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Get informed on credit card processing

December 1, 2007
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Some providers that accept credit card payments are taking an unnecessary financial hit

Addiction treatment providers are finding that today's credit card processing industry is highly complex and the large majority of credit card processing vendors offer little help in bringing light to unanswered questions. Hidden fees, confusing monthly merchant statements, sales representatives with little or no industry knowledge, and questionable business ethics from most vendors are typical of what is encountered by treatment providers that receive credit card payments from clients and their families.

Credit card vendors are capitalizing on the industry's complexity to add to their own profit. They blame high rates and high additional surcharges on Visa and MasterCard, but they camouflage built-in profit streams behind this claim. What is even more disturbing is that some retail and software companies also offer credit card processing services and count on their reputations to invoke trust, yet prove to be some of the worst offenders.

Approaching one's local bank may not offer a much better solution. Most banks simply will pass their customer over to a large credit card vendor with which they have partnered and then will have nothing else to do with servicing the account—other than to receive a monthly referral fee.

Understanding rates

When making a proposal for merchant services to a prospective addiction treatment provider, credit card vendors generally present only one or two “qualified” rates. Higher “mid-qualified” and “non-qualified” rates are usually disclosed in the small print, or their importance is minimized. This pricing structure is called “tiered pricing” and provides the highest profit margin for a vendor. A tiered pricing structure allows credit card vendors to point any transaction they want to the higher mid-qualified and non-qualified rate categories, no matter what card type is being used. This effectively translates into anywhere from 30 to 80% of one's transactions never being priced at the enticingly low rate seen on the proposal.

In fact, if a provider is being priced fairly, the pricing structure should be referred to as “Interchange Plus” and the monthly merchant services statement format will show all transactions categorized into the interchange categories developed by Visa and MasterCard. Each of these categories has a different rate based on the type of credit card being used, the way the transaction was conducted (swiped or keyed by hand), whether added information was attached to the transaction, and the time between when the card was authorized and when it was presented to the bank for collection.

Rates are not the only variable affecting a provider's ultimate cost of accepting credit cards. Even if an agency is set up on an Interchange Plus pricing structure, there are generally two or three interchange category rates for which each transaction can qualify, depending on whether essential data were received with the transaction or if certain time frames were met. Missing data will result in a transaction qualifying to a higher interchange rate or, if pricing is tiered, to a mid-qualified or non-qualified rate.

With tiered pricing, a provider will never know why its transactions didn't qualify, so it will be unable to generate corrections to get the best rates. Credit card processing vendors have no rules to which they must adhere in setting up arrangements with treatment providers. Anything goes, and an improper set-up will force transactions to downgrade to the higher rates. Providers that are set up on an Interchange Plus statement format and have properly programmed terminals will have much more control over credit card processing costs, if the vendor's sales representative has educated program staff on interchange compliance rules.

Legal developments

In 2004, Wal-Mart sued Visa and MasterCard on several issues, including that the companies were charging the same interchange rate for both debit cards (used as credit cards without a pin pad) and consumer cards. Wal-Mart argued that the interchange rate for debit cards should be lower because debit card transactions simply deduct the transaction amount from the cardholder's checking account and therefore the issuer assumes a much lower level of risk. The courts found in favor of Wal-Mart, ordering Visa and MasterCard to lower the interchange rates for debit cards. However, Visa and MasterCard do not offer pricing to addiction treatment providers—credit card processing vendors do. Most vendors do not pass this lower rate on to their addiction treatment providers, continuing to charge the higher rate and keeping the difference as profit.

In November 2006, both Visa and MasterCard published their interchange categories on their Web sites. They are there for anyone to access. A provider agency should be able to look at its monthly merchant services statement and recognize that its transactions are qualifying at the lowest rates available. If a provider's current merchant statement does not show this kind of format, it is more than likely paying too much in fees. If a provider's current credit card processing vendor has not trained the agency on the importance of compliance procedures, and has not pointed out which categories are the best rates available for the card types being used, the agency is probably paying higher fees than it needs to be paying.

If a credit card vendor is doing things right, a provider's statement format will use the interchange categories; its terminals will have been programmed to allow qualification for the best rates; its staff will have been trained in compliance requirements; and the vendor's sales representative will be monitoring transaction activity and making sure the agency is getting the best rates and the best customer service. In essence, the vendor will be managing the agency's account, so that the agency won't have to.