When & Why Do Credit Card Rates Get Raised On Business Owners?

I can’t tell you how many times business owners (or ‘merchants’) ask this question, and they only ask because no one wants to explain it to them.

When

This can happen after being with a credit card processing company for 3mths, 6mths, 12mths, 24mths, or whenever they set up a review process.

Why

This article will explain the real business relationship of credit card acceptance to a business.

  1. This can happen when the average sale amount OR the estimated monthly and annual estimated credit card volume that was put on the application have proven to be incorrect. Incorrect in that either the average sale indicated was too low, or that the estimated monthly and annual volume was too high. The rate given is always based on avg. sale amount and estimated volume.
    • Higher average sale amounts equals risk in the credit card processors’ thinking. I.E. when comparing a $50 transaction to a $500 one: stolen credit cards are not used to falsely purchase low ticket items/services, employee negligence, or fraud affects a larger sale amount greater than a small sale amount.
    • Lower volume equals less profit for the credit card processor, more expense, and shorter longevity of the account in the credit card processors’ thinking.
      A lower rate may have been given for a high volume amount stated. When that is proven untrue, then the account becomes a money losing account to the credit card processor.
      i.e. on application: $10,000/mth in credit cards v.s. actual upon review: $2000/mth.
    • Low volume accounts generally become the default accounts because of business failure from mismanagement, inadequate capitalization, etc., so long term profit cannot be realised (shorter longevity of the account) from this size of a business.
    • Also, low volume accounts are the hardest to please and the easiest to lose, which equals more risk, more expense, and shorter longevity of the accounts.
  2. This can happen when the business model is proven incorrect. I.E. the application says 10% orders by phone with no card present, then the result after a timely review suggests that the phone order percentage is 30%. Multiple this by the actual business volume and could be a huge problem.
  3. This can happen when there is an unusually high volume of chargebacks (even though a business owner pays for each charge back). A high percentage of chargebacks indicate a poorly maintained business with lots of unhappy customers, or a lot of fraud by owner or employees.
  4. This can happen when a credit card brand like Visa or MasterCard decides to raise their wholesale rates (called ‘buyrates’) across the board to all the credit card processors. There are ONLY SIX Credit Card Processors in Canada.  Merchant Accounts are usually sold through what is called ISO Channels, also called Independent Sales Organisations, or Point of Sale Companies, or Payment Solutions Companies. This happens about every quarter in the US Market and we will head in this direction here in Canada. It’s going to be like variable mortgage rates. The fluctuations have started this past April 2008, October 2008, and April 2009, etc.When this happens to Payment Solutions Companies, then everyone is forced to raise their rates, and unfortunately for business owners and consumers, some of the Payment Solutions Companies will often use this time to raise a little extra more for themselves, and blame it on their suppliers, Visa & MasterCard.
  5. Raising rates on business owners can also happen in an attempt by the Payment Solutions Companies to make the money losing part of their network become profitable, or they are streamlining operations, or creating cashflow for steady expansion, or beefing up margins to sell to a larger credit card processor.These companies will send a blanket letter to everyone in their network letting them know that rates will be increased by a certain date, knowing that a large percentage will either not read the letter or not bother with the hassle of shopping around and switching their payment system.

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