Some, in the form of “assessments” and go directly to Visa and MasterCard and a very small piece of the pie goes to the processor. In addition, in the spring of 2009, both Visa and MasterCard began adding what is referred to as an “access fee” that runs in the neighborhood of $.02 on every transaction.

Chapter 2

Credit Card Processing Entities

There are many ways you can acquire credit card processing services. Here is a brief description of those entities so you have a better understanding of what to expect. Banks:

Likely, if you’re in business, you have a commercial account set up with your bank. They may have asked about your merchant services (i.e. credit card processing) and offered to have someone contact you regarding a “competitive rate comparison”. The “selling point” is the “convenience” of getting “all your business services, under one roof”. Well, in the greatest majority of cases, banks are not in the credit card processing business…..they’re in the banking business. However, they typically will have contracted with a provider (a processor) and offer their services to you. Typically, the designated representative will contact you, and they will provide the services for you. The problem with this is that the bank earns a “fee” from the provider for the referral, which will usually mean your rates are a

bit higher to compensate for the banks earnings. You may even get statements from the processor each month, with the banks name on it (part of the agreement) making it look like the bank is actually providing the services. Not that this is a bad deal because the uptick in rates won’t likely be substantial, but don’t just assume that the bank is your best alternative. Shop around and try to go direct to obtain the best rates and service.

ISO: This is an Independent Sales Organization and is a private entity that reps

for one or several different processors. Some of them are good and reputable but just remember, they are in business to make a profit. Often times their MLS’s (Merchant Level Salespeople) will have great “gimmicks” and “sales pitches” to get you interested and often don’t tell you “all the details that you really need to and should know”. They often have a way of making an offer look better than what it really is.

I’ll give you an example: I had a merchant call me recently, that has been

with me for several years now. A rep from an ISO called him and my merchant gave him a copy of his monthly statement from us (which I encourage them to do periodically, just to keep me on my toes) and had him give him a rate comparison. Well, my merchant got it in writing and faxed it to me for review because he said, “this looks really good to me and unless you can compete, I may have to switch”. After careful review, I was able to show him where he was being misled and advised him the specific questions to ask this rep about his numbers. This rep, by the way, wasn’t local and had contacted him from half way across the continent. When he finally returned his call, which was several days later, he provided lots of fancy footwork but never directly answered his questions. Needless to say, this merchant is still part of my portfolio and still sends me referrals.

Now, don’t take this to mean that all of these entities are bad. There are

many that have been around a long time and they have a serious interest in taking care of their accounts. Just remember that you are dealing with a middleman in these cases. If you decide to possibly go with one of these guys, ask for numerous referrals and actually call them to get their personal feedback. You’ll be glad you did. Processors:

These are the actual business’s that “process” the transactions between you, through the Visa/MasterCard networks through to the card issuing bank and then back to you with an authorization or denial for the sale. They pay the issuing

banks the “interchange fees” and Visa or MasterCard, the “assessments”. They in turn, charge you, a “discount rate” or your ISO a “buy rate” (who then charges you a percentage on top of that). These companies will typically provide your customer care and technical support as well. You can find lots of information on-line about processors. Rather than give you any specific links here (I don’t want you to think I am showing favoritism or trying to “lead” you in any way), I’ll let you use your own search capabilities. The research may be time consuming, but rewarding in the long run armed with the knowledge you are gaining with this manual.

You could also go on-line, and type in the name of the processor you’re

considering. Also, add one of these keywords to the search (scam, fraud, lawsuit, rip-off, dishonest, illegal etc.). This way, you’ll be able see what other people are saying and who has the best reputation. PayPal:

You’re probably aware of PayPal, or other on-line payment processing services. These services are great for the small-time business or very infrequent users. They have no contract term and typically, most of them have no set-up fees. Their rates, however are on the high side the last time I checked (1.90% + $.30 up to 2.90% + $.30). If you’re considering PayPal as your payment provider, check with them about current programs by clicking here: PayPal

If you’re serious about your business, and anticipate growth, search for your

own individual merchant account through one of the sources listed above. Chapter 3

Storefront/MOTO/Internet Processing

As a business owner, you fall into one or all three of the categories above. I’d like to give you some insight on how these different entities are viewed by Visa and MasterCard.

Storefront:

Obviously, this is your typical brick and mortar retail establishment. People walk into your establishment, select items or eat a meal, and come to the register to pay. If they are paying with a credit or debit card, you will swipe their card through your credit card terminal or your POS (Point of Sale) system. The card is electronically read and you will pay your lowest rate on this type of transaction.

Sometimes, the magstripe on the back of the card is not readable and you have to hand key the transaction into your terminal. On the other end, the computers think the card is “not present” and therefore, comes inherently with greater risk and your rates will be higher (Mid-Qualified or Tier 3). In the retail game there is always the possibility of returns or dissatisfied customers and the possible “chargeback”. In the restaurant business, rates will most often be a bit lower than they are for retail establishments doing similar volume, because there is inherently fewer chargebacks nationwide, and subsequently, less risky. MOTO:

Mail Order Telephone Order. Many brick and mortar stores have discovered the benefit of printing a catalog and sending it periodically to their database. This generates more sales but they are most always going to be orders taken over the phone and paid with “card not present” credit/debit cards. There are safeguards that you can take to minimize your risk in these types of transactions as follows:

A. Only ship goods to the address listed as the address of the cardholder.

This is done through address verification on your terminal. B. Obtain the CVV or CVC code from the customer (that’s the three digit

code located in the signature line on the back of the card). This ensures you that the person placing the order actually has the card in their possession and didn’t just swipe the numbers off of Aunt Betty’s card and are going on a shopping spree. Always keep in mind, that these “card not present” types of transactions, because of the increase risk of fraud, will come with a higher discount rate (typically in the form of a surcharge to your swipe rate). But, the increase in potential sales, especially if your market is affected by seasonal trends, is well worth it. Just take the necessary steps to protect yourself.

Internet Sales: Nowadays, in the world of ecommerce, savvy merchants are doing all they can to obtain customers email addresses (a good majority of people have them these days). This way, they can, in a very cost effective manner, market to an ever-increasing customer base. This can be an excellent way of selling overstocked or end of season goods rather than continuing to carry them in inventory. This can be done either by having people call the store and place an order or by shopping via your website and utilizing your shopping cart. In either case, when the purchase is made using a card, it is “card not present” and the above steps should also be taken to minimize fraud and loss on your part. If you have business cards, make sure they are prominently displayed and if you have a website, make absolutely sure it is on your cards. When someone walks through your doors, it’s obvious they are interested in the types of things that you sell, so they will, even in the off season, when they are not around, be a good potential

customer for you. If you’re not already taking advantage of this HUGE potential market, do so immediately….the world is your marketplace. Mobile Processing: If you’re the type of business that does most of your transactions remotely, like a plumber, electrician, tow-truck or trade show sales you may find that some form of wireless mobile application would best suit you. There are numerous ways to go and it can be confusing with all the technology and pricing. If I can help you to steer you in the right direction, simply contact me. Chapter 4

3 Different Pricing Models (And variations on these too)

It used to be, just as little as five or six years ago, that there was really only

one pricing model available to the majority of merchants. The major national retailers were always privy to better pricing models simply because of their volume. Nowadays, there are three different pricing methods and it’s important for you to understand them all. It’s not a matter of “one model fits all” any longer. Your business, and how you transact business, is different than any other so let’s make sure you’ve got the best pricing model to accommodate the processing of plastic.

Keep in mind that pricing will depend on your business. New businesses pretty much get a set program and rates. The processor will ask you how you plan to transact sales and the approximate average ticket. NOTE: After you’ve been in business for six months or so, and have established some “averages”, contact your provider for a review to see if things can be improved some.

For the existing merchant, your pricing will depend on your average monthly volume and your average transaction size. And, equipped with the information in this ebook, you will be able to know whether or not you are getting a good deal.

