A Symbiotic Relationship

Accepting credit cards at your business is the only way to allow customers to spend more money than what is actually in their wallets (unless you accept checks) and combined with generous reward programs, the result is a massive increase of credit card purchases.

According to the Federal Reserve Board of Philadelphia, the number of credit card transactions and dollar volume has increased 38% and 47%, respectively, between 2003 and 2012. This large increase in credit card purchasing has enticed many new merchant processing companies into the once lucrative business. The increased competition should have been a good thing for merchants, but instead it spawned confusion, collusion and complicity.

First, a little history, prior to 2005, most retail and restaurant’s credit card transactions were processed on “swipe” terminals provided by merchant processors that were solicited and signed up by “agents” who both cold called and networked with point of sale resellers (VARs). These two complementary industries worked together to benefit merchants and overall help to increase efficiency, decrease shrinkage and to lower operating costs. By 2005, credit card processing became directly integrated in to the point of sale systems and, virtually overnight, VARs became merchant service providers. This didn’t sit well with the street agents and their companies, who lost business and were effectively “locked out” of switching the merchants, as the VARs became the gatekeepers. This paradigm shift in control set up one of the greatest showdowns in modern POS technology; it pitted the merchant services companies, who had enjoyed a mutually beneficial relationship with the VARs, against their former colleagues in a race to acquire merchants in any way possible.

Credit card processors love restaurants, they process many transactions with average tickets ranging from tens to hundreds of dollars. It’s these constant swipes, in combination with the dollar volume that generates lucrative fees for the processor and ultimately the agent who signed them. Sensing a threat from new processors who both partnered and directly integrated to the POS vendors, processing companies went on the offensive, slashing rates and fees and creating a feeding frenzy of merchants swapping processors with the mere suggestion of savings and racing to the bottom of profitability. In desperation, credit card companies came out with their own versions of POS to stave off the competition and to retain market share. However, merchant processors had a lot more to learn to become POS vendors than the POS vendors did to become merchant processors. The marketplace became filled with confusing offerings of systems that vary in quality in price and are backed by little, if any, quality technical support.

Processors do provide real and valuable services to merchants, including batch settlement and deposits, data security, monthly statements, online portals and much more. Yet, these services are often considered by many merchants to be overpriced because of the money they pay for the privilege of accepting credit cards. Many merchants I speak to don’t realize that most of the money they pay for processing doesn’t go to the processing company, but is kept by the issuing banks in the form of “Interchange fees.” Thus, processors are victimized in the war for your business; they have no control over their costs and ultimately no control over their prices.

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As an economist and capitalist, I welcome competition. However the interchange fee structure of our credit card system needs reform. The nation’s check clearing system operates in much the same way as our credit card clearing system and yet it’s free to accept and deposit a check. That the card companies set the interchange rates rather than to allow competition among card brands amounts to no more than price fixing and should not be allowed. Interchange rates should be allowed to float based on volume, risk and customer satisfaction which would shake out the inefficiencies and the disreputable companies while allowing for truly fair pricing and customer satisfaction as well as restoring integrity to an indispensible industry that has increased sales for all the businesses that use them.

Mr. Spitzberg owns Restaurant Software Solutions. He has an MBA in business finance and is a Microsoft Certified Systems Engineer and Cisco Certified Network Associate. He also participates as a network professional with the Accrediting Council of Independent Colleges and Schools certifying network engineering curricula for federal accreditation.