June 2005 - Finding the Proper Payment Processor

The first step in the process is selecting a partner, not a vendor to simply handle part of your business. Experts say price should not be the only determining factor.

By David Lustig

You’ve worked hard to create a product and marketing plan that should, in theory, be a winner. Every attempt has been made to provide the maximum quality product with the least amount of cash siphoned away by unnecessary overhead. It’s your money, and while you don’t mind spending it wisely, having other parties do for you what you should be able to provide for yourself is usually not an option.

At first, payment processing, also known as merchant processing, seems like an avoidable extravagance; one that you should be able to contain in-house. But then you stop and think. Do you really want to get wrapped up in the world of accepting the myriad manners of payment for your goods and/or services? Perhaps this is one very important area you might just want to consider letting the experts grapple with.

But just like any other area of business that you may not be totally familiar, and therefore, comfortable with, you want to determine what is the best path. You don’t want to simply turn over this critical part of your operation by going with just anyone, yet the number of questions and the potential paths to head down seem to multiply at every turn. The very real fear, of course, is that going down a road that seems like an express route to easing a complicated problem just might turn out to be a dead-end with very little chance of turning it around.

In that light, Electronic Retailer magazine asked managers and executives of a number of payment processing firms some of the dos, and don’ts of finding the correct one to serve your business. They were surprisingly candid.

“There are several types of payment processors that serve American businesses,” explains John Jensen, president of CambridgEcommerce of Vista, Calif., just north of San Diego.

“Some focus on brick-and-mortar firms, some on retail, some on auction, and some on infomercial (DRTV). Many payment processors can offer services to a DRTV customer but few can do it well. The criteria that a DRTV customer must look for include a payment processor that performs like your partner, instead of a vendor, and is looking out for your best interests by helping you prepare for each new step of growth; a payment processor that has not only worked with large customers but treats small customers like they are as important as large customers, and a payment processor that constantly adds new levels of services, security and reporting.

“A payment processor [that] knows the steps to success and does not actually guide you along the stepping-stones to success is a vendor, not a partner,” Jensen says, adding, “Move on to the next payment processor.”

How will you know if a payment processor functions like a partner instead of just a vendor? Jensen says one way is reputation and references. “If a potential payment processor does not have both, do not be the ‘test case’ for a new firm or sales representative,” he says.

Diane Vogt, president, enterprise customer development at First Data Corp., headquartered near Denver, Colo., in Greenwood Village, emphasizes it is important to use a firm that understands your business.

“A payment provider should be positioned to consult with you for all POS solutions and be able to discuss how to tailor these to your industry and needs. Choose a company that will give your customers choice. If a customer prefers using a debit card or writing checks and you do not accept these payments, then they might begin shopping somewhere else that does.”

Vogt also recommends looking for all-in-one POS solutions.

“These help merchants process a wider variety of transactions-from smartcards and credit cards to debit cards and electronic checks, thus helping reduce clutter and saving valuable counter space for impulse items and other products. When opening a merchant account, consider accepting PIN debit transactions and electronic checks to help limit the amount of cash and paper checks you handle.”

Vogt also says to always remember that less paper is better. The evolution from paper-based to electronic payments, she says, eases business operations and cuts costs by reducing time-consuming and labor-intensive paper handling and collections efforts.

Okay then, going beyond looking for a company that is a “good fit,” what are common misconceptions that marketers have about payment processing companies, and just as importantly, what are some of the common mistakes they can make?

“Merchants who may have had a difficult experience with a processor often feel that it represents the industry itself,” says Rick Olson, chief operating officer of AmeriNet Inc. in Clearwater Fla. “There are very good vendors and, frankly, very bad ones.” It is a misconception, he adds, that a company with a large industry presence or highly recognized name is, by nature, the better vendor.

“In fact,” Olson says, “technology and the industry as a whole are changing so rapidly, large companies are often slower to adapt. However, a small company that has the nimbleness may not have the financial strength to service a substantial client.”

One common mistake many people make, he says, is comparing processors by transaction fees alone.

