Credit Card Payment Processing Guide

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Created for AAA members by Phillip Parker, CEO of CardPaymentOptions.com
Updated July 23, 2015

Part 1: Overview

Credit-Card-KeyboardThe merchant services industry thrives on confusion and complexity. After all, the less you know, the more money they can make from you. That’s why the first step to securing a good deal is educating yourself on how the industry works. Fortunately, you don’t have to become a payment processing expert to negotiate low rates. You just need a solid understanding of the basics. Finding a credit card processor for your ambulance service can be a complicated and expensive undertaking. There are hundreds of merchant account providers competing for your business, and each one has its own unique contract terms, payment options, and sales team. How do you know which product is the right fit for your business? How do you prevent yourself from getting scammed? And just what exactly constitutes a “good” credit card processing rate?

The Three Major Players

Visa and MasterCard do not supply card processing services directly to merchants. AMEX used to do so, but they are transitioning into the same business model as Visa and MasterCard. If you want to accept card payments, you’ll have to work through a third-party often referred to as a “merchant account provider” or “Independent Sales Organization (ISO).”

[quote_left]Your merchant account provider is the only party that can control the rates your business pays on each transaction.[/quote_left]When you open a merchant account, you are basically establishing a line of credit between your business and two other parties: the merchant account provider and the merchant account provider’s acquiring bank. When a patient swipes a credit or debit card to pay for an ambulance ride, the transaction amount essentially travels downhill through each of these entities until it arrives in your checking account (minus the fees collected by each party along the way). The inner workings of payment processing networks are complex, but the most important thing you need to understand about this whole arrangement is that your merchant account provider is the only party that can control the rates your business pays on each transaction. In other words, if you want to save money, you will need to negotiate the best possible rates and contract terms directly with your provider.

What’s in a Rate?

Sales agents love to quote simple rates—0.05% for debit! 1.29% for credit!—because it’s easier for business owners to understand these numbers without further explanation. But simplistic rate quotes like these hide the markup by the merchant account provider and fail to disclose several surcharges that will be tacked on top of those rates.

One way of understanding rates is to think of merchant account providers as retail stores. Like retailers, they purchase their product at low wholesale costs, and then they sell the product with an additional markup to make a profit. In the merchant account industry, the wholesale cost of processing payments has a fancy name called Interchange and is dictated by the card networks like Visa, MasterCard, and American Express (the bank that issued your customer’s card also gets a portion of Interchange). Interchange is charged as percentage fee of each transaction that you run, and it then receives a markup by the merchant account provider.

CalculatorBut exactly how much of a markup is the provider charging? This is where things gets very complicated. There are hundreds of Interchange rates that can be charged according to various factors like the type of card (debit, fleet, rewards), the payment environment (card present or card not present), or even the size of the bank that issued the card. Rather than explaining all of these factors to merchants, most merchant account providers simply group all of the available Interchange rates into three tiers: Qualified, Mid-Qualified, and Non-Qualified. All of the card types in the Qualified tier get charged a single rate, all of the cards in the Mid-Qualified tier get charged a different, slightly higher rate, and all of the cards in the Non-Qualified tier get charged at the highest rate. This pricing structure, called “tiered” or “bucket” pricing, helps to keep rate quotes simple to understand, but it also makes it impossible for you to determine how much the provider is making on each transaction. For instance, if a provider charges a Mid-Qualified rate of 2.59% per transaction, then a card with an Interchange rate of 2.10%, but classified as Mid-Qualified, will earn the provider a reasonable profit of 0.19%. But what about a card that comes with an Interchange rate of 1.59% but has been classified as Mid-Qualified? Your provider will be making a pretty hefty profit of 1% on that transaction, and you would have no way of knowing how much you’re overpaying. You often find this scenario with debit card transactions that run at an Interchange rate of .05% but get charged at a higher rate in a Qualified tier, usually around 2%.

The Solution: Transparency and Cost-Savings

[quote_left]Interchange-plus pricing charges the individual Interchange rate for each transaction plus a fixed markup by the merchant account provider.[/quote_left]Luckily, there’s a more transparent pricing model that shows you exactly how much your provider is taking on each transaction. It’s called Interchange-plus, and it functions exactly as you might expect. Interchange-plus pricing charges the individual Interchange rate for each transaction plus a fixed markup by the merchant account provider. For example, if your provider’s markup is 0.5% plus $0.20 on top of Interchange, you will pay a half of a percent plus 20 cents on top of the wholesale cost of each transaction. In other words, if a transaction runs at an Interchange rate of 1.29% plus $0.09, you would then pay a total of 1.79% plus $0.29 to process that transaction with the provider’s markup. On other transactions, your rates will fluctuate depending on the applicable Interchange rate for those particular transactions, but your provider’s markup will remain the same. Interchange-plus enables you to see exactly how much you’re paying for the wholesale Interchange cost as well as the profit to your merchant account provider. It’s the most transparent pricing available for taking card payments.

Interchange-plus also does something much more important: it allows you to make apples-to-apples comparisons between your provider’s rate and a competitor’s rate. Under the previous example, if a competitor is unable to provide an Interchange-plus markup lower than 0.5% plus $0.20, then that provider is simply incapable of beating your current provider’s rates. Interchange-plus pricing prevents sales agents from using creative math and misleading pricing tiers to win your business, which will eliminate a lot of the headache and risk for you as you shop. We recommend Interchange-plus pricing over tiered pricing in almost every case for this exact reason. For a more in-depth comparison of tiered and Interchange-plus pricing, see this article explaining tiered merchant account fees.