3 Tier Pricing

First, we’re going to take a look at 3 Tier Pricing, which is what the majority of merchants, are still on today and it may not be the best one for them. Under, 3 Tier Pricing, you will have three different rates. Here’s how it works:

Qualified Transactions: This will be for transactions for either debit or credit cards that are swiped through your credit card terminal or POS (Point of Sale) software for a purchase. It will always be your best rate because swiped transactions are considered to be the least risky. Mid-Qualified Transactions: These will be transactions for debit and credit cards that are “card not present”. In other words, these will be cards that are hand-keyed on your terminal either because the magstripe on the back of the card is unreadable or the customer making the purchase is not present. You will be charged a “surcharge” above and in addition to your Qualified Rate on these. This could also be for some of the Rewards cards that are becoming quite prevalent in the market these days. Non-Qualified Transactions: This type of transaction will be for cards issued in a corporate entity name rather than an individual. It could also be some of the Visa/MasterCard Rewards cards. You will also be hit with a “surcharge” on these transactions that is typically even higher than the mid-qualified surcharge. Under a 3 Tier Pricing model, rates can be quoted in either a “bundled” or “unbundled” fashion. Unbundled will be a rate plus a per item, authorization or transaction fee (for example: 1.69% + $.18). Typically, if you have a low average ticket in your business, (let’s say $10 for example) you would probably want to consider the bundled type of rates. Otherwise, the authorization fees will eat you alive. Bundled rates will be higher than the unbundled but without a per item fee. For example, it could be 3.27% bundled. So on that $10 transaction, it would cost you $.33 in fees. Unbundled your rate might be at 1.69% + $.18 (probably higher though) for example or $.35 in fees.

Now, on the other hand, if you have a much higher average ticket, you typically want the rate portion of the equation to be as low as possible since that is where the majority of your fees are coming from. Just to be sure though, ask any merchant services provider that is quoting rates for you to give you both a bundled and unbundled quote. Then, do the math based on your average ticket and determine which is best for you. Unfortunately, many processors quote you the program that is best for them and not for you so… BEWARE.

Typically, the higher the average ticket, say in the $100 plus range, 3 Tier pricing will be the best model for you because there will likely be a small percentage of debit cards actually being used which we’ll discuss under 4Tier Pricing. For example, let’s say, as a customer, you are paying $225 for an auto repair and you have a choice of using your debit card (knowing that you had enough money in your checking account to cover the transaction) or you could use your frequent flyer credit card and earn miles and then simply pay your credit card

bill at the end of the month, which one would you use? Like most people, you’d probably opt for using your frequent flyer or Rewards card, and pay the card balance at the end of the month so you don’t incur interest charges…..it just makes good sense.

Now let’s take a look at the next pricing model.

4 Tier Pricing

Now that we’ve got a better handle on 3 Tier pricing, let’s get a better understanding of 4 Tier Pricing and its benefits. Debit card usage is dramatically on the increase. Statistics over recent years indicated that more and more transactions processed by Visa were performed with Visa debit cards. Obviously nowadays, the numbers are certainly increasing.

What follows are national averages for Signature Debit transactions as determined in October 2004. I haven’t pulled these numbers recently but, over the years, the percentages have remained fairly constant. Use these as a guideline in determining whether 3 or 4 Tier pricing is best for your business. Since 2004, debit card usage has increased but the percentages by industry type and average ticket should still be fairly accurate.

Retail Signature Debit Ticket Range Estimated Percentage of Signature

Debit Transactions < $10.00 78.72%

$10.01-$25.00 75.55% $25.01-$50.00 51.0% $50.01-$100.00 40.2%

$100.01-$500.00 31.9% $501.00-$1,000.00 23.1%

>$1000.01 17.8%

Restaurant Signature Debit Ticket Range Estimated Percentage of Signature

Debit Transactions <$9.99 83.5%

$10.00-$24.99 68.2% $25.00-$49.99 55.16% $50.00-$99.99 39.14%

>$100.00 26.84%

You can see from these charts that if you are either Retail or Restaurant with an average ticket of under $50.00, it looks like 4 Tier Pricing would be of benefit since nearly 50% of your transactions will be debits. However, if you are a restaurant with customers handing over their cards to their server for payment rather than paying at a cash register, you won’t be able to get the advantage of pinned debit. That is, unless you incorporate a wireless hand-held terminal that can be taken right to the table. The savings you get with pinned debit, will eventually pay for the cost of this kind of terminal. Start out with just one and do the math over time to see how beneficial they are before investing in more.

Let’s take a look at what a large processor is currently charging for New

Retail Merchants and the difference between their 3 Tier and 4 Tier pricing:

3 Tier Pricing Qualified 1.79% + $.25

Mid-Qualified 2.54% + $.25 Non-Qualified 2.79% + $.25

4 Tier Pricing

Tier 1 1.49% + $.25 Tier 2 1.84% + $.25 Tier 3 2.54% + $.25 Tier 4 2.74% + $.25

So, if you anticipate that your average ticket is going to be under $25.00,

you’d certainly be wise to request 4 Tier since over 70% of your volume will likely be debits. You see, in 3 Tier pricing, whether you swipe a credit or debit card, it is going to get the 1.79% + $.25 Qualified Rate. On 4 Tier, the Tier 1 is for debit cards swiped, or off-line (lower rates because of lower inherent risk) and Tier 2 is for Credit cards swiped. Sure, you’ll pay slightly more for credit cards on Tier 2 than you would for them on 3 Tier Pricing (Qualified) but, they will typically be a much smaller percentage of your overall volume based on national averages.

Now, if you have determined that based on your average ticket size that debits are probably a good percentage of your business, you should also consider looking into getting a Pin Pad and setting yourself up to take on-line or Pin based transactions. If you are a retailer, it is much more feasible to capture pin numbers from customers when they are cashing out. In the restaurant business (pay at the table), the only way you will be able to capture pin numbers is by using a wireless terminal, at the table, with a built in pin pad. The benefit of capturing pin numbers is twofold. First, when you simply swipe a debit card without the pin number, the

computer looks in the customer’s account to verify the availability of funds to issue an authorization. When you get the pin number, not only does it look for availability, it also immediately captures the funds. Second, when you capture a pin number, the transaction goes through a different network and could (and most likely will) cost you less. (read about the Durbin Amendment under the Debit section regarding big changes that came about in October 2011, relative to debit transaction costs and the caps that are now applicable).

Here’s the Network Access Fees for on-line pinned debits and is current as

of October 2007:

Debit Network Availability Fee Schedule

Network Name Effective Date Purchase/Cashback Acquirer Fee

ACCEL/XCHG 2/1/2007 $0.15+0.65% Caps @ $.53

$0.240 Qualified Supermarket

CU24 2/1/2007 $0.055+0.65% Caps@ $.0375

All Other POS MCC/SIC

$0.190 Qualified Supermarket

SIC 5411, 5300

$0.65 + 0.60% Caps @ $0.325

Petroleum-SIC5542,7511,5541 $0.065 + 0.55% Caps @ $0.325

Pharmacies-SIC 5912

$0.045 + 1.25% Caps @ $0.325

QuickServiceRestaurant-SIC 5814,5812 $0.190

SIC 5310 AFFN 3/1/2006 $0.13 + 0.55%

Caps @ $0.53 General Retailers

$0.170 Qualified Supermarket-SIC 5411,5300

$0.08 + 0.50 Caps @ $0.38

SIC 5310,5499,5541, 5542,5912,7511,9399

Alaska Option ??? $0.070

INTERLINK 5/1/2007 $0.185+0.75% Caps @ $0.535

$0.275 Qualified Supermarket

Maestro 4/1/2005 $0.175 + 0.75% Max @ $0.525

$.0265 Qualified Supermarket

NETS 10/1/2007 $0.190

NYCE 10/1/2007 $0.1375 + 0.65% Caps @ $0.6875

$.02775 Qualified Supermarket

PULSE 4/1/2007 $0.14 + 0.65% Min = $0.14 Max = No Cap

General Retailer

$0.14 + 0.65% Min = $0.14 Max = No Cap

Petroleum $0.250

Qualified Supermarket SHAZAM 7/1/2006 $0.280

General Retailer $0.200

Qualified Supermarket STAR 9/1/2007 $0.1925 + 0.75%

Caps @ $0.6925 General Retailer

$0.1725 + .60% Caps @ $0.4425

Petroleum $0.2825

Qualified Supermarket

NOTE: The above pinned debit rates are subject to change. For current rates you could do a Google search for “Pinned Debit Network Rates”

So, let’s take a look at an example of a debit transaction, using an average ticket of $35 using the 3 Tier, 4 Tier and pinned debit rates indicated above.