“Like many things, you usually get what you pay for. If one vendor has a significantly different price than another, there is usually a reason. Sometimes the reason is simply that the vendor is more expensive, but there may be significant differences in the services.”

First Data’s Vogt says that a common misconception is that marketers believe that payment processing companies’ solutions are geared towards larger merchants. But, she says, they offer payment solutions tailored to businesses of all sizes. As far as a typical common mistake, Vogt says, many companies use price as one of their biggest criteria in choosing a payment processor.

“Choosing on price alone may not be the best long-term option,” she warns. “Service and evolving products are important as small businesses grow and consolidate functions.”

Rollie Froehlig, president and CEO of National Fulfillment in Lebanon, Tenn., says to always check the monthly statements with the quoted charges. “The amount quoted is for qualified sales,” he says, “and rarely, if ever, does it include the pricing for non-qualified sales.”

CambridgeEcommerce’s Jensen says that most marketers are misled into thinking that payment processing services are as simple as an application and a swipe machine. Nothing, he says, could be further from the truth.

“The most common misconception in the DRTV industry is that all payment processors are the same,” he says, explaining that different payment processors have different business models, as well as performance advantages and disadvantages.

“A marketer must be selective with the pricing, attributes, skills, IT staff, reporting and personal service of a payment processor,” says Jensen. “This will give you the advantage you need when sales are exploding and customers keep calling.”

As far as common mistakes, Jensen shares his list of the top 10 a marketer might make, including that the marketer…

10. Does not confirm that the payment processor is fully integrated into the fulfillment center using batch processing;
9. Thinks a merchant account can be set up in one hour;
8. Doesn’t discuss with the payment processor and the fulfillment house how chargebacks will be administered;
7. Doesn’t coordinate security and fraud checks into the script;
6. Forgets to create a timing flow chart to ensure cards are not charged if the inventory is not available;
5. Doesn’t find out if rates automatically dip as volume increases;
4. Doesn’t find out if the payment processor responds to questions quickly;
3. Forgets to study how data is reported to the marketer in advance;
2. Doesn’t find out if the payment processor offers all forms of credit cards, debit cards and e-checks;
and…the number one common mistake a marketer can make…
1. Doesn’t pick a payment processor that thinks and acts like a partner.

Getting a little worried at this point? After all, we’ve just had experts beat you up and tell you all the common misconceptions and mistakes that can be made in picking a payment processor. But now, let’s turn the tables and ask these same people what important advice they would give marketers looking to find the right payment processor. It turns out, as good as they can dish it out, these same people also have some excellent suggestions.

First Data’s Vogt suggests, “It’s very important to have a payment processing company that can adapt to your business over time. This means delivering meaningful innovation and making it available quickly. As payment options evolve, you want a company that can provide scalable solutions that are tailored for your company’s specific needs.

“You should also consider the company’s experience in the business, experience with similar merchants and value-added products that enhance their ability to bring more sales in the door, such as loyalty and gift cards.”

Olson of Amerinet believes, “Choosing a vendor is, in essence, making an investment. You could compare it to buying a car. Sure, the sticker price, style and color are what initially draw your attention, but it is always a good idea to take it to your mechanic because you also want to know how well it works and how long it will last, and if there are any hidden surprises that might cost more in the long run.

“When you choose a vendor, always look past the glossy marketing and attractive rates. Not all vendors are the same, especially ‘under the hood.’

“Base your selection on what you need, not just what they offer. Look at your own business needs and limitations, particularly your technical limitations. Then, look for the vendor that offers the solutions that fit best into your business. If they want you to fit into their business, you may end up doing more work, at your expense, than you need to.

“Have technical discussions with your IT people on the call. Ask pointed questions to get a comfort level that the vendor has the systems, security, stability, and expertise to handle your business.

“Your business depends on the vendor’s system stability and availability. Redundancy, failover, capacity, all these things are standard practice. Compliance with Data Security standards is crucial. Make sure your vendor is up to speed with the industry standards.

He also suggests that marketers ask for sample reports and make sure they make sense and that they cover all the reporting requirements you have. Lack of clarity can make life very difficult and even result in losses.

