Although the credit card processing industry is extremely complicated, most people believe that they are experts in credit card use. After all, we all use credit cards to buy presents for our spouse and to pay for dinner at restaurants. Additionally, we all use ATM debit cards to withdraw money from our bank accounts. However, the credit card processing industry is far more complicated than it seems and in order to maximize self-service equipment profitability, it is necessary to understand how the credit card industry actually works.

The credit card processing industry consists of two primary aspects. One aspect is credit card issuance, which consists of providing credit cards, and the resulting credit, to card users. The other aspect is merchant acquisition. Merchant acquisition consists of signing up merchants to process their credit card transactions through a specific member bank.

Prior to suggesting methods to increase credit card revenue for self-service equipment operators, I should explain the manner in which credit card processing activity is compensated. In order to process credit card transactions, the Card Associations (Visa, MasterCard, and the like) contract with various banks (known as member banks) to provide processing services to merchants. Each member bank contracts with various Independent Sales Organizations ("ISO") to solicit merchants to contract with that member bank. Each ISO contracts with smaller ISOs and has its own agents for such solicitation. In turn, the smaller ISOs have their own agents and may also have their own ISOs. Larger ISOs are often sponsored by the member bank to also become Card Association members. The rights of the various merchant solicitation entities differ based upon their contractual arrangements and their position in the merchant acquisition hierarchy.

When a merchant agrees to process through a member bank and during the life of the resulting processing relationship, the contracting merchant may be charged various fees. Additionally, each time the merchant processes a credit card transaction, the merchant is charged a fee for the transaction. Finally, when a new merchant is enrolled, the merchant may be sold or given a POS terminal and other equipment to enable processing. These charges to the merchant constitute the revenue which is divided among the various players in the merchant acquisition process.

However, each payment stream is divided differently. Generally, the various fees are divided among the various ISOs and agents involved in enrolling the merchant and sometimes the member bank also shares in such revenue. Such fees are generally implemented by the ISO or agent and may be waived at their discretion. The credit card processing fees (transaction charges) are divided among the relevant Card Association, the member bank, and each ISO and agent in the acquisition chain of the individual merchant. The amount received by each participant is determined by the contractual relationship between the parties. For example, assume that a merchant processes a transaction which generates processing fees and that the merchant was enrolled by an agent of a second tier ISO. A portion of the fee is paid to the Card Association. The remainder of the fee is retained by the member bank.

The member bank retains its portion of the fee and transfers the balance of the fee to the primary ISO on a monthly basis. The primary ISO retains its portion of the fee and transfers the balance to the secondary ISO which solicited the merchant on a monthly basis. The secondary ISO retains its portion of the fee and pays the balance to the agent who actually enrolled the merchant. Although each fee consists of only pennies, the volume of transactions can make the business very profitable.

Furthermore, once a merchant is enrolled, the payment of processing fees (known as residuals) continues through the life of the merchant-member bank relationship. During this period, except for the member bank and sometimes the primary ISO, very little is required to be done by the other entities in the merchant acquisition chain to receive their residual payment.

Finally, since most self-service equipment has the credit card processing capabilities built in, the issue of the sale or distribution of processing equipment rarely comes into play. However, where the ISO provides free equipment to obtain the account, the absence of the need for such equipment is a saving to the ISO.

The foregoing is an extremely simplified version of the manner in which the merchant acquisition process is compensated. However, an understanding of the process suggests various methods to maximize a self-service equipment operator's or provider's profitability from the use of credit cards. Some of the available methods are as follows:

1. Negotiate. Processing rates and fees vary substantially throughout the industry. There are many different ISOs and agents who are attempting to obtain your credit card processing business. After all, signing up a merchant can generate a long term profit stream with little additional work. Therefore, you should be aware of competitive rates in the industry and the type of fees being charged. Although every salesperson you meet will tell you that his rates and fees are the best available, only one of them can be telling you the truth. For example, some programs charge set-up fees and annual fees and some do not. It is important to obtain a full understanding of what you will be expected to pay in writing. If there are fees being requested, there are alternate processors that may not charge such fees. Just because you are contacted directly by a salesperson does not mean that he will offer you the best terms. Also, you should be careful to limit your contractual commitment to the location for which you are requesting processing services. However, please understand that you are entering into a contractual commitment for a fixed amount of time. If you breach your commitment and the processing volume is significant enough, the processor will file suit to enforce the agreement. Washor and Associates has filed such suits on behalf of various ISOs.