Transaction Type Rates Fees 3 Tier Swiped 1.79% + $.25 $.88

4 Tier Swiped 1.49% + $.25 $.77 Pinned Debit thru STAR Retailer

$0.1925 + .75% + Processor fee of maybe $.20

$.48

As you can see from looking at these numbers, pinned debit would definitely

be the way to go. Remember, pretty much all bank issued debit cards these days are branded with a Visa or MasterCard logo and the cards can be used either way (with or without a pin number). All these cards will either say “Debit” on the face of the card or will say “Check Card” (Visa branded) or “Money Card” (MasterCard branded), so they’re easy to identify. When a customer gives you their debit card, they know that there are enough funds in their account to cover the transaction so all that is required for you to obtain the transaction savings is to have them key in their pin number. Now, not everybody even knows their pin number and some may just, for some reason, flat out refuse to use it. But, you should at least try to get them to enter it for the resulting savings for you.

Some merchants use “incentives” to obtain pin numbers. I’ve seen merchants that will have a fish bowl of gift cards that are all pre-loaded with some value. Most are for $1 but maybe there are a couple $5’s, $10’s and maybe even a $20. The sign at the counter reads…”enter your pin and win”. When they enter their pin number, they get to stick their hand in the bowl. The gift card they pull out is only good at your place of business so they either find something else to buy, on the spot, or it brings them back in another time (or they give it to someone as a gift which brings them into your store). There are lots of creative ideas you can come up with in order to capture more pin numbers. Other merchants have simply put up a sign that politely informs customers that pinned debit costs them (the merchant) about half what it costs them when the pin isn’t used. Honestly, the majority of customers have no clue and when informed, since many are likely regular customers, will oblige and enter their pin. You have to at least try something to increase your odds of getting pin numbers and the resulting savings that go along with it. Remember: Debit cards are NOT CREDIT CARDS. They will never issue the cardholder credit. If the account backing up the card does not have sufficient funds for the transaction, the card will be denied.

So, now we’ve looked at 3 Tier and 4 Tier and the benefits of both. One of the inherent “problems” with either 3 or 4 Tier pricing is that processors lump

several types of card types (with their own individual surcharge rate) into one of the available “buckets” of Mid-Qualified, Non-Qualified or 3rd or 4th Tiers. This could work to your disadvantage so let’s take a look at a possible solution. Next, we will take a look at Cost-Plus Pricing, which has only just recently become available to small to mid-size regional type merchants and is growing rapidly in popularity since it is the most transparent type of pricing.

Cost-Plus or Interchange-Plus Pricing

In the past, this form of pricing was made primarily available to the large national chains like Target, Wal-Mart, and Sears etc. Now, if your volume and types of transactions justify this type of pricing, it will become important to explore this option for the cost savings that it could potentially provide.

Okay, take a look in your wallet. You probably have a credit card (possibly

more than one) and a debit card or two. For example, I carry a Capital One MasterCard that I use. Whenever I use that card at a merchant for goods or services, Capital One earns the “Interchange Rate”. This fee covers their costs of issuing cards and collecting payment from me, the cardholder. Currently (as of April 2009) the Interchange Rate for a MasterCard swiped transaction, is 1.55% + $.10 (see the Interchange sheets below). So, if I spend $100, Capital One makes $1.65 on that transaction (translated to mean, it costs you the merchant that amount). Then, on top of Interchange is also an “Assessment Fee” which in this case, is currently .095% (again, see the Interchange sheets below). This fee goes directly to MasterCard International, which pays for upkeep on the electronic networks, and helps pay for their national advertising on behalf of their member banks. In addition, in April of 2009 a new form of “Access Fee” has been implemented by both Visa and MasterCard equal to about $.02.

In a Cost-Plus pricing model, you pay these direct costs “plus” something

to the Merchant Bank, or processor, for handling the transaction and assuming risk. The “plus” fee can be quoted either in cents or basis points or a combination of both, depending on your average volume and transaction size. Currently, taking into account credit cards, debit cards, corporate cards, world cards, rewards cards etc., etc., there are in excess of 200 different card and transaction types all of which have their own Interchange Rate. If you’re in a 3 Tier or 4 Tier model, the processor knows from national averages for your industry type, that you will likely get X% of this type and X% of that type of card. Some cards cost more than others so what they do is take several categories and just lump them into one of your categories (or “buckets”). Consequently, you may be paying way more on some

transactions than what is fair and, likely on those transactions that they know you will likely get very few of, you are paying less than interchange on them, but, since they are charging you more on the majority of transactions, they still make a profit (of course they do!) For example, I just did an analysis for a restaurant merchant who is currently paying 2.535% bundled on Visa transactions. The interchange on those transactions is currently 1.54% plus .0925% assessment plus $.10 plus the $.02 Access Fee. In other words, cost is about 1.6325% + $.12, with all fees taken into consideration. I figured I could offer him Cost Plus $.15 so instead of costing him $.91 on his $36 average transaction it will cost him $.86. It’s only pennies but based on the volume he is doing, it will ultimately save him over $4000 a year…ChaChing!!! Those pennies really add up!

For your typical brick and mortar type business, the majority of your transactions, whether they be debit or credit cards, will be swiped through your credit card machine and therefore, receive your best rate. However, when you hand key a card or take a corporate or rewards card, they are going to cost you more whether you are on 3 Tier, 4 Tier or Cost-Plus. You just want to make sure you’re getting as close to cost of the actual card/transaction type, as possible.

Take a look at your current statement. Does it break down specific card

types? Check the rates you’re paying against the Interchange Rates shown below. Remember, the processor is in business to make a profit just as you are. But, it should be fair and reasonable based on their costs and risks that they are taking. Shown below is the current Interchange Rates (effective April 2009). If your current processor refuses to talk to you about this pricing model or if someone is approaching you with a “deal” and refuses to talk with you about Cost-Plus Pricing, look elsewhere. Typically, Interchange Rate changes take place in April and October of each year. So, you would want to be watching your statements in February and March for any “notifications” of upcoming changes in rates. Additionally, you would want to be on the lookout in August and September as well. Then, after you receive your May and November statements, compare them to previous months so you can be absolutely certain you fully understand any changes and how they affect you. Get a thorough explanation and don’t accept less. Since the Interchange Rates below reflect April 2009 levels, you may access both the Visa and MasterCard sites at appropriate times of the year for updated and current Interchange Rates: Here’s the sites for your convenience.

VISA INTERCHANGE RATES

MASTERCARD INTERCHANGE RATES

VISA INTERCHANGE FEES EFFECTIVE APRIL 2009 Changes each April and October

Interchange Programs Domestic Cards International Cards

Consumer Credit Consumer Debit Consumer Credit Consumer Debit

CPS Retail 1.54% + $.10 1.03% + $.15 1.94% + $.10 1.43% + $.15

CPS Retail Threshold I* 1.43% + $.10 .62% + $.13 N/A N/A

CPS Retail Threshold II* 1.47% + $.10 .81% + $.13 N/A N/A

CPS Retail Threshold III* 1.51% + $.10 .92% + $.15 N/A N/A

CPS Rewards 1 1.65% + $.10 N/A 2.05% + $.10 N/A

CPS Rewards 2 1.95% + $.10 N/A 2.30% + $.10 N/A

CPS Restaurant 1.54% + $.10 1.19% + $.10 1.94% + $.10 1.59% + $.10

CPS Supermarket 1.24% + $.05 1.03% + $.15 (max @ $.35)

1.65% + $.05 1.43% + $.15 (max @ $.35***)

CPS Supermarket Threshold I* 1.15% + $.05 .62% + $.13 (max @ $.35)