“Understand things like processing cutoff times and any other non-negotiable deadlines or time intervals you will have to operate within,” says Olson. “And, ask for references and then follow up on them!”

National Fulfillment’s Froehlig, says, “Look for dependability and easy access to someone for answers. Have the ability to connect to different networks for data transfer. And, select a company that has the ability to process in many different ways, so they can respond and take care of all your processing needs as your business grows and changes as the market dictates.”

Jensen of CambridgEcommerce contends, “When you select a retail store to do business with, you need to know about their customer service level, pricing strategy and philosophy. When you select a payment processor, these criteria should be the same.

“Customer Service relates to a payment processor’s [proactive ability] in guiding you through the steps to DRTV success and their service level. Pricing has to do with giving you a value price, with all the payment forms. Philosophy relates to the long-term business model of a payment processor.” He says that payment processor business models usually break down into one of two forms: sign them up and forget them, and partnership philosophy.

“How do you know which business model a payment processor really uses? According to Olson, ask the fulfillment center and the payment processor that they should call in the future for questions.

“Then call that person or department in advance and see how long it takes them to respond. After these two tests, you will have your answer,” he suggests.

Furthermore, picking a payment processor is like anything else in business; read all you can on the subject, ask intelligent questions, look for results, find out, if possible, what companies other people are using, and if appropriate, find out what they think of the service they are getting. And finally, ask for references and then actually call those references and ask hard questions. The success of your business may very well depend on the homework you do.

Revenue Is the Bottom Line

By Steven J. Edelstein

The idea is conceived, the strategy is deployed, the product is marketed, backend services are anxiously awaiting the direction to process and ship your orders, but how do you transact the business? The process of merchant processing is vital to your revenue goals and confusing to the novice marketer. What lies ahead will define, illustrate, profile and detail merchant processing, the process, the business, and the value so important to the financial livelihood of any direct-to-consumer business.

In order to decipher the value and effect that merchant processing has on your business, marketers must understand what merchant processing is and how it applies to your business. According to Shane Bradford, national sales manager of Transfirst e-Payment Services Inc. in Omaha, Neb., “Merchant processing is the ability to accept payment for a product or service. Typically, methods of payment are credit cards, debit cards or checks.”

Is there a typical merchant processing customer? Generally, a company or individual who needs to accept payment via credit card, debit card, check or electronic means-is a candidate for a merchant processing account. This is critical in order to provide a reasonable method of payment for goods and services that would have otherwise been only available through cash payment.

It is important to source a merchant processor that has a legacy and experience in the direct-to-customer market you are engaging. Before sourcing a viable merchant processor, several questions need to be addressed:

  • Do you have previous processing experience in direct-to-customer marketing?
  • Will you put a dollar volume limit on what I can process?
  • What payment gateways do you work with?
  • What are your reserve policies?

The merchant processor you are engaging should be able to address these and alternate questions that are specific to all financial obligations, and process issues. If they cannot address these questions, then it is recommended that you continue your search with other options.

In all merchant-processing cases, a detailed process needs to be followed to ensure that all parties are protected and all businesses are potentially profitable.

Bradford explains, “The first process an individual or company must go through is obtaining a merchant account to process payments. The ability to obtain a merchant account is done by applying with a banking institution or merchant services company. The procedure an individual or company must go through to obtain a merchant account is to complete an application for approval. Once a merchant account is approved, the business must integrate with the processing company to process orders that they obtain. The most common ways to integrate are through a terminal or personal computer. Businesses that require the ability to process a large number of orders will need an enhanced integration platform to process their orders. Companies can utilize batch processing methods or payment gateways to process a large number of orders in an efficient time.”

Now that the merchant processing component is established, are there issues or concerns that a company or individual should be aware of?