2. Understand. Often there are provisions in the merchant agreement which may have an unexpected adverse effect upon your business. Therefore, you need to read and understand the merchant agreement before you sign it. If the term is too long, you may be stuck with an unsatisfactory processing arrangement for a long time. If the terms relating to chargeback are unreasonable, you may have your ability to perform credit card processing severely restricted.

We recently had a small incubator client who had been quite successful with various platform based businesses. The client opened up a new business which was less successful. It stopped soliciting new customers and continued to service existing customers only. However, the percentage of chargebacks increased because no new clients were being signed up to offset the number of chargeback transactions. Its ISO refused to process for his new business and ceased processing for his old businesses despite their generating close to $500,000 in monthly business with minimal chargebacks. Furthermore, the ISO TMF'd (put on industry list of merchants who were terminated by their processors) the client which made it virtually impossible for him to obtain an American processing for his businesses. In order to obtain an American processing relationship for his businesses, Washor and Associates had to contact the individual in charge of merchant acquisition for a large member bank. The client obtained the processing relationship but at increased rates. This could have been avoided if the client had understood the terms of his merchant agreement and he had spoken to the ISO before launching his new product .

Likewise, many ISOs charge merchants for permitting the merchants to monitor their own account activity. This should be discussed with the salesperson and the liabilities and cost imposed from such activity fully understood.

Finally, almost every member bank and many large ISOs have their own merchant agreements. Each agreement is different and although they appear to be boilerplate, they should be carefully reviewed before being executed and any problem provision should be discussed.

3. Join the Party. Assuming that your processing volume is large enough, there is no reason that you can not become an ISO or an agent.

If you are an operator of sufficient self-service equipment, many ISOs would be willing to enroll you as a secondary ISO or an agent. If your volume is large enough, there are some member banks that would do so as well. As an ISO or agent, you would be reimbursed the portion of your processing fees which would go to the ISO or agent which enrolls you. Since it is generally the ISO or agent which sets the various fees charged to merchants, you should be able to avoid the bulk of these fees and obtain a lower processing rate by enrolling yourself. In this regard, you should be aware that there is no special knowledge, education, training, or license required. Although if you desire to become an ISO, you will need to satisfy the Association requirements for being designated as an ISO. Of course, the value of this tactic will depend upon your actual processing volume and the type of business in which you engage.

If you are a seller or a lessor of self-service equipment, it might prove profitable for you to become an ISO and contractually to require the merchants purchasing or leasing your equipment to process credit card transactions through you. Of course, the profitability of this tactic would depend upon the number of units which you sell or lease and the type of business for which the equipment is used. This strategy is more complicated than the other strategies suggested in this article and requires marketing skill in addition to legal documentation. However, this strategy should enable you to give the purchasers or lessors of your equipment better processing rates than they would be able to obtain on their own and if properly structured, could be extremely profitable for you.

Finally, it is important to keep in mind that I have presented a complicated industry in a very simplistic fashion and that implementing the foregoing strategies requires time, effort, and a thorough understanding of the process. In other words, some of the foregoing strategies are easier to suggest than they are to carry out. Nonetheless, every self-service equipment operator using credit card processing can engage in comparative shopping and negotiate to obtain better transaction pricing and fewer fees. There is no reason to pay more than necessary for credit card processing.

Lawrence Washor is an attorney at Washor and Associates, a firm that specializes in the self-service, ATM, and credit card-processing industries.