N/A N/A

CPS Supermarket Threshold II* 1.20% + $.05 .81% + $.13 (max @ $.35)

N/A N/A

CPS Supermarket Threshold III* 1.22% + $.05 1.22% + $.05 .92% + $.15

(max @ $.35)

N/A N/A

EIRF 2.30% + $.10 1.75% + $.20 (max @ $.95 for

MCC 5541 & 5542)

2.70% + $.10 2.15% + $.20 (max @ $.95 for

MCC 5541 & 5542***)

CPS Key Entered 1.80% + $.10 1.60% + $.15 2.25% + $.10 2.00% + $.15

CPS Retail 2 1.43% + $.05 .80% + $.25 1.83% + $.05 1.20% + $.25

CPS E-Commerce Preferred 1.80% + $.10 1.55% + $.15 2.20% + $.10 1.95% + $.15 CPS E-Commerce Basic 1.80% + $.10 1.60% + $.15 2.25% + $.10 2.00% + $.15 CPS Card Not Present 1.80% + $.10 1.60% + $.15 2.25% + $.10 2.00% + $.15

CPS Automated Fuel (including Signature credit

cards)

1.15% + $.25 .70% + $.17 (max @ $.95)

1.55% + $.25 1.10% + $.17 (max @ $.95***)

CPS Retail Service Station 1.43% + $.10 .70% + $.17 (max @ $.95)

1.83% + $.10 1.10% + $.17 (max @ $.95***)

CPS Small Ticket 1.65% + $.04 1.55% + $.04 2.05% + $.04 1.95% + $.04 Utilities $.75 $.75 .40% + $.75 .40% + $.75

CPS Hotel/Car Rental –Card Present

1.54% + $.10 1.36% + $.15 1.98% + $.10 1.76% + $.15

CPS Hotel/Car Rental – Card Not Present

1.54% + $.10 1.36% + $.15 1.98% + $.10 1.76% + $.15

Standard 2.70% + $.10 1.90% + $.25 3.10% + $.10 2.30% + $.25

SIGNATURE PREFERRED SIGNATURE PREFERRED

Card Not Present 2.40% + $.10 N/A 2.70% + $.10 N/A

Preferred Retail 2.10% + $.10 N/A 2.50% + $.10 N/A

B2B 2.10% + $.10 N/A 2.50% + $.10 N/A

Electronic 2.40% + $.10 N/A 2.70% + $.10 N/A

Standard 2.95% + $.10 N/A 3.10% + $.10 N/A

***EXCLUDING .40% ISA & ASSESSMENTS

VISA INTERCHANGE FEES EFFECTIVE APRIL 2009

INTERCHANGE PROGRAMS CONSUMER & SIGNATUR PREFERRED CONSUMER CREDIT REFUND DEBIT REFUND MO/TO E-Commerce 2.05% 1.87% All Other Markets 1.76% 1.31% Commercial Credit 2.24%

VISA INTERCHANGE FEES EFFECTIVE APRIL 2009

INTERCHANGE PROGRAMS DOMESTIC CARDS INTERNATIONAL CARDS

COMMERCIAL CREDIT COMMERCIAL CREDIT Utilities $1.50 .40% + $1.50

Purchasing Electronic 2.65% + $.10 3.05% + $.10

Business Electronic 2.40% + $.10 2.80% + $.10

Corporate Electronic 2.25% + $.10 2.65% + $.10

Purchasing Card Not Present 2.55% + $.10 2.95% + $.10

Business Card Not Present 2.25% + $.10 2.65% + $.10

Corporate Card Not Present 2.20% + $.10 2.60% + $.10

Purchasing Retail 2.30% + $.10 2.70% + $.10

Business Retail 2.20% + $.10 2.60% + $.10

Corporate Retail 2.10% + $.10 2.50% + $.10

Purchasing B2B 2.10% + $.10 2.50% + $.10

Business B2B 2.10% + $.10 2.50% + $.10

Corporate B2B 2.10% + $.10 2.50% + $.10

Business Standard 2.95% + $.10 3.35% + $.10

Purchasing Standard 2.95% + $.10 3.35% + $.10

Corporate Standard 2.95% + $.10 3.35% + $.10

Purchasing Level II 2.00% + $.10 2.40% + $.10

Business Level II 2.05% + $.10 2.45% + $.10

Corporate Level II 2.05% + $.10 2.45% + $.10

Purchasing Level III 1.80% + $.10 2.20% + $.10

Corporate G2G 1.65% + $.10 N/A

Purchasing G2G 1.65% + $.10 N/A

GSA Purchasing Large Ticket 1.20% + $39.00 1.60% + $39.00

Purchasing Large Ticket .95% + $35.00 1.35% + $35.00

OTHER FEES: ASSESSMENT FEES .0925% AUTHORIZATION ACCESS FEES $.005 PER ITEM (will be $.0195 effective 7/1/09; additionally, *Threshold pricing merchants authorization access fee will be $.0145 effective 7/1/09) SETTLEMENT ACCESS FEES $.0017 PER ITEM

RISK FEES $.001 PER ITEM Interchange fees are paid to the cardholder’s issuing bank Assessment fees are paid to Visa

MASTERCARD INTERCHANGE FEES EFFECTIVE APRIL 17, 2009

INTERCHANGE PROGRAMS

CONSUMER CREDIT CARDS CONSUMER DEBIT/PREP

AID

Consumer Core

Consumer Enhanced

Consumer WorldCard

Consumer WorldCard

Elite

Consumer WorldCard High Value

Consumer Debit

Public Sector 1.55% + $.10 1.55% + $.10 1.55% + $.10 1.55% + $.10 1.55% + $.10 N/A Convenience Purchase 1.90% 1.90% 2.00% 2.00% 2.00% N/A Merchant UCAF 1.58% + $.10 1.73% + $.10 1.73% + $.10 2.20% + $.10 2.20% + $.10 1.05% + $.15

Full UCAF 1.68% + $.10 1.83% + $.10 1.83% + $.10 2.30% + $.10 2.30% + $.10 1.15% + $.15 Merit III 1.58% + $.10 1.73% + $.10 1.73% + $.10 2.20% + $.10 2.20% + $.10 1.05% + $.15

Merit III Tier I 1.43% + $.10 1.43% + $.10 1.53% + $.10 1.53% + $.10 1.53% + $.10 .70% + $.15 Merit III Tier II 1.48% + $.10 1.48% + $.10 1.58% + $.10 1.58% + $.10 1.58% + $.10 .83% + $.15 Merit III Tier III 1.55% + $.10 1.55% + $.10 1.65% + $.10 1.65% + $.10 1.65% + $.10 .95% + $.15

Supermarket 1.48% + $.05 1.48% + $.05 1.58% + $.05 1.90% + $.05 1.90% + $.05

1.05% + $.15 (max @ $.35)

Supermarket Tier I 1.27% 1.27% 1.37% 1.37% 1.37%

.70% + $.15 (max @ $.35)

Supermarket Tier II 1.32% 1.32% 1.42% 1.42% 1.42%

.83% + $.15 (max @ $.35)

Warehouse Club 1.10% 1.10% 1.10% 1.10% 1.10%

1.05% + $.15 (max @ $.35)

Warehouse Club Tier I .90% .90% .90% .90% .90%

.70% + $.15 (max @ $.35)

Warehouse Club Tier II N/A N/A N/A N/A N/A

.83% + $.15 (max @ $.35)

Warehouse Club Tier III N/A N/A N/A N/A N/A

.95% + $.15 (max @ $.35)

Merit I 1.89% + $.10 2.04% + $.10 2.05% + $.10 2.50% + $.10 2.50% $.10 1.64% + $.16 Merit I – Insurance 1.43% + $.05 1.43% + $.05 1.43% + $.05 2.20% + $.10 2.20% + $.10 N/A Merit I – Real Estate 1.10% 1.10% 1.10% 2.20% + $.10 2.20% + $.10 1.10%

Key Entered 1.89% + $.10 2.04% + $.10 2.05% + $.10 2.50% $.10 2.50% $.10 1.64% + $.16 Petroleum 1.90%

