Before you purchase any payment card solution from any vendor, please read through the following information to get a clearer understanding of the differences between processing payment card transactions through a 3rd Party Processor versus directly though an actual processor itself (i.e., Elavon).

A processor is an organization that authorizes and captures payment card transactions and submits these transactions to the bank systems gateway that links the processor to the bank. The three largest processors in North America are Vital, PaymentTech, and Elavon (formerly Nova Information Systems).

A 3rd party processor is normally a marketing organization that functions as a reseller of the services offered by one or more processors.

Over the last eight years CFXWorks has had the opportunity to talk with hundreds of merchants. A common thread among many merchants was their dissatisfaction and frustration with 3rd party payment solutions. Their dissatisfaction and frustration was focused on the following issues:

• Reliability
• Excessive 3rd party processor fees
• Hidden 3rd party processor fees
• Lack of access to and control over transaction data
• Inability to capture transactions in thier own database
• Inability to create customized reports
• Lack of support from their vendors and processor

Most merchants focus on cost as thier first priority in selecting a payment solution. We suggest that the most important factor should be reliability. An unreliable payment solution will cost you time, customer dissatisfaction and lost business. Therefore, it is important for you to consider that Elavon is rated the number 1 processing network by MasterCard ® for speed, availability and reliability. In addition, Elavon competitively prices its services.

Merchants that establish a merchant account commit themselves to a fee structure that includes components:

• Annual Fees - Some processors charge merchants an annual fee. This fee typically ranges from 150 dollars to about 350 dollars and is in addition to all the other fees charged to the merchant.
• Discount Rate - The fee a merchant pays for the privilege to deposit the value of each day's payment card purchases. This fee is normally quoted in the range of two to three percent of purchase value. However, the quote is likely to be for a specific type of transaction (qualified) only under specific conditions. For example it may only apply to "card present" transactions when both AVS and CVV2 are present and verified. Therefore, merchants should make sure that the quote they receive fits their specific transaction type and mode of operation.
• Monthly Fees - Some processors charge merchants a monthly fee. It probably is reflected on the merchants account statement as "Other Fees" or "Statement fees". This fee typically ranges from a couple of dollars per month to about thirty dollars per month.
• Quarterly Fees - Some processors charge merchants a quarterly fee. This fee typically ranges from 50 to 150 dollars per quarter.
• Transaction Fees - Some processors charge merchants a fee for each payment card transaction. This fee can range from a few cents to perhaps as high as thirty cents per transaction.
• Hidden Fees - We refer to hidden fees as fees charged for any of the following:
  • International fees
  • Charge back fees
  • Minimun discount fees
  • Return item fees
  • Debit card fees
  • Voice authorization fees
  • Add-on security fees
• Software Fees - In addition to the above, their may be additional fees associated with the software used to connect the merchant to the processor. This software may be provided by the processor or from a separate source, for example CFXWorks.

To understand precisely what a merchant is paying for payment card transactions, it is absolutely necessary to understand all the costs associated with each of the above. It will always be more than the quoted discount rate.

When a merchant establishes a "merchant account" they can do it directly through a processor (i.e., Elavon) or they can do it through a middleman referred to as a 3rd party provider. 3rd party providers are typically resellers of a processor’s services. A 3rd party processor may or may not insert a separate server in the transaction processing pipeline. If they have their server in the pipeline, then they must relay transactions received from the merchant to the processor through their server.

• The merchant negotiates directly with the processor to establish their merchant account and all aspects of the fee structure assigned to the merchant account.
• No middlemen are involved in negotiating this relationship.
• No middlemen are involved in processing transactions. Transactions are sent directly from the merchant’s server to the processor.
• There are no middlemen fees or hidden costs in this environment because there are no middlemen.
• There are no service, reliability or performance issues caused by middlemen because there are no middlemen in the pipeline.

• The merchant negotiates with the 3rd party processor to establish the fee structure. Who pays the 3rd party? Ultimately the merchant pays both the "processor" and the "3rd party processor". This being the case, the merchant should carefully consider what additional services are provided by the 3rd party to justify the added cost.
• In most 3rd party processor situations, transactions are sent first to the 3rd party processor’s system and then relayed to the processor. This introduces one more point of failure in the pipeline and may create issues related to performance,security, and of course fees.
• When problems arise who’s at fault when a transaction fails? Does the issue lie with the "3rd party" or the "actual processor"? With these two entities pointing their finger at each other, the Merchant can be left in a rather precarious situation. Meanwhile, until the issues/problems are resolved the merchant is losing sales as well as potential future customer relationships.

