Fifteen years ago, the Durbin Amendment to the Dodd-Frank financial reform bill established reduced rates for regulated debit cards. Although the Fed significantly increased those rates in diverging from what the Durbin Amendment required, big merchants still succeeded in gaining about a 50% reduction in their cost of accepting regulated debit cards for payment.
Several months after the Durbin Amendment became Law, I was listening to a presentation by one of the largest merchant acquirers in the country when a senior officer of the acquirer bragged to an audience composed of ISOs that, guess what, we’re going to keep all the savings owing to the merchants instead of passing through the savings to our merchant clients. Apparently, the fact that the ISOs were charging their merchants a discount (bundled rate) rather than a more transparent approach, such as interchange plus an explicit fee over and above the interchange fees and network fees, enabled the ISOs to do this.
Discount fees are easily understood as opposed to detailed statements illustrating which fees are simply passed through, like interchange fees and network fees, as contrasted with the fees charged by ISOs and acquirers. However, discount fees often come with various other charges that significantly raise merchants’ total costs. For many of us, discount fees have become the source of frustration with the ISO industry since they typically do not result in the transparency that more sophisticated merchants demand from their acquirers.
Today, merchants have little choice but to accept payment cards. While cards are ubiquitous and are popular with consumers wedded to the promise of rewards, merchants suffer ever-increasing costs to accept them. Recent examples of marketplace abuse have gained the attention of social network media and horror stories of merchant abuse abound. Detailed analysis of merchant statements have been reported on Linkedin that show excerpts of merchant statements with over a 5% markup over interchange. Other sources have weighed in at length about many of the hidden fees and lack of transparency in the merchant payment processing.
This situation has created a Wild West scenario in which vigorous competition exists to gain merchants’ business. Competition has led to better services and reduced costs for sophisticated merchants that have a thorough understanding of their own costs as well as the costs imposed by the card networks, including the interchange paid to card-issuing banks. The most sophisticated merchants know precisely how much they are paying for acquiring services and they demand cost-plus contracts where acquirers’ and network fees are disclosed clearly within contracts and periodic statements of fees.
Unfortunately, most merchants lack the sophistication needed to gain complete insight into how much they are paying for acquiring services. Unscrupulous companies often take advantage of unknowing merchants, resulting in them paying extraordinarily high fees and holding grossly one-sided contracts. It’s been said that acquiring card transactions has created more millionaires in the US than any other occupation!
Here are some steps I have found helpful when attempting to renegotiate an existing agreement or finding a new provider:
- Merchants should review their current acquirer contracts so they entirely understand how much they are being charged.
- They should compare proposals from multiple providers to ensure they get the best deals.
- They should focus not only on price but also on all contractual provisions within the contracts.
- They should set deadlines in order to make sure they do this far in advance of renewing their existing agreements, in order to avoid being trapped by provisions that automatically renew their agreements.
- Plan for 6 months at a minimum to review existing agreements and gather proposals.
- Plan for an additional 6 months to coordinate conversion, if necessary, to another provider. The timeframe needs to be adjusted in the event customized services or reports are required.
- Consider adding a provision in your new agreement that requires the new provider to clearly disclose all fees and limits or eliminate altogether any new fees during the term of the new contract.
Following these steps can be time-consuming, but shortcuts typically lead to failure to obtain the most cost-effective services. Start early and consider hiring an expert to assist in this endeavor.
We can help. Contact us at info@payments-roundup.com or +1 484-269-1719