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Selecting the Best Payment Processor

Written by Scott Scharf

Accountants and trusted advisors should take an active role in helping their clients select the right payment processor for their business. This is especially important for ecommerce businesses, where the majority of their revenue flows through their merchant provider. Fees are charged on every transaction, which can impact profitability, so selecting the wrong processor can lead to your clients’ funds being held (for an undermined amount of time). In addition, you must select a solution that will integrate with your clients’ existing ecommerce or point of sale (POS) infrastructure.CreditCard

Accountants are perfectly situated to analyze the costs and benefits of different payment options. This is a critical decision that shouldn’t be left to the default (Intuit Merchant Services) or based on a quick web search or one of the top-ten pay-to-play sites.

This is a value-added service you can provide your clients, and it gives you a reason to have a high-level conversation with your business owner clients. You’re there to look out for their business, reduce costs, reduce risk, and provide better financial information. Plus, you can move your clients to a service where you have access to all the transaction information you need to keep their finances up to date – in less time and with fewer headaches.

To effectively compare these services and select the best solution for each client you need to understand the merchant processing world.

Payment Options

There are a range of payment services available for businesses:

Most businesses need to accept credit cards and should have the best solution for their business. PayPal is an option, depending on a business’ requirements. If your clients are selling on eBay, then PayPal is the only option.

Make sure to document your client’s payment requirements:

  • Point of sale (POS)
  • Ecommerce
  • Mobile
  • International
  • Volume and size of sales

Note: In most cases, a business will be required to have different merchant accounts for POS/mobile and an ecommerce site.

Merchant Services Overview

There are lots of different players – each collecting its own percentage of the fees – agents, gateways, merchants, issuing banks, and, of course, the Federal Reserve in the middle of everything. There are lots of rules these players have to follow, and lots and lots of shady characters, poor business practices, expensive contracts, and costs you need be aware of and help your clients avoid.

Following is a summary of merchant services:

  • Issuing banks – The bank that issued the credit card to your customer and usually receives the majority of the processing fees. This is called the “interchange” rate, with a max of 5% + 22¢ per transaction, per the Durbin Amendment in Dodd-Frank.
  • Credit card associations – Visa, MasterCard, Discover, American Express. The card association fees are typically 5% to 10% of the processing fees.
  • Gateway – An online company that processes the initial part of the transactions. Gateways are connected to ecommerce sites, POS, and mobile solutions. Gateways charge a variety of fees, both monthly for specific services and per-item fees.
  • Merchant – The business that collects revenue through credit cards and has a relationship with a processor.
  • Merchant service provider (processor) – The merchant services provider is the company from which your customers purchase their processing services. This is the critical relationship. This is the company your client has a contract with (good or, in many cases, bad), where unnecessary and expensive fees are added. It’s the company that deposits the revenue collected into your clients’ bank account.

Note: Most accountants don’t have or request access to the processor’s online service. This is where you can download batch details (where multiple transactions are bundled into a single bank deposit) and the statements that show all the different fees that are being charged. There might be an additional $5 to $10 charge to access this information, but it’s worth it to have the details. Unfortunately, some processors only process statements monthly, so you can’t update merchant costs on a daily or weekly basis.

Typical Fees

Following is an overview of fees (but not all) that can be related to a merchant account. Understanding what your customers are paying for and where you can reduce or eliminate fees is how you can provide value to your customers:

  • Address verification fee – A fraud verification tool that verifies a cardholder’s address with the one on file. Some processors charge a small fee of around 5¢ to 10¢ per transaction.
  • Cancellation fee – An early termination fee that’s applied when a merchant cancels its contract before the end of the term. This is one of the worst practices in the industry: multiyear contracts that auto renew; extremely high cancellation costs (sometimes 100% of the fees that would have been collected over the remainder of the contract); and high “lease” rates on credit card machines.
  • Chargeback fee – The return of money to the consumer, forcibly initiated by the issuing bank.
  • Gateway fee – The monthly charge by the payment gateway passed through to the merchant.
  • Monthly minimum – The minimum dollar amount that must be processed to keep the merchant account active. If the monthly minimum isn’t met, the processor will charge the difference.
  • Payment card industry (PCI) compliance fee – PCI insurance to cover some of the costs if a merchant has a security breach. This typically provides $100K of insurance, but most breaches cost significantly more. This doesn’t replace a merchant’s requirement to be PCI compliant, follow the security requirements, and implement proper credit card handling features. Your clients should consider purchasing cyber liability insurance to provide additional business risk protection.
  • Statement fee – A charge for processing statements. In many cases, you can get these charges waived, but it might require calling or changing the settings on both the gateway and processor online account.
  • Transaction fee – A flat fee that’s charged on every transaction, typically between 10¢ and 25¢. There are some services that don’t include a transaction fee, but the costs are in the percentage charged per transaction.