There is risk on both sides of the equation-the company and the merchant processor-and/or-merchant bank. Bradford qualifies this by saying, “Several issues and/or concerns can arise when a direct-to-consumer marketer engages a merchant account. First of all, marketers need to make sure that the processor they are engaging for a merchant account has processing experience in the direct-to-consumer marketing business. Secondly, marketers need to establish if the processor is going to put a volume limit on the dollar amount a marketer can process through a merchant account. The limits are typically done on a monthly basis. Ideally, marketers want to work with a processor that does not limit the dollar amount a marketer can process. Thirdly, marketers need to be savvy when evaluating the price quotes from the processor. You want to make sure that you are getting an aggressive price from a processor that fully understands the direct-to-consumer marketing business. In terms of merchant processing, the traditional direct-to-consumer marketer is not obtaining a signature with the sale. It is typically a non face-to-face transaction. The non face-to-face transaction is a higher risk sale than the traditional retail transaction where a signature is obtained. The risk is the key issue when it comes to pricing. Marketers do not want to pay too much for merchant processing but they need to be careful if the only thing they are looking for is the lowest price. Lastly, when engaging a merchant processor marketers need to have an understanding of the processor’s position on reserves/holdback. Due to the higher risk environment in direct-to-customer marketing, the processor might hold a percentage of the sales in a reserve account to protect their liability if the marketer runs into problems with their business.”

How does the business get transacted? Depending on the business situation you are entertaining-handling transactions within the customer’s domain or outsourcing to a professional partner, a system needs to be in place in order to facilitate all transactions. According to Bradford, “The interface between the processor and the customer is a crucial component to this process. [We] typically integrate with our customers via a batch processing method or a real- time gateway service. [We] can provide terminal or PC support, but these are manual methods, which can be a challenge for high volume programs. The customer can process very effectively with a batch method or gateway services.”

Additionally, outsourcing to a viable business partner can be a cost-effective solution for providing transaction support. Bradford goes on to say, “[We] typically interface with other direct-to-consumer partners at the telemarketing, Internet or fulfillment center.” This is an efficient process to engage for many reasons-mostly experience, seamless transfer of secure data, and total integration.

What are the advantages (or disadvantages) of utilizing any specific credit card? The general consensus and recommendation is to source MasterCard, Visa, American Express and Discover as viable selections for credit card transactions. It is always recommended to allow the customer as many payment options as possible, being aware that variable transaction cost(s) may affect your choice(s).

How does a merchant processor charge for these services? For most merchant processors, the average cost structure is focused on the discount rate or percentage fee that is charged, as well as bank transaction fees. These fees comprise the cost per transaction. There are other fees such as chargeback, statement, minimums, etc., that might vary depending on the processor. A precise average cost will depend on the quote that the customer receives from the merchant processor of choice.

All in all, a merchant processor’s main objective is to ensure that monies that are transacted are deposited and available for the individual or company that has employed these services. In order to reach this objective, there are several steps that a merchant processor must engage, such as:

  • An authentication process must be executed to confirm that sufficient funds are available for the transaction and can be secured for the purchase of a product and/or service.
  • The settlement process (phase) must be initiated in order to enter the customer’s account, debit the authorized funds and continue the processing for the transaction.
  • Post-settlement, the merchant processor transfers the sales revenue transacted into the marketer’s account.
  • Final detail of all deposited revenue is available to the marketer through various reports that detail this process.

The bottom line-service is critical and availability of funds transacted affect the day-to-day livelihood of businesses throughout the world. The value proposition to the customer is vital.

Transfirst ePayment’s Bradford adds, “The ultimate value proposition that [I] offer to my customer is the fact that [I] will represent them to my company. [I] will always do my best to make sure that they are being treated fairly by the company that I represent.”

Merchant processing-providing a vital service that affects how we conduct business-is a necessary function. How we choose to utilize this service will ultimately contribute to the success of an organization or individual business-transaction by transaction.

Steven J. Edelstein is managing director of corporate marketing for Fosdick Fulfillment, a backend services company based in Wallingford, Conn. You can reach him at (800) 759-5558, or via e-mail at [email protected].

David Lustig is a contributing writer to Electronic Retailer magazine. We would appreciate your feedback. To submit comments, point your browser to paymentjune.marketing-era.com.

No Comments

No comments yet.

RSS feed for comments on this post. TrackBack URI

Leave a comment