3 Merchant Processor Scams and Tricks to Stay Away From
For the vast majority of business owners, the selection of a payment processor is done in much the same way that one would go about selecting an auto mechanic. Unless you are very familiar with how a car works and how it should be repaired, you must simply trust the mechanic to be honest and not rip you off.
The same thing can be said for some credit card processors. From tacking on hidden fees to spouting off misleading marketing statements, the payment processing industry is fraught with borderline (and sometimes downright) scammy activities.
This post sheds light on some of the most common tricks and scams that payment processors run on merchants. Educate yourself on these scams to avoid getting ripped off.
1. Misleading rate quotes
This one is rampant, particularly among processors who use the tiered pricing model for their fees. In these cases, the payment processor will advertise a low rate — e.g., 1.69% — without fully explaining that the rate only applies “qualified” charges.
Qualified charges are typically purchases made using debit cards and non-reward cards. Purchases made using rewards cards and business credit cards would usually fall into the “mid-qualified” or “non-qualified” categories, which come with higher processing rates.
The payment processor doesn’t advertise those higher rates. Instead, they reel you in using the low qualified rate, then charge higher fees once you start processing with them.
How to avoid misleading rate quotes
The best way to avoid misleading rate quotes is to stay away from payment processors who use tiered pricing (i.e.,g those that use qualified, mid-, and non-qualified categories). You’re much better off going for processors that charge a flat rate or those that use interchange-plus and membership pricing.
You can also spot misleading quotes by calculating your effective rate
The effective rate is the rate merchants pay for credit card processing after factoring in the non-negotiable processing fees and your provider’s markup. It’s the rate that you’re getting when you add up all of your processing costs.
The formula for calculating your effective rate is:
( total credit card processing fees / total amount processed ) x 100
Calculating your effective rate lets you see how much of your fees are going to card networks (Visa, Mastercard, Discover) and how much are going to your processor’s pocket. It then allows you to compare different processing rates so you can make an informed decision.
2. Hidden fees
Hidden fees are a real thing in the payment processing world. Case in point: It was discovered Wordplay, the largest payment processor in the US by transaction volume, failed to properly inform merchants of added fees.
Apparently, Worldpay has been tacking additional fees (of up to 1.95%) on certain transactions without properly explaining them to the merchant. One family business Florida has been reportedly paying hundreds of dollars a month in extra fees.
And while extra fees are technically allowed per Worldpay’s merchant agreement, the company doesn’t do a good job in informing merchants about them. As Reuters points out:
…Worldpay tells merchants upfront that it will collect two different kinds of fees on card transactions. Those are a fee for its own services, and charges levied by the card networks and issuers that it collects and passes on.
In fact, the processor adds a third fee for some small merchants that is disclosed in the fine print – a markup to the card network and issuer charges, these people said. In its billing statements, it mixes that markup with the card company charges and does not show the specific amount it has added, according to the people and the documents.
The worst part? This isn’t the first time that this has happened. In 2017, Vantiv settled a lawsuit in which it allegedly overcharged nearly 200,000 merchants for extra markups and fees.
How to avoid hidden fees
Pay close attention to your payment processor agreement or proposal. Do note just sign on the dotted line without reading the fine print. Yes, this task can be tedious, but taking the time to do it can save you hundreds (maybe even thousands) of dollars per month.
If you already have an existing payment processor, analyze your credit card processing statements to uncover any hidden fees. Go through various transactions and see if you’re paying more than you should. If you are, call your provider and ask them about it.
(Pro tip: Need help analyzing your proposal or statement? Payment Depot’s specialists can evaluate your documents for free and provide unbiased advice on how to lower your costs. Get in touch to learn more.)
3. Equipment leasing
We’ve said before, and we’ll say it again: credit card terminal leasing is a bad idea, and providers that push you do it do not have your best interests at heart.
The cost of leasing a payment terminal typically costs $30 to $100 over the course of 2 to 4 years, which can add up to several thousands of dollars over the course of the lease. Since you can purchase a new terminal for a few hundred dollars, choosing to lease equipment means you’re literally paying thousands of dollars for a device that’s worth a fraction of that.
Sure, you don’t pay anything “up front” but you’re paying a whole lot more in the long run.
How to avoid leasing equipment
There are a number of things you can instead of leasing:
Purchase equipment upfront – It costs more out of pocket — at first. But your long-term savings compared to leasing are tremendous.
Reprogram your current devices – If you have existing equipment, see if your provider can help reprogram your devices. (Pro tip: Payment Depot does this for free!)
Rent the equipment – If you cannot afford to purchase upfront, you can go for a short term rental until you have the funds to buy new equipment.
General tips to safeguard yourself from merchant processor scams
Below are some additional pointers to ensure that you don’t get ripped off by your payment processor:
1. Check the provider’s reputation
Research the company’s reputation before signing up. Check their profile on the Better Business Bureau, and read reviews on sites like Merchant Maverick, CardFellow, and more. You can also do a quick online search for “[COMPANY NAME] scam” or “[COMPANY NAME] complaints” to uncover issues or unethical practices.
2. Evaluate their support offerings
A company’s sales reps are usually always available when they’re getting you to sign up, but what about their customer support team? Be sure to do your research on the vendor’s customer service offerings, specifically when it comes to:
Customer support channels – Do they offer phone support and live chat or is everything done via email? Make sure you sign up with a provide that lets you speak to a real person when necessary.
Hours – Are their support hours in line with hours of operation? Or better yet, do they provide 24/7 customer service? Needless to say, you need a provider that’s there for you when you need them.
Resources – You can often get a feel of how great a vendor is based on the support and educational resources they offer. Having an active and educational blog and an easy to understand FAQ page are good signs that the company is invested in your success.
3. Educate yourself
New scams and tricks are popping up constantly — and not just in the realm of credit card processing. There are numerous small business scams making rounds, so it’s best to stay vigilant and aware.
Keep an out for notices from the Federal Trade Commission and check out the FTC’s resources guide on small biz scams here.
4. Don’t be in a rush to sign up
Be wary of companies who try to rush you into signing a contract. Remember that it’s OK — recommended, even — that you take your time when evaluating payment processors. Don’t be afraid to shop around and ask questions. Read the fine print and take the steps we mentioned above before making a decision.
Remember that your merchant services provider will either cost you or save you thousands of dollars per month. You want to make sure that you team up with the right one!
Need help deciding on the right payment processor? Send us your credit card processing statement or proposal. We’ll analyze it, run the numbers, and make recommendations on how you can save.