It’s an obvious statement that the world of payments is changing rapidly. For suppliers and distributors that have been set in their ways for years with their collection habits, the day has come to truly understand the most effective measures to establish a credit card processing program.
Many CEOs and CFOs are completely overwhelmed, paralyzed with day-to-day decisions. With the promo products industry predicated on the reality that logoed items must arrive promptly, who has time to investigate payment strategies?
Don’t be alarmed if you haven’t reviewed your credit card processing programs in years – you’re in the majority. But this must change as credit card processing fees are escalating annually and hurting the value of your business. Even for personnel with accounting backgrounds, deciphering credit card processing fees is a unique subset of the world of finance. Many executives don’t understand the opportunities that exist to save significant money on a merchant services bill.
Credit card fees are considered a commodity. “What’s your rate?” is a common question asked by execs. However, there are more than 600 fee classes and interchange levels that comprise the “what’s your rate” question? Most finance personnel will typically say “I pay 2.5% or 3%.” Yet this is just a small piece of the puzzle as Visa/MC/American Express, the banks and processors have purposely made reading a credit card statement impossible. Even after all my years in the space, I still get dumbfounded when reading some new statements that deliberately hide fees, making it incredibly difficult to understand the gibberish. I equate it to reading your phone bill, which I still have no clue how to do. What matters isn’t your base rate but the net effective rate, which takes into consideration all of the expenses affecting your processing fees.
A Complicated Climate
There’s a lot to absorb and payment options are vast. PayPal is now a ubiquitous term. Then there’s Square. Stripe. ApplePay. Venmo. Not to be forgotten is the emergence of Bitcoin, Ethereum and other cryptocurrencies that have created a quagmire of information overload for business executives. Blockchain technology is here to stay and although many promo companies can’t imagine accepting payment for their logoed hat or T-shirt in a cryptocurrency, it’s going to happen. In my opinion, the time is closer than you think. One of the most critical areas of the changing landscape in payments is determining the most advantageous method of setting up your merchant account. Whether you’re a distributor or supplier, your business is different from a restaurant, website or retailer selling primarily to the consumer. Within the promo market, the majority of sales are business-to-business.
Within the B2B realm, there’s a nuance of credit card processing rarely disclosed called “interchange optimization management,” which the majority of banks and processors never review. In layman’s terms, managing interchange is the study of reviewing which of the hundreds of interchange fee classes a transaction is hitting.
For example, my firm has worked with many promo industry companies that were paying fees comparable to Walmart – meaning the rate was incredible with little to no markup. However, because of interchange optimization, we helped these organizations save hundreds of thousands of dollars annually by fixing the back-end fees as established by Visa and MasterCard. We accomplished this even as other processors and banks said there was no way to lower fees.
Based on actual data with implementing interchange optimization and correct setup, we’ve been able to save some of the larger promo industry companies in excess of $500,000 annually and other B2B companies greater than $1 million each year. All this was done without the need for firms to change their current processor and/or banking relationships. Whether you can save $500 per month or $50,000 per month, you can ensure that you have the most advantageous merchant services program.
The Big Issues
Having worked with many promo and B2B companies that already accepted credit cards, we found over 96% of merchant accounts were set up incorrectly, being overcharged, had hidden fees and line items that weren’t relevant to their business. What happened to the banks and processors helping business owners versus taking advantage of them? Yes, only 4% of clients we reviewed were considered “competitively priced” by our metrics, and this analysis includes reviewing and working with some of the biggest players (both distributors and suppliers) in the promotional products industry.
Within this 96%, it’s amazing to see how many accounts also had “accidental” data entry mistakes. I’m sorry to sound cynical, but I’ve seen it too often with mistakes that become very meaningful in lost profits – you have to ask who at your company is verifying these numbers.
