Are you happy with the company that facilitates your payment processing? If you’re not, you’re not alone. JD Power found that merchant satisfaction with payment processors is down from 2022. Driven in large part by the cost of service. But as we’ll see, there are other reasons some business owners could be dissatisfied and looking to switch payment processors.

How do you know when it’s time to leave? We’re talking about your relationship with a payment processor of course, nothing else—no tearful breakups or Facebook stalking here (unless they have a cool Facebook page).

There are some obvious signs of a relationship that isn’t working…such as equipment that doesn’t work. If POS terminals are shutting down all the time, you probably won’t stick around. But are there more subtle signs that go unnoticed?

As it turns out, there are. Disadvantageous pricing structures. Poor customer service. Too many fees, or surprise fees. Onerous reserve requirements. A lack of versatility. Etc. These are just a few of the invisible reasons (beyond the hardware) merchants may be looking to switch payment processors.

Red Flag #1: You’re Paying More —with Tiered Pricing

Tiered pricing is a popular model among banks that offer merchant processing. In this pricing, there are typically three tiers, or groups with different fees.

Qualified cards include debit cards and non-rewards credit cards. Mid-qualified cards include rewards credit cards, keyed-in transactions, and authorized transactions that aren’t run within 24 hours. Non-Qualified cards include corporate cards, international cards, and card-not-present transactions.

The fees increase as you go from qualified to non-qualified tiers. Think of it as the opposite of a baseball game. When it comes to baseball tickets, the cheap seats are often the worst seats. But in tiered pricing, the worst sorts of cards (for the bank) have the most expensive fees.

That’s because tiered pricing is all about helping the bank cover its bases (to continue our baseball metaphor). For example, card-not-present transactions are subject to a lot more fraud and chargebacks than other types of payments. Hence, these are non-qualified transactions that have higher fees.

Tiered Pricing is Not a Good Model for Most Business Types

Tiered pricing is especially bad for certain types of small business owners. If your business is online, tiered pricing is a horrendous model (for you) because every online transaction is a card-not-present transaction. If your business takes preauthorizations (common examples include hotels and restaurants) and can’t run the charge within 24 hours, you’ll also be paying higher fees.

Many merchants also find that payment processing companies are not transparent about their tiers. They may change the pricing or even the definition of what credit and debit cards fall into which tier. What seems like a simple pricing model can become very confusing. For all these reasons, if you find out your merchant service provider is using tiered pricing, you should ask for a different pricing model—or seek a new way of accepting payments.

Red Flag #2: They’ve Got One-Size-Fits-None Flat Rate Pricing

Another popular pricing model is flat rate pricing. This type of pricing model is typically offered by large payment aggregators like Stripe, Square, Venmo, and PayPal. To be fair, some of these companies do offer a little bit more nuanced pricing once you reach a certain sales volume, but it actually is (still) pretty much a flat rate.

Flat-rate pricing has some immediate appeal to small business owners who are looking for a payment gateway. These business owners may have just started a business and are searching for convenience over savings. Some of these companies are integrated with sales platforms like Shopify, which help small business owners get set up in the marketplace.

However, once a merchant reaches a more normal and consistent sales volume, tiered pricing is actually to their detriment. That’s because different payment methods have different fees. Visa, Mastercard, Amex, and Discover all have different interchange fees.

Different banks have different fees. And even different ways of making a payment have different fees. But wait…there’s more. Every business has an MCC or merchant category code, and card networks also have different fees for different business types.

For example, an American Express run for an online purchase is going to have higher fees than a Visa card offered in person and accompanied by a PIN. But you would never know that with flat rate pricing.

Close Your Eyes and Think of the Ocean (Trust Us)

What often ends up happening is that you (the merchant) get repeatedly charged fees that are higher than you should be paying. True, the payment processor may lose a little change on some of the more expensive transactions, but they’ll gain far more on all the others.

