The Intricate World of Payment Processing: Part 2

In this episode of the B2U Podcast, payment processing experts, Brian Boxell and Kel Hodel of Heartland Payment Systems are back, discussing how to choose the correct POS system, a trusted payment processor, and pricing models for your small business.

Alec: Hello there, listeners. Thanks for joining us for the B2U podcast. This podcast is brought to you by cbrbiz.com where our goal is to bring business resources directly to you. I’m your host, Alec Mangum and today we’re learning about how to choose the best payment processing plan for your company. Here to talk to us all about it is Brian Boxell and Kel Hodel of Heartland Payment Systems. Welcome back, guys.

Kel: Yeah, thanks for having us back.

Brian: Thank you.

Alec: So we’re gonna just jump right into the questions here because they know all about you and there’s a lot to cover. So payment processing companies like Heartland keep the ball rolling on all mechanisms that make revenue a reality. Making sure you have a payment processor that meets your business’ needs is obviously very important. Can you tell us some mistakes you commonly see when new business owners are choosing a processor?

Brian: Sure. Kel has been at this for a little bit longer than I have, so I’m sure he has some additional things. But and write this down, people, don’t lease your terminal or your equipment. You’ll end up paying four or five or six different times.

Kel: Write that one down.

Alec: Don’t lease your terminal or equipment.

Brian: Correct, just buy it outright. They’re not horribly expensive, around $300. And we’ve seen companies lease them for, you know, $70 plus dollars a month for that same $300 terminal. It’s always better just to purchase it up front.

Kel: Not just a month. It’s for four years. So do the math on that. Buying a terminal for $300, or let me get my calculator right now, that’s a lot more expensive. It’s just for four years, you know, $50, $60, $70 a month, you could nearly buy a used car. You know, I think, Alec, one of the things that are very important to understand and I’ll ask this question a lot when I’m presenting to groups of business owners, by hand, you know, I’ll say, so how many banks in America process credit cards? And the answer to that is zero. And this is a part that is just, it’s a miseducation or just a misunderstanding. You know, we tend to gravitate towards a brick-and-mortar bank because we know the people there. You may have a loan there, you know, you’ve got a deposit account. And that’s really the most important thing for the bank, is that deposit account, and out of convenience, you know, I’m not a by any way dinging the banks here. Out of convenience, they’re saying, “Hey, we can also help you in this area.” Of course, they’re trying to get money in their deposit account, right?

So all banks in America farm-out or outsource that function to another company. Some of the big banks did own a processor and then spun those off because it is such a complicated area. They spun those entities off that are out there. Now, currently, there’s a less than a dozen direct processors in the industry, which you think of them as kind of the engines of the industry. So there’s just a handful of these direct processors. What makes our company unique is that Heartland is the only one that can’t be resold. However, there’s a lot of great processors out there. But when you look for a processor, some of the key components to understand is really where they’re at, you know, in terms of steps away from your funding bank. Are there three companies in between, you know, you and your bank account that may be too many in terms of risk and probably too many hands in the proverbial cookie jar?

Alec: Too many cooks in the kitchen.

Kel: Exactly. So looking at who that processor is, it’s amazing how many folks just haven’t even done a Google search on the processor and find out what the rating is. And you could find a good processor that has an A, B, or maybe even a B-minus rating. Anybody else, I would be fearful of ensuring that you’ve got somebody that’s gonna take care of you. Another piece is making sure that you understand truly and see in writing if you were not happy, if you were to leave a big problem in our industry is liquidated damages or loss of profits over the remainder of the contract. It’s kind of criminal, I think, to, you know, along with leasing to lease a piece of hardware to somebody under the guise that this is better for them when, you know, our company has never leased or rented hardware because we think it’s just, it’s a little crooked. You know, it’s not something that you should do. We do rent only to nonprofits for a dollar per month, so they have something because we understand they’re not bringing in a lot of money and they need some help. But understanding the contract or agreement that you get that you see all of your fees, they are clearly defined that you don’t have something in there that, if you were to leave, that they’re gonna charge you in literally thousands of dollars. I’ve seen this happen and it’s pretty sad. You know, people that wanna work with us but are fearful of leaving because…

Alec: Because they’re kind of in these contracts.

Kel: Yeah. These kinds of mafia, you know, shoot your kneecaps off kind of and you can’t leave if you even wanted to, sort of contracts. Even if you went out of business, some of those folks are in just bad shape. And even us, you know, we’re a $20 billion global technology company that, you know, we have an agreement that has a flat $295 fee. Really, everybody does. Since I’ve been here, I’ve literally seen this happen a handful of times where somebody was charged the $295. And it’s more to get somebody to pick up the phone and give us a call and say, “Hey, what did we do wrong?” You know, and most of the people leave us, it’s more about either they went out of business, they transition to a software or a POS system like we talked about that we’re just not compatible to. But getting somebody that really helps you understand some of these key areas rather than just signing something because somebody says, “Hey, I’m gonna give you a good rate because there’s a lot more behind it.”

Alec: Yeah. Yeah. So we’ve touched a little bit on the pricing models of payment processing systems. Can you talk just a little bit more about that? What are the different pricing models you guys see out there?