Note: There are a range of additional terms and processes for determining the fees, including basis points, qualified, mid-qualified, nonqualified, etc.

Terms

  • Acquirer A bank that handles both the payment processor and gateway processing (e.g., Chase Paymentech). By cutting out the middleman, the acquirer can provide better services and sometimes better fees.
  • Batch transactions Transactions the gateway processes during a specific time frame, usually daily, that are bundled by the processor into a single bank deposit. Without access to the processor’s online site, it can be almost impossible to reconcile all the gateway transactions to the bank deposits.
  • Billback and enhanced billback – Watch out for contracts that include billback. If you’re on a daily discount service and promised a flat rate, that’s what happens daily, but it’s not how the whole service works. If the type of transaction doesn’t qualify for that rate, the process will billback the difference in rates over the next two months. Basically, avoid.
  • Chargeback Chargebacks are where a consumer challenges a charge on their credit card. The money is immediately removed from the merchant’s bank account (the same way the money is deposited). The consumer is right and can challenge any charge; it’s the merchant’s responsibility to prove the charge was valid. If a business has a lot of chargebacks, the processor can require the merchant to maintain a minimum balance in the deposit account. In some cases, the processor will hold back a reserve of funds owed to the merchant, which can be months of payments and significantly impact your clients’ cash flow.
  • Restricted/high-risk businesses – Some businesses (e.g., travel, adult products, gambling, and recreational drugs in Colorado) are classified as high risk, and it can be difficult and expensive for such businesses to find processing services.
  • Withheld funds and account terminations – Funds can be withheld on suspicious transactions until they’re resolved. Accounts can be suspended (all transactions stopped) or terminated if the rules of the contracts are broken. Make sure you and your client know the rules to reduce fraud and chargebacks.

Daily Discount vs. Monthly Contract

This is one of the key options that impacts accountants. Daily discount services (PayPal, Square, Stripe, and others) pull the transaction fees out of every sale. Monthly contract services charge all the transaction fees and costs once a month. The challenge with daily discount is it makes it difficult to reconcile each transaction to a specific sale to mark it paid. Reconciling the fees and making it easy for accountants shouldn’t be the only consideration, but if having accurate books and costs, fees, and sales recorded properly is important, it should be a consideration.

There are pros and cons to each service:

  • Daily discount
    • Pros: Easy to set up, good for low volume
    • Cons: Fees subtracted from each transaction, hard to reconcile, minimal support
  • Monthly contract
    • Pros: All fees/costs deducted monthly, easier to reconcile, better support, PCI insurance
    • Cons: Monthly fees can be high if not negotiated; watch out for yearly/auto-renewing contracts

Note: There are a number of online services that will help manage daily discount services like PayPal and import the information into accounting systems cleanly.

Guidelines for Selecting the Best Payment Processor for Your Clients

To be successful, you, the accountant need a direct relationship with the payment processor. I recommend you request quotes from at least two processors, negotiate on your client’s behalf, and ensure you have access to the information you need to maintain your client’s finances. The first payment processor should be someone locally who you can network with, share leads, and you know cares about its clients, the same way you care about your clients. You want to avoid any agents or sales reps who represent multiple processors. This is where you’ll find significant fraud, poor business practices, and a lack of support for you and your client. Look for someone who has a track record and understands the merchant world.

The next relationship should be with one of the major payment processors, either directly (not with anyone selling services) with First Data, Chase Paymentech, or other major acquirer. These companies might be less personalized, but they have world-class services – all the services you would need, and fees can be negotiated. Specifically, make sure to have them waive the cancellation fee.

