5 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.
Certain processors may initially charge a low rate, but raise your fees overtime. Some providers even have text in their agreements stating that they can raise their prices at their own discretion. And often, this means a major rate hike within the first three months.
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., 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. Some credit card processors may tell you that your rate is 1.2% “no matter what.”
What they don’t tell you is the fact that they also have surcharges that they legally don’t have to put a rate next to. Your effective rate at the end of the month is closer to 3% when adding in the surcharges. This is a deceptive sales tactic.
Case in point: It was discovered that Worldpay, 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 in 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 (now Worldpay) 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. Don’t just sign on the dotted line without reading the fine print. Keep an eye out for verbiage that gives the payment processor permission to charge additional fees.
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.
You can typically find these fees in a section called “Surcharges” in your statement. The processor won’t put any rates next to the charge — just a dollar amount next to it.
It’s also advisable to choose a processor that is month to month with no cancellation fees. That way if your bill is different than it should be, you’re not stuck with them.”
(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. “Exclusive” POS software
In certain cases, the payment processor may try to sell you on a point of sale system they claim can do everything you need to run your business. That may be true, but often, these POS systems are tied to one processing service, which means they can strongarm you into paying higher rates because they know you won’t give up the POS system’s features to save money.
How to avoid falling into the POS trap
Be wary of POS systems that only work with certain payment processors. If a merchant services provider is encouraging you to go with a specific point of sale system, ask them if the solution works with other payment processors. It may also help to get in touch with the POS company directly to discuss how they work with the payment processor.
4. 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 to 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.
5. Disappearing salesmen
This one is pretty simple: a salesman from the credit card processing company may hound you until you sign up and tell you everything you want to hear. Once you hop on board, you’re locked in a contract and can’t get a hold of your representative, while they are making a residual percentage of every dollar that you process.
How to avoid falling for salesmen’s tricks
Choose a payment processing company with strong values, and ideally one that has sales and customer service working in-house. It also helps to get references from the processor’s other customers. Ask these merchants about their experience with the company, then factor in their comments when deciding which vendor to choose.
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
When looking at the reviews, see if they actually mention employee names. That will verify that they do have sales and support that go above and beyond to ensure that you will be happy with your decision. And if the reviews seem very vague, there’s a chance that the reviews are fake or paid.”
Another tip? 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 provider that lets you speak to a real person when necessary.
Hours. Are their support hours in line with your 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. Know the ins and outs of credit card processing
When you’re familiar with how credit card processing works, you’ll be able to ask the right questions and avoid getting duped by unethical payment processors. Here are some of the things you should be aware of, when shopping for a new credit card processing service:
- Know what interchange rates are and how they work
- Be aware of the different pricing structures and methods
- Understand how to read a merchant statement
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. 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.
FAQs about Merchant Processor Scams
Q: What are merchant processor scams?
Merchant processor scams are fraudulent activities where unscrupulous individuals or organizations deceive merchants by offering deceptive or unreliable payment processing services. These scams can involve hidden fees, unauthorized transactions, lackluster customer service, or non-existent services.
Q: How can we spot merchant processor scams?
Common signs of merchant processor scams include unsolicited offers with abnormally low rates, high-pressure tactics to rush the decision-making process, lack of transparency in providing crucial service details, lack of an official website, unprofessional means of communication, and requests for upfront payments or sensitive financial information.
Q: How can merchants protect themselves from payment processors scams?
To safeguard themselves against payment processor scams, merchants should conduct thorough due diligence on the potential processors, validate their credentials and reputation, compare multiple service providers, meticulously review contracts, seek endorsements from trusted sources, initiate conversations with customer service to assess their responsiveness, and trust their gut instincts if something seems uncharacteristic or suspicious.
Q: What are the red flags to look out for when selecting a payment processor?
Merchants should be vigilant for providers who are elusive about service details or fees, show a lack of transparency in their communication, resort to aggressive sales tactics, or demand upfront payments without rendering any services.
Q: What steps should be taken if a merchant feels they are a victim of a payment processor scam?
Any merchant suspecting they have fallen victim to a merchant processor scam should immediately cease communication with the suspected scammer, report the incident to their local law enforcement authority, notify their bank or financial institution about the suspect transactions, and share their experience within their network and online forums to alert others about the scam and prevent a similar occurrence.