(max @$.95) 1.90%

(max @ $.95) 2.00%

(max @ $.95) 2.00%

(max @ .95) 2.00%

(max @ $.95) N/A

Petroleum-CAT/AFD N/A N/A N/A N/A N/A

.70% + $.17 (max @ $.95)

Petroleum-Service Station

N/A N/A N/A N/A N/A

.70% + $.17 (max @ $.95)

Utilities $.65 $.65 $.65 $.75 $.75 $.45

Service Industries 1.15% + $.05 1.15% + $.05 1.15% + $.05 1.15% + $.05 1.15% + $.05 1.15% + $.05 Restaurant N/A N/A 1.73% + $.10 1.73% + $.10 1.73% + $.10 1.19% + $.10

Small Ticket N/A N/A N/A N/A N/A 1.55% + $.04 Emerging Markets N/A N/A N/A N/A N/A .80% + $.25

T&E N/A N/A 2.30% + $.10 2.75% + $.10 2.75% + $.10 N/A T&E Large Ticket N/A N/A N/A 2.00% 2.00% N/A Standard 2.95% + $.10 2.95% + $.10 2.95% + $.10 3.25% + $.10 3.25% + $.10 1.90% + $.25

MASTERCARD INTERCHANGE FEES EFFECTIVE APRIL 17, 2009

INTERCHANGE PROGRAMS

COMMERCIAL CARDS

Business Cards

Fleet Cards Purchasing Cards Commercial, Corporate

World, & Corporate World

Elite Cards

Business World, & Business World

Elite Cards

Commercial Face to Face 2.20% + $.10 2.50% + $.10 2.40% + $.10 2.15% + $.10 2.25% + $.10 Commercial Face to Face Petro 2.05% + $.10 N/A 2.05% + $.10 2.05% + $.10 2.10% + $.10 Commercial Large Ticket I – max tran amount $7,255

1.25% + $40.00 1.25% + $40.00 1.25% + $40.00 1.25% + $40.00 1.30% + $40.00

Commercial Large Ticket II – max tran amount $25,000

1.25% + $40.00 1.25% + $40.00 1.25% + $40.00 1.25% + $40.00 1.30% + $40.00

Commercial Large Ticket III – max tran amount $100,000

1.25% + $40.00 1.25% + $40.00 1.25% + $40.00 1.25% + $40.00 1.30% + $40.00

Data Rate I 2.65% + $.10 2.65% + $.10 2.65% + $.10 2.65% + $.10 2.70% + $.10 Data Rate II 2.20% + $.10 2.50% + $.10 2.40% + $.10 2.15% + $.10 2.25% +$.10 Data Rate III 1.80% + $.10 1.80% + $.10 1.80% + $.10 1.80% + $.10 1.85% + $.10 Data Rate II Petroleum 2.05% + $.10 2.05% + $.10 2.05% + $.10 2.05% + $.10 2.10% +$.10 Commercial T&E I 2.50% 2.70% 2.70% 2.40% 2.55% Commercial T&E II 2.35% + $.10 2.55% + $.10 2.55% + $.10 2.25% + $.10 2.40% + $.10 Commercial T&E III 2.30% + $.10 2.50% + $.10 2.50% + $.10 2.20% + $.10 2.35% + $.10 Standard 2.95% + $.10 2.95% + $.10 2.95% + $.10 2.95% + $.10 3.00% + $.10

MASTERCARD INTERCHANGE FEES EFFECTIVE APRIL 17, 2009 INTERCHANGE PROGRAMS INTERNATIONAL CARDS

Commercial Purchasing Data Rate II** 2.00% Consumer Merchant UCAF 2.25% + $.10 Consumer Full UCAF 2.35% + $.10 Consumer Electronic 1.91% Consumer Standard 2.44% + $.10 Commercial Standard 2.75% Commercial Purchasing Large Ticket** 1.20% + $30.00 Commercial Purchasing Standard 2.75% ** Program Support Fees are not added to these interchange categories

MASTERCARD INTERCHANGE FEES EFFECTIVE OCTOBER 2008

INTERCHANGE PROGRAMS REFUNDS Consumer/World/World

Elite Credit Consumer

Debit Commercial

Credit

REFUND GROUP 1 2.42% 1.72% 2.37% REFUND GROUP 2 2.09% 1.68% 2.30% REFUND GROUP 3 1.95% 1.40% 2.21% REFUND GROUP 4 1.82% N/A 2.16% REFUND GROUP 5 1.73% N/A N/A OTHER FEES: ASSESSMENT FEES .095%

NETWORK ACCESS & BRAND USAGE FEES $.0185 PER ITEM SETTLEMENT ACCESS FEES $.0011 PER ITEM Interchange fees are paid to the cardholder’s issuing bank

Chapter 5

Debit Card Processing/On-Line and Off-Line

As discussed earlier, under 4 Tier Pricing, there is a difference between on-line and off-line debit card rates. If you are priced on a 4 tier structure, and aren’t using a pin pad, your Tier 1 rates will be off-line debit transactions and will be your lowest “swiped” rate. If, however, you have a pin pad present and customers are entering their pin number, you are processing on-line debit transactions. In some cases, this will be less expensive for you but it really depends on your average ticket. Take a look at the scenario discussed in the chapter on 4 Tier Pricing to determine if you should have and utilize a pin pad for savings. Typically, if you elect to use a pin pad, the processor will charge you a monthly fee to access the Debit Networks and a per item fee (which is where they make their money). Make sure you use that charge when calculating to determine if it will be an overall cost sensible option for you. In October 2011, the Durbin Amendment to the Dodd Frank Act was passed by Congress. The effects of this amendment pertain specifically to debit transactions. Now, as a result of this legislation, there is a cap of .05% + $.21 ($.22 for those processors that provide additional security measures) on all debit transactions whether it is swiped like a credit card or entered with a pin number. In other words, the most any debit card issuer can make now is just what is provided by these fees. Remember, these are referred to as the “interchange fees” and it is what your processor is charged. You, on the otherhand, are charged a “discount rate” that will be in addition to these fees. If you are priced on the most transparent form of pricing, which is Interchange-Plus, or Cost-Plus, the savings are automatically passed thru to you. If, however, you are priced on a 3 Tier or 4 Tier pricing, it will be much more difficult to determine if your processor is passing on the savings to you, or, simply lining their pockets with the increased profits. Chapter 6

Underwriting and Risk

Understand that when a processor runs a transaction for you, and then within 48-72 business hours, deposits the funds for the sale in your account, they are taking a risk. They pay you before they receive payment from the card-issuing bank. Consequently, each processor has an underwriting and risk assessment

procedure they go through for every account. Your typical brick and mortar retail or restaurant type business that swipes the card through a terminal, represent the least amount of risk for processors. If you swipe less than 80% of your sales, as a rule of thumb, your provider will likely charge you a bit higher rate (or a surcharge) for this “assumed” higher risk to them.

Certain industries are inherently more risky as well. Lodging is a good

example. Many processors charge higher rates for lodging merchants because of the relatively high incidence of chargebacks. A guest reserves a room, giving the innkeeper their credit card number. Then, for whatever the reason, at the last minute, doesn’t show up. The hotel/motel charges the customers’ card for a “cancellation fee” and the customer disputes the charge because they never actually stayed there. This is one example but there are many others as well. Furniture stores, for example would be one. Customer places a special order for something they saw in a catalog. The customer gives their card to place a deposit for the item. When the item arrives, the customer doesn’t like it and refuses delivery and the store is stuck with the goods. Customer wants deposit back and the store refuses and the next thing you know, there is a chargeback dispute happening. So, this type of industry typically gets charged higher rates.