Other Costs

Of course, getting a good deal on a merchant account isn’t simply about getting the lowest rate. There are other fees and contract terms that can do a great deal of damage to your bank account if you don’t know to avoid them. The following is an abbreviated list of common contract pitfalls:

  • Multiyear or auto-renewing agreements – Some merchant account providers require an initial contract of up to three years with automatic renewal for one-year periods after that. Whenever possible, seek a month-to-month agreement so that you can potentially opt out for a more competitive deal.
  • Equipment leases – Some merchant account providers will try to lease you credit card processing equipment at a monthly rate for a non-cancellable term of up to four years. These leases often charge thousands of dollars over the full lease term for equipment that can be purchased upfront for a few hundred dollars. If you find that you need dedicated card processing hardware, we advise you to purchase equipment rather than lease.
  • Early termination fees – Long-term contracts often penalize merchants who cancel before the initial term has expired by charging a one-time termination fee, pulled directly from the merchant’s bank account. Most early termination fees cost a few hundred dollars, but we have seen some (known as Liquidated Damages fees) that cost thousands of dollars. Whenever possible, you should seek out a merchant account provider that does not charge an early termination fee.
  • PCI Compliance fees – Often simply called an “annual fee,” “security fee,” or “regulatory fee,” PCI Compliance fees are charged to cover the provider’s cost of ensuring that each of its merchants is fully compliant with industry-imposed security regulations. PCI Compliance fees are commonly charged throughout the industry, but the amount differs between providers. You should ensure that the PCI Compliance fees you pay are actually supplying you with some security and compliance assistance. Generally, PCI fees should be less than $100 per year.

These are only a few of the most costly contract terms you might encounter. For a more comprehensive list, see this list of contract terms to avoid. Overall, common business sense applies when it comes to credit card processing contracts, so be sure to read your agreement in full.

Part 2: Solutions for You

For most ambulance services, dedicated credit card processing equipment will not be necessary. Patients do not typically have the time or presence of mind to physically swipe a card when they receive service, so you will end up collecting most of your payments through mail, over the phone, or online. It is true that swiped card transactions often receive lower Interchange rates than keyed-in transactions, but the few opportunities to physically swipe a patients card will not offset the cost of purchasing or leasing a credit card terminal, nor is a credit card terminal the best available hardware.

Now that you’ve got a handle on pricing, it’s time to look at the best payment processing products for ambulance service providers. Each business has different needs and desires when it comes to payment processing, so the following recommendations are meant to help guide you and make you aware of the possibilities.

Virtual Terminals

Credit-CardAs an alternative, you should consider using a virtual terminal offered by your merchant account provider. A virtual terminal is a type of service that replicates the function of a credit card terminal using the computers and devices you already own, allowing you securely swipe or type in payments. In a typical transaction, a patient would provide his or her credit card number by phone or by mail, and you would enter this number by hand into the virtual terminal and then charge the appropriate amount. Most virtual terminals on the market offer cutting-edge encryption as well as the ability to establish payment plans, recharge previous customers, send digital receipts, generate online invoices, and integrate with accounting software. They are far less expensive than physical terminals, offer more versatility and security, and can be accessed on any computer with an Internet connection.

Payment Gateways

Another option worth considering is accepting payments through a payment gateway which will enable you to take payments directly via your website. This is a convenient and quick way for patients to pay you by directly entering in their payment information at home. Not only does it save your customer time, but it reduces the personnel costs associated with mailed or called-in payments.

You have a couple of options when accepting payments on your website: you can hire a web developer to build out the payment forms and technology for taking the payment, or you can utilize a third-party hosted “plug and play” type service. The advantage of hiring a developer is that you will have full control and flexibility over the payment experience for both you and the patient as well as how data is stored and transferred. The disadvantage is that building out your own technology is costly, requires ongoing maintenance, and requires careful consideration of how payment information is stored and transferred on your systems. Failure to comply with payment industry security standards or to protect payment data can result in devastating fines and penalties.

The advantage to using a third-party hosted “plug and play” service is ease of implementation via “pay now” buttons and customizable payment forms, built-in security, automatic compliance with data security standards, and no maintenance worries.

If you choose to accept payments via a payment gateway, it is very important that you take care to comply with all HIPAA regulations when accepting or discussing confidential patient information via the internet. Payment processors are to some degree exempt from HIPAA regulations, but just because a processor keeps your patients’ information secure doesn’t mean that your own internal practices are HIPAA-compliant.

Part 3: The Best Deal Possible

So what does a good deal on a merchant account look like for an ambulance service provider? The exact answer will vary depending on your particular business needs, the patients you serve, your budget, and your personal preference. However, we recommend that you pursue a merchant services package that includes most or all of the following:

  • Competitive Interchange-plus rate
  • Month-to-month contract
  • No early termination fee
  • No long-term equipment lease
  • Virtual terminal
  • Simple, secure online payment gateway integration

This combination offers the optimal pricing and service combination for a typical ambulance service provider. It should give you everything you need (and nothing you don’t) for the lowest cost possible. Before signing on the dotted line, take advantage of the knowledge you’ve obtained to negotiate confidently (see: Negotiating Merchant Account Fees). Research providers, narrow the list, and engage sales reps with informed questions. Once you’ve narrowed the list, make them compete for your business. They will drive each other’s prices down until every deal on the table is a good one. By the time you make your final decision, you’ll know that you’ve found the best merchant account for your ambulance service.