Other issues that may surface when using a 3rd party processor are:

• Delayed receipt of funds – a processor, for example Elavon, automatically settles the merchant’s account every night. Therefore, the funds are deposited in the merchant’s banking account the next day. A 3rd party processor may remit payments only once or twice a month.
• Risk of non-payment - Since the 3rd party delays payment for some period of time (sometimes several days), the merchant is exposed to loss if the 3rd party is not financially sound.
• Chargeback risk - Customers are far more likely to dispute charges on their credit card statements that do not clearly identify the source of the charge. When a merchant account is established directly with the processor, the merchant’s organization name and telephone number will typically be displayed on the customers' statement. Charges processed via a 3rd party will typically have the 3rd party's name, which is often not relevant to the cardholder. Often, customers will simply call their credit card company and dispute the charge. This is likely to result in extra charges (called Chargeback fees), as well as extra work for the merchant and the customer that may result in your loss of the sale.
• Less information about customers - Typically the online forms used by 3rd party processors are very generic and don't allow the merchant to collect additional information about the customers that could be helpful in future solicitations and customer development.
• Higher costs - Typically 3rd party processors charge higher transaction processing fees, than if you negotiate directly with the processor. They may also hide a significant portion of their fees in what is commonly referred to as “hidden fees”. For the unsuspecting Merchant these hidden fees can really add up quickly and bite into their bottom line.

To minimize payment card processing fees we suggest that the merchant needs to focus on the following issues:

• Establish your merchant account and negotiate your fee structure directly with a processor, for example Elavon. Steer clear of 3rd party processors. Insist on full disclosure of all of the fees.
• Card-present transactions should result in lower fees than card-not-present transactions. But card-present transactions are not available to shopping cart applications deployed over the internet.
• Determine what security features you will enforce for each transaction. Accepting only transactions with validated AVS and CVV2 should result in the lowest possible fees. On the other hand, will you lose sales if you reject transactions from customers who do not supply the correct information?
• Negotiate directly with the processor for the best deal on all fees.
• Finally, make sure you have full disclosure of all those hidden fees. They can really add up.

The only way to really know what you are paying for payment card transactions is to subtract from your gross sales your total cost including all the fees you are paying including discount rate, monthly, quarterly, annual and transaction fees. Plus, don't forget to include the costs associated reliability issues including your management time and lost business. Don't be surprised if you find you are paying two to three times the discount rate quoted you.

The following table reflects the fees a merchant pays releated to the discount rate. For example, if the merchant negotiates a 2.5% discount rate they would pay fees of $25,000 for each $1,000,000 of sales.

Transaction processing fees can add up quickly even if the additional fee is only a few cents per transaction. A review of the following table reflects how a merchant’s processor fees can add up rather quickly.

Note that these fees can be significant. For example, a $15 monthly fee (15 x 12 = 180), plus a $50 quarterly fee (50 x 4 = 200), plus a $150 annual fee totals $530 of hidden fees (180 + 200 + 150 = 530).

For example, you should think about the following:

• Charge back fees (at $15 to $20, per transaction).
• Voice authorization fees (at ¢65 to $1.00 per transaction
• Add-on security fees (at >= $300.00 per year)

To figure out your total cost of processing payment card transaction through a particular processor you must add all the fees together. This includes:

• Discount rate fees
• Transaction Processing Fees
• Monthly, quarterly and yearly fees
• Hidden processing fees

As an example let's make the following assumptions:

• Your discount rate is 2.5%
• Your transaction processing fees is 10 cents per transaction
• Monthly, quarterly and yearly fees:
  • $100 monthly fee (100 x 12 = $1,200)
  • $150 quarterly fee (150 x 4 = $600)
  • $500 annual fee
• Hidden fees:
  • Charge back fee - $15 per transaction
  • Voice authorization fee - $1 per transaction
  • Add-on security fees - $300 annualy

If you ran $2,000,000 worth of payment card transaction at a volume of 500,000 transactions the total cost of these transactions looks as follows:

• $2,000,000 in transactions X 2.5% discount rate = $50,000
• 40,000 transaction at 10 cents per transaction = $4,000
• Monthly, quarterly and yearly fees (1,200 + 600 + 500 = $2,300)
  • $1,200 monthly fees $1,200)
  • $600 quarterly fees $600)
  • $500 annual fees
• Hidden Processing Fees (assuming a 2% charge back fee and voice authorization rate)
  • Charge back - .02 X 40,000 X $15 = $12,000
  • Voice authorization - .02 X 40,000 X $1 = $800