Each processor has their own guidelines for assessing risk. Many will have “special high risk merchants” and most will have “prohibited merchants”. When you make your application, the agent will be asking you questions about your type of business and how you transact business so that their Underwriting department can get a better understanding of the risk to them. Chapter 7

Equipment and Supplies

In order to process credit cards for payments, you will need a POS (Point of Sale) terminal or software. First let’s talk about payment terminals. There are lots of different types with all kinds of bells and whistles. With the Internet at your fingertips, it’s quite easy to research the different types and find the best price and terminal type for your needs. Here’s a list of the largest manufactures listed in order of the most terminals in service to the least:

Verifone Hypercom

Ingenico Lipman Thales

There are other manufactures but the ones listed above are the major

players. Obviously, each company has many different types of terminals (wireless, terminals with built in printers, terminals w/o printers, smart card terminals, check readers, etc). Do the research and determine what will best suit your particular needs now as well as in the future.

Now, when looking at terminals, keep in mind one big important thing...make sure you are not purchasing a proprietary terminal that only works with one processor (like a Linkpoint that only works with one company….they figure if they can sucker you into purchasing their terminal, you’re less likely to ever leave them because it would involve buying another terminal). Also, you will need to determine if you are going to purchase or lease the terminal. I’ll tell you this that there are many reps out there that are making a HUGE living off of just leasing terminals to people for say, “only $69 a month for 48 months”. Do the math! That comes out to over $3300 for a terminal that probably cost about $3-600.

Most often, you will be better off purchasing rather than leasing. Some

companies will let you split the purchase price up over a period of several months with no interest. Oh yah, when you see some of those ads that say “FREE TERMINALS with your merchant account”, make sure you take that into consideration when comparing overall rates from one company to the next. Let’s face it, if you find you are paying a bit more with company A that is offering a FREE Terminal than you would with Company B, just do the math. Over a period of a year or two, you may ending up paying for that terminal several times over….they really don’t cost that much these days. All I’m saying is simply, do the math for yourself and don’t get lured down that path, if it’s absolutely not the right thing to do.

The other way that you can process transactions is thru a software program

that has a credit card processing application built in. Some merchants elect to utilize a software program because of all the other business applications they get like, inventory control, time and attendance, accounting and other valuable business tools. These programs will most often cost quite a bit more than a credit card terminal. However, it may be a real cost savings in the long run because of improved business efficiencies.

Supplies can be purchased from your provider and in some cases, they have

a regular monthly program, for a fee that covers supplies and insures equipment. What I’ve found is that you are most often better off getting your paper rolls and ribbons from Sam’s Club, Costco, Staples, OfficeMax etc. or even take a look online as well….isn’t the Internet great?

In today’s marketplace, we are now seeing a myriad of new mobile or

wireless type processing solutions. There may be some applications here that fit your business and how you transact sales but, they do carry some additional fees so make certain that you perform your due diligence when checking into these new and exciting alternatives. Don’t hesitate to use my contact info with questions. Chapter 8

Ask the Questions

This is your business and you are signing on the dotted line in order to be able to accept plastic in your business. Before you do, ask the questions and even ask to see a copy of the “fine print” in the agreement and actually read it. Ask for a copy that you can review, overnight, if need be. If they refuse to let you look at a copy, run. Know what you are getting into. Here are some things to ask:

Is there a contract term? If so, how long is it?

If I terminate my contract, is there a penalty? If so, how much? (Depending on how far along you are into your contract and you’re looking to

leave for a better deal, you may be better off just continuing to keep the account active and just paying the Monthly Minimum for the duration instead of the termination fee). Some processors will even pay your termination fee to

come on board. Ask the questions and do the math.

Is there a monthly minimum? If so, how much?

Is there a statement fee? If so, how much?

Are there Batch Header Fees? How much?

Are there any set-up or New Account fees? How much?

Are there any per item fees for AMEX and Discover?

Are there any Annual Fees? How much?

Can my rate increase during the contract term? Why and how much?

How about chargeback fees? How much?

Set-up fees for AMEX or Discover?

Voice Authorization fees?

Do they offer 24/7 Customer Support?

Is the equipment they are recommending proprietary? (only usable with that processor) or could you use

it with any other processor if you decide to terminate your relationship with them

Do they refund the discount rate to you when you issue a credit to the customer?

Can you reprogram my existing equipment?

Don’t replace it unless you absolutely need to. If so, shop around on-line or even on eBay for your best price.

Caution: DON’T BUY USED EQUIPMENT

Are there any PCI fees? Are they annual, monthly or A combination of both? What do you get for it?

Are supplies included or, is there a program available

For a monthly fee? How much?

Chapter 9

More valuable information for your benefit

DISCOVER: Recently, Discover has begun charging most merchants $9.95 a month simply to send you a paper statement. You can access them on-line for FREE by simply contacting them and let them know that you no longer want to receive the paper. Also, while you’re at it, it would be a good idea to attempt to negotiate a lower rate with them. They’re typically pretty good to work with and will usually accommodate your request. And, eliminating the ten bucks a month for the statement is a great way to easily put an additional $120 in your pocket each year.

AMEX: Here’s another way you can save yourself over $50 a year. If you are currently accepting AMEX for payments, and you are receiving a paper statement from them, they are charging you $4.50 per month. Again, you can access it on-line, if you so desire, for FREE by simply contacting them. Don’t even bother trying to negotiate rate with them because they won’t budge. If you’re not currently accepting AMEX and feel you want to give it a try, they have a $5 monthly flat rate program. If at any time in a twelve month period, however, if you exceed $4,999 in AMEX volume, they will automatically kick you into their 3.25-3.50% rate program. Check Guarantee Services: Most credit card processing entities also offer the availability of a check guarantee service. If you have an issue with bad, checks, you should certainly look into this service. The general rule of thumb is if you write off more than about $300 a year in bad, uncollectable, checks, the service will pay for itself. The reason being is that they offer many types of programs but typically they come with a monthly minimum fee of about $25. You would only run checks on people that are questionable or possibly even new customers just to protect yourself. There is no need to run regular customers checks. And, don’t let someone try to sell you a check reader machine unless you are doing a huge volume of checks that you’re going to run. You can simply use your credit card machine for this service once it is programmed accordingly. Most of these services also offer “features” that may benefit your business. You can get business check coverage, stop payment coverage and even a multiple check option that you could use and offer to customers to help increase business. ECC (Electronic Check Conversion): This may be a service that you’ve experienced yourself. You write a check to pay for a purchase. The cashier scans it through a check reader and then hands your check back to you. In essence, what has happened is that your check has been converted to a debit transaction and hit your account immediately. This may be a service that could be of benefit to you if you take a large number of checks. You’ll see more and more merchants utilizing this feature going forward. Gift/Rewards Cards: Many processors now offer gift and reward/loyalty cards. The gift cards are more functional and durable than paper gift certificates. The rewards cards replace old punch cards and help to build customer loyalty. Both of these types of cards, with some creative thinking, can help to build your business. Merchants are coming up with all kinds of innovative applications for them. And, typically, you can get on-line tracking and reports for them that make them even more functional for you.

Many merchants are using Gift Cards as a tool to capture more pin numbers on debit transactions (see section on debit cards). Some are using them to create additional sales. For example: let’s say you put a sign on the counter that says “Sales of $50 or more earns a $5 or $10 Gift Card good towards your next purchase”. Then, when the customer comes to the counter and only has, say, $40 in merchandise, it may just prompt them to continue shopping and increasing your sales that day. Then, they get a Gift Card that guarantees to bring them in again or, possibly they give the card to someone as a gift that has never been in your store before. If you let your mind be creative, you’ll find numerous ways to utilize Gift Cards outside of their normal and more obvious uses.

In addition, if you’re not already doing so, you could load the value of any returns onto a Gift Card which, again, ensures you of a return of the customer. Some customers may object to this and simply ask for the cash back or credit back to their credit card. However, you may offer them some “incentive” here by offering either a percentage increase or a set dollar amount over and above the return items value. Cash Advance: Is your business in need of working capital? There are numerous companies offering this service and it may indeed be a great alternative to bank lending. You may be eligible for $2,500-$150,000 in working capital. Funds can be used for anything you may need in your business. There are high approval rates, funding in as few as 5 business days with completely automated collection and no application fees and no personal collateral. There are no fixed monthly payments as you simply repay a pre-determined percentage of each of your credit card sales volume batches each day. Let me know if you have any questions. Chapter 10

Payment Card Industry/Data Security Standards

AS A MERCHANT, HAVE YOU EVER...