With these relationships, you should be able to meet most of your client’s requirements.

As an option, you can work with a few of reputable services that will review your requirements, identify the best processor, and negotiate the contracts. I would suggest (but don’t certify) www.merchantmaverick.com (if you need the current relationship reviewed).

Establishing a relationship is critical to maintaining constant communication with your processor’s account contact and risk management underwriting office. Keep them updated on your client’s business, changes in products, sales, average sales amount, and more. Discuss risk and any chargeback conditions; forecast revenue growth (processors will also hold funds to reduce their risk of chargebacks if a business grows faster than they expected); and get support when challenging any consumer chargebacks.

Good vs. Bad Contract Terms

The following table compares what you should expect to see on a good vs. bad merchant contract.

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Client Requirements and Requesting Quotes

Start by gaining an understanding of your client’s requirements and which services match their business so you get quotes for the right solutions.

Collect the following information to request quotes. (You’ll need more detailed information for the application. You’re the one with the financial information, so help your clients complete the application accurately.)

  • Customer name and doing business as (DBA) name
  • Owner information for at least 50% of the owners
  • Type of products sold (be specific)
  • Average transaction amount
  • Monthly amount
  • Statements (previous two months if with another processor)
  • Method of processing (card present [in person]; card not present [Internet/ecommerce]; mail order/phone order; mobile)

Gateways

There are two key options when selecting a gateway:

  1. If you have a specific technical requirement from your shopping cart or POS that you need to integrate, you’ll typically want to use Authorize.net, which already integrates with a wide range of applications. Make sure you review the monthly fees. Authorize.net has a range of services that are valuable, but don’t pay for ones you don’t need.
  2. If you don’t have a specific requirement, confirm that the gateway the processor is recommending (either they’re the same company or they have an exclusive relationship) is supported by your shopping cart or POS. There are benefits of this bundled solution, such as better fees and a single point of contact.

Recommendations

Follow these recommendations to be successful:

  • Build relationships with at least two processors or a merchant consultant.
  • Review all of your client’s processor contract. If any have a termination date and termination fees if cancelled, SEND cancellation notices in writing NOW and mark when they expire. Set up the replacement processor now as a backup.
  • Convert your clients to a monthly contract vs. daily discount services.
  • Take PCI compliance seriously (the insurance-only approach isn’t enough).

The Accountant’s Role

Credit card processing is a financial transaction, has costs, and, in many cases, is the only way some of your clients collect revenue. This is a great area to provide value, deepen your relationship with your client, and provide ongoing services. Make time to understand your client’s business so you can make the best recommendation when it comes to merchant services.

Get access to all of your customers’ online accounts. In order to manage and reconcile all of their financial transactions, you need access. Get a login for the shopping cart or marketplace (Amazon), the gateway to see all the individual transactions, the processor to see the batch deposits, and the bank to confirm payment.

Reconcile all transactions to verify your client is getting paid for every sale. Look for missing transactions, extra fees, and any held funds. Know where your client’s revenue is at every step of the process. Build a consistent process so this is a standard process for your team on an ongoing basis, and a clear month-end close process to provide accurate financial information.

Actively communicate with the processor to support your client’s growth, changes in business and products, and ensure the consistent cash flow of credit card revenue.

Credit card processing is complicated, and your clients need your support in both selecting and managing their merchant services.


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About the author

Scott Scharf

Scott Scharf is the owner of Catching Clouds LLC, a cloud accounting practice providing virtual controller and virtual bookkeeping services leveraging cloud technologies. Scott has been in IT for over 30 years providing consulting and solutions from global multinational businesses to small businesses and is an expert in Unified Communications and Collaboration, IT Security, and cloud technologies. Scott now focuses his attention on helping businesses succeed by provide cloud accounting solutions, virtual CIO/CTO services, and cybersecurity/cyber-liability solutions. Scott is passionate about leveraging technology in smart and new ways to improve business processes, productivity, and profitability. Scott collaborates with his wife, Patti Scharf, a CPA who provides the deep accounting expertise, builds our virtual controller and virtual bookkeeping programs, and is a technology power user herself.

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