“Having worked with many ASI industry and B2B companies that already accepted credit cards, we found over 96% of merchant accounts were set up incorrectly, being overcharged, had hidden fees and line items that weren’t relevant to their business.” — Jeff Shavitz
It’s critical to understand how all the players who touch your money work within the payment processing space. Ninety-nine percent of processors only discuss rates, but what’s much more important is establishing your merchant services’ program to hit the lowest possible interchange level. Have you ever googled “Visa Interchange Tables” or “MasterCard Interchange Fees?” Do it and you’ll see the compilation of hundreds of publicly listed rates. The trick is to ensure that if and when you accept a credit card, it hits the lowest rate possible. The processors don’t care because they aren’t earning profit by helping your company reach the most economical rate. It’s sad but true.
In January 2019, I attended the ASI Show in Orlando. I spoke with many business owners who didn’t understand the monthly fees they were paying to Visa/MC/Discover and American Express. Did you know you’re being charged a different rate depending on whether you accept a personal credit card, rewards card, corporate card and/or international card? Did you know the local bank that may do your processing is just a “middle man” to the actual processor, which affects your rates? Do you know if your money is hitting your bank account in 12 hours (commonly called next-day funding), or two to three days from acceptance of your payment?
Just think about the cash flow implications when the processor has your money for an extra few days earning interest versus it sitting in your bank account and earning interest for you. Do you know which gateway and/or terminal you use and the different benefits each offers? Are you aware of the fees for leasing your equipment, POS systems and terminals? Is your terminal EMV compliant and chip enabled? Are you PCI compliant for 2019? Better yet, what does PCI compliance even mean? What do the terms qualified rate, mid-qualified rate and non-qualified rate mean? When was the last time you spoke with your payment processing company? Based on industry research, probably never, unless you were changing your bank account information.
The point is there’s a lot more to your credit card program than just the rate. Having worked with tens of thousands of merchants during my career, I realize setting up a merchant account is confusing. Do you go to your bank? Do you work directly with a processor? Can you call Visa or MasterCard directly? Terms like interchange plus, pass-through pricing, back billing, flat fee pricing, bundled, tiered, cash discount processing – what are they? In the end, most companies listen to their credit card salesperson and pick the option they suggest. The merchant services industry is an unregulated business and certain processing models are best for the profitability of the bank and processor while being detrimental to the bottom line of your company.
Strategies & Savings
Some distributors and suppliers – maybe you’re among them – are still fighting accepting credit cards in 2019. Why? Is it because your company isn’t prepared to pay the percentage to accept the cards? Is it because it just seems too difficult to set up your merchant account? Or are you just too busy to fill out the application? Regardless, my firm conducted a study that determined over 79% of companies that don’t accept credit cards are likely to have collection issues over 60 days – and these companies lose tens of thousands of dollars per year in business and unpaid accounts receivables.
Given the consolidation of companies with mergers and acquisitions becoming more prevalent in the promotional world, EBIDTA (or earnings before interest, taxes, depreciation and amortization), is increasingly an important measure of a company’s overall financial performance. This quantitative study is often the preferred metric for valuing a company as an alternative to simple earnings or net income in determining a company’s valuation and quantifying market valuations.
In this regard, credit card processing fees can be very meaningful when CEOs are considering a forthcoming sale. I recently analyzed the merchant fees of a B2B seller that was under due diligence to be purchased by a private equity fund. My firm analyzed the company’s credit card processing expenses and found $15,400 in savings per month or $184,800 annually. Using a multiple of seven, this $184,800 just increased the valuation of this company by $1,293,600. Not a bad appreciation in value for the business the PE firm just acquired, and it came about from reviewing and reducing the credit card processing expenses on day one.
All companies want to grow top-line sales, but don’t forget about looking closely at the key expense items like credit card processing. A dollar saved in expense management is a real dollar saved and falls right to your bottom line.
Credit card acceptance is here to stay and will only grow in the coming years. It’s important to avoid the array of pitfalls associated with accepting credit cards for payment. You can take ownership of this confusing facet of running your company. Just like we need to maintain our health by exercising regularly, promo industry companies must exercise their financial acumen when analyzing whether they have the best credit card program for their organization.