• Processed a credit card transaction at your business and noticed the receipts

contained the full credit card number and the expiration date? How about

your copy of the receipt? If so, you are NOT COMPLIANT AND AT

RISK.

• Stored credit card numbers in a binder or on your computer in a spreadsheet

for recurring billing? NON-COMPLIANT!!!

• Configured your router or computer and used a easy, generic password such

as 1-2-3-4? HACKERS LOVE THIS….YOU, AND YOUR

CUSTOMERS ARE AT RISK. Create your own password and never use

default passwords.

• Had your terminal go down and started keeping credit card data written in a

spreadsheet on your computer to charge the client later?

• Imprinted a card and written down the CVV data (3-digit security code on

back or 4-digit code on the front of the card)?

• Not renewed your anti-virus software on your computer?

• Spent years storing your receipts in a shoe box in your back office?

You may have seen in the news in recent months of the huge data breaches that

took place which resulted in millions of credit card numbers being compromised.

A couple huge payment processors and a major retailer were hacked into. You

would think that these types of entities are the main targets of these international

fraudsters. However, due to increased security being put into place, hackers and

thieves are beginning to focus their attention on small, local, mom and pop type

organizations. Consequently, you absolutely need to be aware and alert for the

safety of you, your business and your customers.

PCI DSS is the real buzz phrase in the payments industry these days. It stands

for Payment Card Industry Data Security Standards. Compliance is a standard

of security established for any business that processes credit cards. Whether you

have a computerized POS system, process over a phone and do manual imprints,

process through a credit card terminal or have an e-commerce website taking

orders, PCI establishes a series of best practices and minimum security protocols

that must be observed for your business type.

Through the Fair and Accurate Credit Transactions Act (FACTA) of 2003, Public Law 108 to 159, the U.S. congress preempted what some individual states mandated on credit and debit card truncation to set a national standard. Under Title 1, Section 113 of the act, only the last five digits of the card account number can be printed on electronically printed receipts provided to the customer. The laws vary by state regarding truncation of the merchants copy. Some states carry it even further and say that the expiration date can’t appear on receipts either. To be on the safe side, I would suggest that you make certain that both copies are truncated totally. If your receipts are showing more than is allowed, contact your

processor, or POS vendor, immediately and have them assist you in becoming fully compliant.

While you’re at it, ask your processor about any PCI compliance fees they may now, or in the future, be charging you. Some are using this as a new revenue stream and charging excessive monthly, annual or a combination of both, fees with no corresponding benefits. ASK THE QUESTIONS AND GET THE

SPECIFICS.

MAKE CERTAIN YOU ARE FULLY COMPLIANT AND NOT AT RISK….FINES FOR NON-COMPLIANCE

CAN BE HUGE AND CAN LITERALLY THREATEN THE CONTINUATION OF YOUR BUSINESS

Glossary of Terms

Acceptor A business that has qualified to accept credit or debit cards as payment. Acquirer This is an organization that is registered as a member of Visa and MasterCard as a member bank or bank/processor. They are in the business of processing credit card transactions for businesses. Acquiring Financial Institution The acquiring financial institution (acquirer) contracts with the bank and the merchants to enable sales utilizing credit cards. The acquirer deposits daily credit card totals and debits processing fees from the merchants’ bank account. Address Verification Service (AVS) AVS is a service provided as part of a credit card transaction and validates and confirms the cardholder’s address with the card issuer’s records. This helps to protect the merchant from fraudulent transactions especially on Card Not Present transactions. A code is returned with the authorization indicating the address match up. Adjustment The acquirer to correct a processing error initiates an adjustment. The error could simply be a duplication of a transaction or could be the result of a cardholder

dispute. The acquirer debits or credits the merchant DDA account for the dollar amount of the adjustment. Associations These are entities that are formed to administer and promote credit and credit cards. Of course, the best-known associations are Visa and MasterCard.

Authorization The authorization verifies that the card has sufficient funds available to cover the amount of the transaction. The authorization code is returned back to the merchant on their credit card terminal and will print on the receipt. Typical responses will be:

Approval: transaction approved Decline: transaction denied or not approved Call Center: more details are needed and merchant will need to call a toll-free Authorization number.

Authorization Fee When your rates are “unbundled” you will have a rate plus an authorization or transaction fee. This could be anywhere from $.05 to $.50. Also, most processors will charge you a transaction fee for processing AMEX, Discover, JCB or other card types of usually no more than $.25 each. Auto-Close This is a terminal function that enables the machine to automatically batch out at a predetermined time each day. However, this is never guaranteed, due to possible technical difficulties so you should always verify the day after on your printer to see “batch accepted” “batch settled” or something similar, indicating a successful batch. Automated Clearing House (ACH) file This is an electronic file with instructions for the exchange and settlement of electronic payments paid between financial institutions. Average Ticket The average dollar amount of the merchants’ sales. This number is obtained by taking the total sales volume divided by the number of sales. Processors in determining your rates most often use this figure.

Batch At the end of the day, you will “settle” your terminal. In other words, you will “batch out” which takes all credit card transactions run thru your machine for the day and sends them for settlement. Within a couple business days, you will receive the deposit into your account.

Bankcard This would be a credit card issued by a Visa or MasterCard sponsored financial institution. Cards such as Discover, American Express, Diners Club, JCB, etc. are issued directly from them rather than through banks. Cardholder This is, of course, the individual that owns the credit card that is being used in your business. Card Issuing Bank A network member bank that offers credit/debit card purchasing for their account holders. An example would be Citibank and the Citibank Visa card.

Card Not Present When you process a transaction on a website, over the phone or fax or even if you have to manually enter a card number due to the magstripe being unreadable, you will be charged CNP rates. When a credit card is not electronically read by a credit card machine, it is considered by V/MC to be a higher risk transaction and therefore, your rates will be higher than they are for cards swiped. In some cases, if you obtain the CVV/CVC code from the back of the card, it may lessen your rate surcharge somewhat. Chargeback This is a credit card transaction that is billed back to the merchant after the sale due to a dispute from the customer. The credit card issuer on behalf of the cardholder initiates Chargebacks. Typical cardholder disputes involve product delivery failure or product/service dissatisfaction. You will be typically be charged a “chargeback handling fee” in the neighborhood of $25, or more. When you receive a chargeback, you will have a specified period of time to respond with proper documentation validating the original charge to the customer in order to retrieve the funds. These are never fun! Make sure to keep you batch totals and individual sales receipts on file (but, always keep them in a secure place).

Commercial Card Credit cards issued to business entities to cover expenses such as travel, entertainment and procurement. This could include purchase cards, business cards, corporate cards and fleet cards. There are special procedures to be followed with prompts on your POS machine that will assist in passing billing information back to the card-issuing bank. This information will, in turn, be displayed on the cardholder statements. This program helps promote the use of credit cards for business purchases by providing tracking to business users. Corporate Card Similar to Commercial Cards discussed above and are issued for business related expenses. Credit Reversal This is the cancellation or reversal of a sale that was done on the same day. The transaction is still in the terminal and it is simply a transaction done on the POS machine to wash out the transactions. Demand Deposit Account (DDA) This is simply your bank account where you will have your sales deposited to. Discount Rate The percentage rate that the processor charges the merchant for the settlement of sales transactions. Interchange Fee This is the largest part of the Discount Rate charged by the processor and could be referred to as a “pass-through” fee. These fees get paid directly from the processor to the card-issuing bank, which covers their costs of issuing cards, collecting payments and marketing expenses. There are over 100 different Interchange Fees currently and it is constantly changing. Most merchants think that the processors are making all this money but, in reality, they make very little per transaction while the bulk of the fees are paid to the issuer. Issuing Bank This would be the bank that issued your credit card. There are numerous “issuing banks” today. They give a credit card to a Cardholder and grant them the rights to borrow money from them up to a “credit limit”. The cardholder then makes payments on the balance back to the issuer and pays interest unless they pay the balance in full each month.

