How to Avoid Overpaying for Credit Card Processing
Credit card processing is a confusing topic at the best of times. For vape and tobacco shops, the waters are muddied further by “high risk” classifications and conflicting information about pricing. Fortunately, with a little knowledge on how processing fees really work, you’ll be able to better evaluate your options.
“High Risk” Credit Card Processing
In credit card processing, the term “high risk” applies to industries that processors have deemed to be riskier to underwrite. It’s not a reflection on your business individually, nor is it a moral aversion to an industry. Some industries are considered high risk due to higher-than-average chargeback rates, others are considered high risk due to selling age-restricted items, while still others are high risk because of the potential for operating in legal grey areas.
There’s some confusion about high risk merchant accounts for smoke shops, because it’s not universally high risk or low risk.
As a rough rule of thumb, if the credit card brands deem an industry high risk, processors will also consider it high risk. If the card brands don’t specify, a processor may consider that industry high risk or low risk at their discretion. That is, just because Visa or Mastercard doesn’t explicitly state that an industry is high risk doesn’t mean a processor can’t decide that it is.
As of 2018, most processors consider vape shops to be “high risk” whether selling online or in-person, and tobacco shops to be “high risk” only when selling online.
Understanding Processing Fees
Every time you accept a card, you’ll be charged a processing fee. This fee has three components. There’s interchange (which goes to the banks that issue cards to your customers), assessments (which goes to the card brands), and markup (which goes to the processor.)
Interchange and assessments are non-negotiable. These costs are set by the banks and card brands, and no processor has the power to change them. Every business that accepts credit cards, from tobacco shops to restaurants to dental practices, will be charged the costs of interchange and assessments.
For high risk businesses, interchange and markup are essentially grouped together using a pricing model called “tiered” or “bundled” pricing.
Processors typically charge high risk businesses using a “tiered pricing” model. That means that instead of charging you the interchange rate for each transaction, the processor will lump many interchange rates into one “tier” and charge one rate for all transactions in that tier. It’s common to see three-tier models, but processors can create more or fewer tiers at their discretion.
For the purposes of this article, let’s assume a three-tiered model with tiers called “qualified,” “mid-qualified,” and “non-qualified.” Your processor will provide you with rates for each tier.
Here’s the tricky part – there are no universal designations for “qualified,” “mid-qualified,” and “non-qualified” cards. It’s completely up to the processor. What happens is that your processor will create a “qualification matrix” to determine which transactions they will route to which tier. They could decide to class debit transactions as “qualified” while rewards credit cards could be deemed “non-qualified.” However, they can also change your qualifications whenever they like. In processing, this is referred to as “inconsistent buckets.”
Evaluating Tiered Offers
As a result of inconsistent buckets, it can be difficult to compare tiered pricing offers accurately. Let’s say that Processor A quotes 2.5% qualified, 3.25% mid-qualified, and 4% non-qualified while Processor B offers 2.25% qualified, 3% mid-qualified, and 3.5% mid-qualified.
On the surface, Processor B is the clear choice. All of their ‘rates’ are lower. But the X factor is that you don’t know how many transactions will go to which tier. If Processor A routes more of your transactions to the “qualified” tier, that would cost you less than if Processor B routes your transactions to the mid-and non-qualified tiers. In tiered pricing, “rates” don’t tell the whole picture.
So how do you compare? You’ll need to look at the total cost while keeping the qualification assumptions the same. Meaning, what will it cost you if Processors A and B both route your transactions the same way? It can be very difficult to do that on your own, but there are services that can help estimate costs using the same starting qualification matrix.
Finding a Processor
When it comes to finding the right processor, the first thing you’ll need to do is determine if you’re likely to be considered high risk. If you’re a tobacco shop that sells exclusively in person, you are likely NOT high risk, and can work with traditional low risk processors. If you’re a tobacco shop that sells online or a vape shop (selling in person or online) you will need a processor that supports high risk.
Fortunately, there are comparison tools available that allow you to get quotes from multiple processing companies that can support your business. Some offer great free services where you can see real pricing from processing companies without having to give your contact info to sales reps.
Low Risk Tobacco Shops
Businesses considered “low risk” should look for competitive interchange plus pricing, which allows you to see the markup paid over wholesale. Avoid contracts with cancellation fees and don’t sign equipment leases, which are a common way that businesses overpay. Consider using credit card processing comparison services that offer additional protections such as lifetime rate locks and independent statement monitoring.
High Risk Tobacco and Vape Shops
While high risk businesses have fewer choices than low risk industries, there are plenty of options. You may not be eligible for interchange plus pricing, but that doesn’t mean you can’t find a good solution.
As with low-risk businesses, don’t lease credit card equipment. If a processor tells you that they require a lease in order to open your merchant account, look for another processor. Leases are not required to open merchant accounts, even high-risk ones.
In all cases, when looking for a processor:
• Be honest.
Fudging the details to secure lower rates may seem harmless, but the processor will eventually catch on and close your account. You may even end up on the Terminated Merchant File if the processor decides that you fraudulently opened an account, which will make it very difficult for you to open an account with another processor in the future.
• Don’t take rejection personally.
If a processor turns you down for a merchant account, try not to take it personally. It just means that a specific processor cannot provide service to you. There are other companies that will.
• Ask questions.
If you don’t understand a fee or have questions about any aspect of the service, ask before signing up. If a processor can’t (or won’t) provide a satisfactory answer, continue your search. If you start off with a processor that avoids questions, you can expect them to do that if something goes wrong during your contract with them. SVBS
Ellen Cunningham is the Marketing Manager for CardFellow.com, a free service where businesses can easily compare credit card processors to find the right solution. Certified quotes through the marketplace include CardFellow’s business protections, including a lifetime rate lock, no cancellation fees, independent statement monitoring, and more. Both high and low risk businesses can use CardFellow to see real costs for accepting cards and to get advice from independent processing experts. Ellen can be reached at (800) 509-4220 or you can contact CardFellow on Twitter or Facebook.