Understanding Credit Card Processing

As I wrote that headline, I instantly thought that there may be many out there that aren’t quite sure.  So, let’s take a look at the potential differences that could affect you.

Processors are the actual companies that process credit card transactions thru the bank system for you. Typically, banks utilize a third party to process transactions rather than providing the service themselves. Their expertise is in banking, not credit card processing.

As a processor, you can distribute payment services thru a variety of different channels. There’s the ISO (Independent Sales Organization) channel, the agent bank channel, direct sales, office supply and other retailers like Sam’s Club, the internet, etc.  The two channels that are most prevalent in our industry are the ISO channel and the agent bank channel which is primarily what I want to discuss here.

Processors essentially get their merchants for free from “the channel” and those channels receive their compensation through a revenue sharing arrangement.  Typically, generally get their merchants directly from their banking customers.  Rarely will you find that banks have a dedicated sales force marketing payment processing.  Since these merchants have other financial relationships with the bank, the attrition rate tends to be lower.  Most often, when merchants get loans thru their bank, the bank may require them to do their credit card processing thru them as well providing an added layer of security for the loan.

ISO”s’  on the other hand don’t have similar tools to provide stickiness and attrition rates tend to be higher.  When a merchant feels they aren’t receiving the service they desire or another rep comes thru the door offering lower rates, they will more readily make a switch.  So, ISO’s and their MLS’s (merchant level salespeople) make up for the higher attrition rate by being more aggressive and productive in their efforts.  They don’t wait for customers to come their way.  Instead, they are actively knocking on doors, making phone calls, using the internet or other marketing methods to attract new merchants.  In fact, their opening line may be an offering that may seem like a bank product, like a cash advance program that may fill a need that the merchants bank won’t.

To give you an idea of the potential for some major differences between ISO’s rate offerings, compared to Agent Bank rate offerings, consider this.  Recently, Harold Montgomery, CEO of Calpian, Inc., developed a study of what one processors experience with the ISO channel vs the agent bank channel.  Simply, he found that the ISO Channel offered rates at an average of 61.3 basis points over interchange.  Agent Bank Channel rates averaged 186 basis points over interchange or, 124.7% higher.  Ouch!  Now, to the processor, the bank channel is much more profitable.  But, to the merchant, getting your processing thru an ISO surely seems like the smartest, most economical way to go.

Now, there is one more thing to note here.  Typically, bank-derived merchants generally process larger volumes than ISO merchants.  ISO’s tend to be the “feet on the street” and tend to recruit smaller, more entrepreneurial merchants. These are the guys and gals knocking on your doors and calling on the phone.

Another difference between agent banks and ISO’s is that ISO’s are much more aggressinve in their approach.  Banks, in general, are not that great at sales.  They respond when asked if processing services are available but have a difficult time initiating anything.  They simply “fill the order” when a customer asks.  Consequently, typical agent bank branch production numbers are measured in single digits per month.  ISO’s, on the other hand, being much more aggressive in their marketing get their new customers anywhere and everywhere and they will typically negotiate better rates for you.

There is a bit of a caveat regarding Agent Bank channels.  Over the years, I have set up numerous “bank relationships” to offer credit card processing services to their customers.  These banks were typically local, community or regional banks and usually had less than 25 branches total.  They were interested in offering additional “services” to their customers in order to better compete with the larger national banks.  Again, the more services a banking institution can offer their customers, the less likely they are to search elsewhere for their banking needs.  In this type situation, since the banks staff rarely understand processing, I would handle the entire process with their customers.  It was a win/win/win situation in all regards.  The bank wins by being able to offer the service to their customers.  And, it provided for an additional revenue stream for them.  I would simply negotiate a favorable split of my commissions rather than mark rates up to their customer. The merchant wins because I offered them beneficial rates like I would to self-generated customers.  And, I win by having additional business come my way to add to my personal portfolio.

So, as I wrap this up, let me just suggest that if you are currently processing thru your bank, take the time to get an independent evaluation of your rates and services.  Don’t just assume that because it is your bank that they are truly doing you any favors by providing this service to you.  You don’t necessarily have to keep your processing with the bank even if you have loans with them.  Of course, in some rare cases, that may be the case, but not usually.  If you’d like, all my contact information is available and I’d be happy to be of assistance you.

Thanks for reading and feel free to pass this article along to others you know that may find it to be beneficial to their needs.

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