Knuckle Buster This is a manual credit card imprinter. Every merchant should have one of these around for the occasional power outage or network downtime. Merchant Account You are the merchant and you obtain a “merchant account” from a “Sponsoring Bank”, “Acquiring Bank”, or “Merchant Bank”. Merchant ID number (MID) Your processor will issue you a MID to identify you during the processing of sales transactions. Mid-Qualified Transactions (MQ) Any time you process a card not present transaction, you will be charged, at least, MQ rate surcharges. Again, remember these types of transactions are considered to be more risky and therefore, are charged more. Some processors charge you even higher NQ rates for these types of transactions. Net Effective Rate When trying to figure out what you are really paying for your credit card services, take your total monthly fees and divide by your total monthly volume. This will give you a more accurate assessment of your “actual rate”. It’s very important to understand what the Effective Rate is because it can be significantly more than the “discount rate” you have been quoted. Non-Qualified Transactions (NQ) These are sales that do not meet Visa or MasterCard criteria and are processed at a higher rate. Many corporate entity type cards and some Rewards cards are charged NQ rates. Payment Processor This is the company that your credit card authorization requests and electronically routes the sale thru to the card issuer and coordinates fund payment to the merchant. Phishing Phishing (pronounced “fishing”) is a general term used to refer to the creation and use of e-mails and websites – designed to look like legitimate emails and websites from well-known businesses, financial institutions, and government agencies – in

order to deceive Internet users into disclosing their bank and financial account information or other personal data such as usernames and passwords. The phishers then take that information and use it for criminal purposes, such as identity theft and fraud. Point of Sale (POS) When you’re shopping in a retail store or dining at a restaurant, and you make a purchase and present your card. Your card is swiped thru a machine or POS system, an authorization is received (hopefully), a receipt is printed and you sign for the transaction. POS Terminal This is electronic equipment used to collect, transmit and/or/ store credit card transaction information at the point of sale. There are numerous manufactures but the largest and oldest are Verifone, Hypercom, Lipman, Thales, and Ingenico etc. There are others too but sometimes reps will try to sell you a “proprietary” machine that will only work with their processor. Always make certain that you buy, or lease a universal machine so you don’t get yourself tied to a non-performing processor.

Processors These are companies that process credit card transactions thru the bank system for you. Typically, banks utilize a third party to process transactions rather than providing the service themselves. Their expertise is in banking, not credit card processing. Real-Time Processing Typically used on websites but can now, more frequently, be seen in the retail environment as well. Real-time processing requires a secure payment gateway for the security of card/cardholder information. Secure Payment Gateway Software utilizing Secure Sockets Layer (SSL) and encryption technology to transmit transaction data over the Internet. It is typically a third party service held on a different server so the customers’ credit card info doesn’t need to be stored on the merchant’s server. Settlement Amount This is the amount of proceeds deposited into your account after the sales and settlement of your terminal. Typically, funds are deposited 24-48 business hours

after settlement. Some processors charge “daily discounting” meaning that they take their discount fees out of each batch. This can be an accounting nightmare. Shop around until you find a processor that gives you gross deposits daily and only takes their fees once a month. Shopping Cart Software This is a software program attached to your website. It is especially handy if you market numerous items and would be similar to going the store and walking through the aisles and throwing things in your “basket”. The software program collects and stores shopping information such as the types of items, quantities, taxes and shipping. When the customer is ready to “check out” it also collects their billing information. This software typically interfaces with secure third party payment gateway software on a different server, again for security purposes. With shopping card software, customers can be shopping on your website at 3AM while you are sound asleep. Skimming Technological advances have brought ways for thieves to take advantage of you. Inexpensive, easily configurable devices like a cell phone or PDA, allow a crooked individual to swipe a credit card into the device. Once swiped, the thief has all of the magnetic track info for the card to be duplicated or use the card number contained in the magstripe information to initiate transactions over the Internet. Make certain you know where your card is used, especially in situations where you turn it over to someone, like in a restaurant. Small Ticket Interchange For merchants with transactions under $15 and high volume, you can get your terminal programmed for “small ticket interchange”. This simply means that you aren’t required to get the customers signature on these sales and you are still protected as if you had. This can greatly help speed up your checkout procedures during busy times. Smart Card A Smart Card is one that has a microchip built into it. While these are not in widespread use today, they will be some day. When you are considering purchasing new equipment, make certain that it is smart card ready so that later, you won’t have to upgrade to a new terminal again.

Spoofing/Phishing You may have heard these terms, especially as it relates to doing business on the Internet. This is primarily the practice of setting up a website with the sole intention of ripping off cardholders’ credit card info. A website is set up to make a cardholder believe it to be a legitimate business they normally do business with, or someone they would want to do business with. The site collects the cardholder’s card info and card number. They, in turn, make purchases for themselves and make a quick resale of the items and pocket the cash. Some of these guys also share the info with other fraudsters so the card info can be used as much as possible before the cardholder discovers something wrong is happening with their account. Truncation: This has to do with the programming of your POS terminal or software. It will suppress the customers’ credit card number to only display the last three or four digits on receipts. All states are required to truncate, at least, the customers’ copy but many states also mandate the merchants copy to be truncated as well. And, in some cases, even the expiration date needs to be truncated too. To be on the safe side, do it all. If you ever have need or recalling a transaction for refund purposes, your processors’ Customer Service department will be able to help you.

Virtual Terminal Software that is used to collect, transmit and/or store credit card transactions information on an ecommerce site. Voice Authorization These are needed when the merchant can’t get an authorization thru their normal method or if the transaction amount is unusually high or when a transaction is being declined without a specific reason. You may get a “call center” indication on your POS terminal.

CONCLUSION

As a long time sales rep in the credit card processing business, I have discovered that it has the potential to be very lucrative. As a result, the industry is constantly attracting new reps. Consequently, it is an extremely competitive business simply because of the large number of reps out there. While there are many newbies coming into the business, many, quite frankly, can’t handle the extremely high rejection rate. Take your own business for example and consider how many credit card processing reps you haven’t been willing to give the time of

day to. So, the attrition rate is high and next week, or next month, you see a whole new batch of people coming thru your door with their “deal”. They are “pitching” you what they have been taught (typically after just a half day of training) which certainly may not ultimately be the best “plan” for your business.

All merchant account providers have similar costs and there really isn’t one provider over another that can significantly beat another. Be prudent and do your own research and you will be blessed in the long run.

The benefits that you receive from this guide is that, once you’ve gone through it thoroughly, you will become better educated than 90% of the reps coming through your door. Finally, the playing field in the credit card processing industry is being leveled. Knowledge is power! Nobody cares more about your business and your bottom line than you do. This guide will help you know for sure that you are controlling your costs, in this segment of your business, the best that you can. I would greatly appreciate any testimonial comments that you could email me regarding how this eBook helped you.

Visit MY SITE once in a while for news that may be helpful to you and your

business. It will keep you updated on industry trends and evolutions. You may also subscribe to its RSS feed so you don’t miss anything.

Thank you for reading and if you have any questions or suggestions for

additional information that I could provide in this eBook, you may contact us via my email account which is Michael@creditcardprocessingknowledge.com .

Also, please don’t hesitate to send others to our site once you’ve experienced

the value and benefits received in this eBook. Every single business owner that you know will discover savings to be had in their credit card processing services. Give them the gift that keeps on giving. They’ll thank you for it! That website once again is http://www.creditcardprocessingknowledge.com.

SOME ADDITIONAL HELPFUL RESOURCES

MasterCard Merchants Site

Visa Merchants Site

PCI Security Standards

PCI Self Assessment Questionairre

CONTACT INFORMATION

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MICHAEL MICHAEL MICHAEL MICHAEL SAUMSAUMSAUMSAUM

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WEBSITE: CREDITCARDPROCESSINGKNOWLEDGE.COM

BE BLESSED AND BE A BLESSING

ALL RIGHTS RESERVED. No part of this report may be reproduced or transmitted in any form whatsoever, electronic, or mechanical, including photocopying, recording, or by any informational storage or retrieval system without express written, dated and signed permission from the author.