As mentioned, flat rate pricing seems simple and convenient. Picture the ocean on a still day, and think of that as your flat fee. Now picture the bottom of the ocean as the actual price of a transaction. The ocean floor rises and dips, just like different cards have different fees.

And picture the space between the sea level and the ocean floor as the profit made by the payment processor. There are lots of times when you could be paying less money to accept card payments. If your payment processor only offers flat rates, it may be time to raise your sails and seek new ports of call (preferably ones with good rum).

Red Flag #3: You Can’t Get Them On the Phone

One thing that successful business owners quickly learn is that you can’t work as a lone wolf. Delegation is crucial for running a business, especially once your business starts to grow. HR, accounting, customer service, and IT support are all things you’ll want to outsource so you can focus on your business.

Included in the IT category is support for your POS (point of sale) systems and the software that animates them. Even after this technology is set up, there will periodically be times when you have a question about the hardware and/or the software

When these questions come up, you’ll want to get help immediately. Unfortunately for many merchants, they find out that large companies like PayPal and Square are very hard to get tangible, useful support from. There are tickets and wait times and a lot of phone tag.

These companies are also technically something called payment aggregators. An aggregator bundles their customer merchants into their own merchant ID. This means that every business using Square, for instance, is actually identified as Square in the payment landscape (in simplest terms).

Big Payment Processing Companies Ain’t Got No Time For That

What this means is that if anything goes wrong, Square will quickly dump this merchant and lock them out of taking payments. Square cannot afford to have any bad apples in the bunch, so they’ll immediately cut out any troublemakers. Unfortunately, you may not find this out until you try to run a payment, and can’t.

An opposite approach to a massive customer service hotline is account management. Smaller payment processors often assign account managers to work with their customers. This account manager can become a point person for troubleshooting issues as they come up. It’s an arrangement that is much more responsive than a 1-800 number.

If your payment processor is hard to get on the phone, or rather, it’s hard to get what you need on the phone, you should look for a different payment processor. Responsiveness is crucial for running a business, especially when you are collecting a steady stream of payments.

Red Flag #4: There Are Too Many Surprise Fees

A lack of transparency is not good in any relationship, personally and in business. If you are seeing lots of surprise fees on your account statement, there is a lack of transparency in this business relationship.

If the fees were not surprising, it’s unlikely you would sign up to work with that particular payment processor company. Or is it? A payment processing vendor is legally required to disclose all their fees. However, this part of the presentation may be glossed over, or handed to you in brochure form.

The payment processor may have presented you with this information, but done so in a way that obscured the information. Of course, in some cases, the fees may also be hidden, which is not legal. As you would with any other vendor, you will want to discontinue working together.

What Are All These Fees?

The main fees charged by a payment processor will be included in your merchant discount rate. With interchange plus pricing, the payment processor will facilitate your transactions and collect a small fee on top of that. This type of payment model (in contrast to tiered or flat rate pricing discussed above) is the most transparent type.

Other fees that payment processors sometimes charge are a monthly service fee, and fees for equipment. While those fees are understandable requests, additional fees can become burdensome. They may seem like thinly-veiled attempts to collect more money from customers.

These fees include things like an IRS reporting fee, PCI compliance fee, paper statement fee, contract cancellation fee, and technology upgrade fee. Many of these fees should be bundled into the fees they are already charging you. And if they are not, they should offer you the opportunity to negotiate the fees and eliminate expenses you don’t need.

Take note that your payment processor will need to assess chargeback fees when chargebacks happen. These fees cover the cost of reversing fraudulent charges or charges related to a dispute. But other than that, if your payment processor is frequently levying fees against you, it is time to look for another merchant services provider.

Red Flag #5: They Are Asking for Too Much Reserve

Some merchants cannot get a normal payment processor to work with them. The business may have a bad payment processing history (with chargebacks) or it may be a high-risk business. Businesses in industries such as supplements, CBD oils, adult entertainment, and gun sales need to get a high-risk merchant account with a provider who specializes in high-risk merchant service.

