Some background for people not familiar with how credit card processing works for a merchant (the vendor that sells you stuff and charges your credit card). Merchants that want to process credit cards need to have a deal a merchant services provider. This merchant services provider provides a valuable service to the merchant, the ability to process credit card transactions.
In return the merchant services provider keeps a percentage of the total transaction. The percentage depends on an incredible number of factors but generally works out to between 2% and 6%. The rest of the money is passed through to the merchant, deposited directly to their bank account a day or two later in most cases.
That means that at least 2% of every credit card transaction (and remember, we're talking about the gross value – the merchant has to pay this percentage on sales taxes too) gets eaten up in processing fees. This means that even small reductions in processing fees can have a huge impact on profitability. And with that in mind smart merchants routinely review their merchant services deals, shopping around for better rates at least once a year.
Recently one client realized they were overpaying – they were being charged about 5% in processing fees. For every $10,000 they processed their merchant services provider kept about $500, passing about $9,500 back to the merchant. Our client was hoping to save some money and we introduced them to a well-respected and highly ethical company we have been working with for years.
This company has an interesting business model. Strictly speaking they are not a merchant services provider but an advocate. They work with a number of merchant services providers, and find the best deal for every single client – almost like an insurance broker. Time and time again we have seen them save merchants a significant amount of money.
In return they charge the merchant for a small percentage of the savings they provide. This is a kind of value billing – they are charging for the value (in this case savings) that they have provided to their customer (the merchant). And because the advocate is very ethical they strive to be fully transparent in their billing, and this fee is charged separately from the processing fees.
Now for every $10,000 processed the merchant services provider keeps much less, just $200, and passes through much more, about $9,800, to the merchant – thanks to the great deal that the advocate set up. The advocate then charges the merchant about $100 in this case for their services, leaving the merchant with a total savings of about 2% or $200.
Generally it works great, but in this case the merchant couldn't come to terms with it. No matter how much more was hitting their bank account, or being left in their bank account, all they could see was the money coming out of their account. That hadn't happened before, and they didn't like it, even though they were demonstrably saving money.
What went wrong?
With the old merchant services provider no money was taken out of their account. A lot less money went into their account, but the costs were hidden in what never got to there account. They couldn't miss it because they never had it. With the new system it was very apparent that they were getting, then giving back money – and it was most definitely missed.
The higher fees encountered with the old system were hidden through abstraction. There wasn't even a straight line between credit cards sales one day and deposits to the bank account x days later. Transaction cut-off times were almost certainly part of the problem – unless changed merchant services provider accounts generally stop processing on the current date at an arbitrary time and start processing on the next day. It's usually a good idea to push the cut-off time to something like 11:30 PM to avoid this.
It can also take a different amount of time for payments from different cards to hit the bank account. This all meant that, under the old system, there was no way to quickly compare the sales on Tuesday with what appeared in the bank account on Thursday. If there had been the merchant might have been more sensitive to the amount they were paying. Complicated statements, so complicated they seemed designed to obfuscate, also exacerbated this problem.
Meanwhile the new deal was the exact opposite. With good intentions and a desire for complete transparency the new advocate company wanted the merchant to understand all of the costs. In doing so they kept drawing attention to the fees that the merchant so hated.
In some ways the value provided by the advocate was the simplest thing in the world – they were saving the customer xy, and charging x in return.
The problem was that the customer, the merchant, just wasn't seeing it. All they could see was the new charge that had never been levied before.
This, along with the realization that the advocate wasn't really doing "the work" (the actual processing was being done by the new, cheaper merchant services provider), led to an almost irrational anger. It was expressed as the belief the advocate not doing anything, "just sitting on a beach chair and taking my money".
This of course is not true – the advocate had provided considerable value, in the form of savings, on an ongoing basis, and was charging as agreed.
It might have been avoided with some kind of monthly statement that clearly showed how much money the merchant would have had under the old deal, and how much there now getting under the new deal. By highlighting the value being delivered they might have been more willing to pay the fees.
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