The Dark Art of Payment Processing

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The Dark Art of Payment Processing

By Toby Malbec - 05/04/2018

With the growth and proliferation of bundled POS/Payment solution providers, it somehow seemed appropriate to address what many recognize is indeed a confusing world; that of credit card payment processing. Is bundling your POS and credit card processing with one vendor a good thing? Are there benefits for or against this approach?

First, let's discuss why so many POS vendors appear to be heading in this direction. With the migration from license-based POS solutions that were front-loaded with big license fees and smaller on-going maintenance costs, the new model is a flat "rental" fee that means minimal up-front cost and the allure of an easy transition from one solution to another. To support this notion, many POS vendors actually advertise the fact that there is no contract and the application can be used month-to-month without any long-term commitment. It sounds very appealing to the operator, and quite frankly it is. It has also become much easier to switch vendors, export your data, and move on with your new partner. This is great for the operator, but not as reassuring for the POS vendor who is constantly fighting not only for new business but to stop poachers with their existing users. So how do vendors make their solutions more sticky? Payment Processing.

While it may be easier to unwind a POS solution, it is not as easy to unwind from a payment processor. Additionally, while the POS vendor may allow you to go month-to-month, it is extremely unlikely that the payment processor will be quite so accommodating. A typical payment services contract is at least 2-3 years with some unsuspecting operators actually agreeing to 5 year agreements! With a long-term contract in-hand and a tightly integration between POS and payments in place, this creates a de-facto POS contract which allows the supplier to breathe easier.

Now, this is not necessarily a bad thing: a payment processing solution tightly integrated to POS can provide some interesting and useful functionality such as strong analytics and reporting, integrated card/purchase history, and even the ability to dynamically update a customer's online card information in cases where they are given a new card to account for a loss or theft. With the two systems tied together, vendors will eagerly - and accurately - share with you that the integration is symbiotic and very valuable. The marketing department will love some of the analytics that can be collected and reported upon that gives a much better idea of the purchase patterns of your customer both inside and outside your walls. 

Now comes the tricky part; how do I know whether the payment processing fees charged by these vendors is the best rate available or at the very least highly competitive? This is extremely challenging. Most of these suppliers will tout that their fees are competitive and will often say that they will match the operator's current fees or to send three months of credit card processing invoices so that they can compare and match. Two issues here: one is who is to say that your current fees are competitive? If you haven't shopped them in the last 12-18 months you may not actually have a very good rate plan in place. Two - by simply looking at three month's worth of bills, the vendor can really only "homogenize" a comparable rate plan since interchange -  the base fee charged by the card companies for use of their cards is a strange and nebulous figure. Payment processing companies make money by putting a small markup on top of the interchange rate. The challenge is that depending on the type of the card, how it's processed, the originating bank, and a number of other factors,  the interchange varies as does the mark-up from the middleman. Think it's simple - think again.

As you can see from the VISA interchange fee document , it is impossible to try and "match" or beat a rate. To do so on a line-by-line basis would be challenging, as would be analyzing your statements to see what types of charges are most prevalent on your statements and focusing on those. Additionally, these fees only speak to interchange so while it is possible that they would do a line-by-line match of these charges, be sure that other fees such as PCI-compliance, annual account, and chargeback are also competitive. Finally if you are leasing PED (Payment Encryption Devices) from the company once again ensure that these fees are reasonable.

Key Takeaways
So what's the moral of the story? Integrated POS/Payment solutions can provide great value in the right environment but can be challenging in a situation where long-term processing contracts are already in place or in a franchised environment where it may be difficult to move a fractured payment landscape to a single solution. Additionally, it may take some time, dedication, and research to ensure the fees are competitive or better than your current. Finally, push for short-term agreements; the world of payment processing continues to evolve, so you don't want to be in a long-term agreement the day the industry starts to move in the right direction and become more operator-friendly. With the continued growth and proliferation of friction-less payment solutions, positive change may come sooner rather than later.

Toby Malbec

Toby Malbec is the principal at TWM Insight LLC