High-risk payment processors will often ask their customers to leave a rolling reserve deposit with them. This rolling deposit is a cash reserve to cover chargeback fees that high-risk merchant processors may incur with the industry. Since a high-risk industry or high-risk business may experience a greater number of chargebacks, this rolling reserve can protect the payment processor.

As time goes by, funds from the reserve are released back to the merchant, and the merchant will then replenish the funds. Of course, they will also replenish the funds if they get used to cover the cost of a chargeback. And as time goes on, the payment processor may lower the reserve requirements, as the business demonstrates a positive payment history.

Typical rolling reserves vary between 5% to 15% of transaction volume. That said, if your payment processor is asking for 20% or 25%, that could be within the scope of normal. But if they are asking for something exorbitant like 40% or 50% of your transaction volume, this is probably not the best high-risk payment processor for you. You do not want to work with this company.

It’s good to parse out the details of a rolling reserve with a potential payment processor. You will want to determine how much they’ll need, how funds are released, and if there is the ability to lower your reserve requirements over time.

Red Flag #6: Your Merchant Account Just Doesn’t Have Enough Bells and Whistles

The monthly fee you pay for merchant services should include the ability to integrate with other vital business solutions. Three examples include inventory, customer analytics, and inventory management software.

The point of sale is an unparalleled gateway for keeping track of all these considerations. When customers make purchases, these purchases can help you gauge what items are best-sellers, and which ones are not so hot. This in turn can inform your purchasing choices.

A POS terminal can tell you detailed information about consumer habits. You will know what types of items people buy on what days, and even during what hour. You will know what items they typically buy together. All of this information can inform what type of sales and discounts you run, and even how you arrange your store layout.

Then, of course, there is accounting. Connecting your payment gateways to your accounting software can eliminate the onerous step of having to manually carry information from one place to the other. The automation facilitated by this integration can save hundreds, if not thousands of hours over the course of the year.

What Else Can They Do?

Technology today facilitates numerous integrations between software solutions. Your payment processor should be able to provide the latest services. But in addition to that, it’s good to work with a payment processor who can do other things as well.

Payment processors can also facilitate point-of-sale loans for your customers and clients. These POS loans allow them to break their purchase up into several installments. However, you (the merchant) get paid right away (within 24-48 hours). The in-house or partner lender with whom your payment processor works will facilitate and service the loan.

Payment processors can also offer you loans and financial products such as a merchant cash advance. This type of cash advance is repaid by taking a portion of your sales volume, or a fixed percentage from your checking account. It is offered based on an assessment of your credit and debit card sales.

Other related services can include recurring payments, ACH payments, invoicing, ATM machines, and online payment gateways that integrate seamlessly with your website. If your payment processor can only collect debit and credit cards, you may want to find a merchant services provider with more versatility.

Ready to Switch Payment Processors?

Terminating a relationship with any vendor or supplier can be difficult. For some business owners, it’s not. This is especially true for large companies where the decision is not personal, and the person in charge of cutting ties is not really the one who makes decisions.

But for small and even medium-sized business owners, switching payment processors is a different story. Or is it? Most of the considerations above—bad pricing, bad customer service, high reserve requirements—apply to large payment aggregators like PayPal and Square. Don’t feel bad kicking them to the curb, because they’ve got millions of other customers.

Even if you are working with a smaller payment processor, and you would like to look for a new merchant services provider, you should not feel bad about your choice. If a payment processor (or any merchant) really wants to retain your business, they will negotiate with you. 

You should do some research into other payment processors to see what they can offer you. Make sure to ask lots of questions about their pricing models, fees, and customer service process (e.g. can you call them, etc.). You can then take that information to your current payment processor and ask if they can match or surpass this other company.

If any of the above concerns resonated with you (bad pricing, too many fees, poor service) we would love to hear from you. Please give us a call or fill out the form below to find out more about our complete suite of merchant services.