Brian: Absolutely. I think before we kinda dive into that too deeply, it’s important to kind of go back and review something we touched on earlier and that is interchange pricing. And when we talk about interchange pricing or interchange fees, what is that? Those are the fees that everybody pays. Every business pays it. I don’t care how big you are, how small you are, everybody pays it and they pay it to the bank who issued the card as well as to the card companies themselves. So that is a fixed rate, non-negotiable. Everybody pays it. So now that we’ve kind of established that there are three primary different types of pricing models. The only one we have and the one we’re a big proponent of because of the transparency of it and the ease of reading the state…must be able to actually understand where your money’s going and what you’re paying is called interchange plus. And what does that mean? It just simply means that we are showing you what interchange fees we’re paying. And also, the plus part is our fee and what we’re charging the merchant for that in essence, short term loan.

Alec: Right, right. Is that common in the industry?

Kel: Unfortunately, it’s not common enough. You know, we kind of chuckle when we see some statements that have been coined by a competitor called interchange plus, we call it interchange plus-plus because what is happening…because the business owner doesn’t understand, you know, going back to that rewards card, I use as an example with Wells Fargo 1.85 and 10 cents and somebody comes in and says, ”Hey, you know, I’m looking at your statement and you’re being charged 0.5% or 0.50. We’ll charge you only 0.25, we just cut your cost in half. Wow, sign right here.” But then what happens is because the business owner doesn’t understand interchange or wholesale cost, that the 1.85, what it should be passed along without a penny markup gets marked up to maybe 2.10 and 10 cents.

So now you look at that model and your price just went up, even though the processor said that your cost is coming down. And now you’re in that ugly contract that we talked about and you can’t get out of it. So it’s vital that business owners understand this area. So, back to Brian, so we’ve got interchange plus, which is wholesale costs plus the cost of the processor, a platform to be able to push that transaction through the Federal Reserve and into the business owner’s bank account.

Brian: Another pricing model would be surcharge where in essence they are either one or two flat, I wouldn’t say flat rate, but it will be the interchange plus whatever that processor is charging. But there’s no transparency there because you don’t know what the actual interchange rates are and what their rates are. So when those fluctuate, it’s hard to see exactly what you’re paying. And then you also have tiered pricing where the process where we’ll put the transactions in different buckets, usually qualified, not qualified, sometimes mid-qualified. The problem with that is they’re in charge of determining what’s qualified and unqualified. Those are their terms, their buckets. So a person can come into a business, and as Kel had said, say, ”Hey, well, we can save you, I don’t know, let’s say, $50 a month on processing because we’re gonna put everything in this one tier or this one bucket with a lower rate.”

The first few statements that the business owner gets, everything looks good. But people get busy and they’ll stop to, you know, excuse me, stop reading those statements. And over time, they’ll see more and more transactions going into those higher tiers of those higher buckets. And that’s something we see a lot at a service that we provided at no charge. We, you know, at the request of a business owner, we will come in and benchmark what they’re paying with our current processor just to let them know, “Hey, yeah, your business for, you know, what you do like businesses you are in-line in regards to what you’re paying.” That happens, I don’t know, Kel, what do you think? About 50% of the time maybe?

Kel: At least, yeah. At least 50% of the time. And you know, almost equate that to…you can’t see my hands here, but I’m moving them around as if you’ve got, you know, the three cups in the ball, the red ball moving and watch the red ball, that’s your money, and you’re moving around real fast. And it’s like, “Where did my money go?” And that’s what surcharging and the tiered pricing platforms do. So in some cases, if you…and I said surcharging. The best way to explain that is you get square or some of the other programs where you have this flat, you know, maybe 2.69%. So, hey, I get it, it’s complicated, this industry, so I’m just gonna make it easy for myself and I’m gonna pay 2.69%. But let’s say you’re a retail environment or a restaurant that has an average ticket of below $25, there’s a very high probability that you’re going to get a debit card.

So to put, when I say 2.69% and the folks that are listening that have square, you may be in a great place. You know, if you’re doing less than probably $10,000 or $15,000, square may be a very good scenario for you. But understanding at what point you need to make a transition to have a wholesale cost and a fee from a processor and when to make that change is vital for your business and cost containment. But for, let’s say, the square example or really any processor that has a flat fee where you’re accepting a debit card, and we’ll say 2.69 is the equivalent of 269 basis points, okay? So the 0.05 and 22 cents that we talked about for debit or regulated debit is equivalent to about five basis points. You add the 22 cents in and some, you can add that up.

So let’s say you’re paying 20 basis points total versus 265 basis points. So which one do you think you’re gonna come out and benefiting from, you know, when you’re selling cups of coffee or, you know, plates of food at $10 or $15? So really understanding where those fees come from? But again, you know, square could be a perfect scenario for you. Some people, I tell them to stay there with square because being with us could be more expensive. We don’t have a flat rate that works in that fashion, but the interchange or wholesale and a flat fee is something that is much easier to understand if you understand the card categories. And that’s what we do, is try to educate people to know what true cost is.

And when you do that, now you can kind of stick a pin in that and focus on other areas of your business that really make sense, like that point of sale system, and invoicing, and marketing, and geofencing, and customer engagement, loyalty programs and things that really matter. Because once you do that, you know, instead of just trying to save a dollar, now you can figure out how to make another five, that’s a more compelling conversation. I always feel dirty when we’re just talking about saving somebody money because it’s a lot more about, you know, how can we create a partner and environment, use technology to make another five increase the foot traffic. And there’s ways to do that once you understand this complicated area.

Alec: Yeah. Well, it sounds like there’s a lot of complicated concepts and potentially some things that are not as transparent for the business owner. Who is the advocate for the business owner in this situation? Is that their processor? Is it, you know, who’s gonna be the one that…? It sounds like Heartland has some systems in place to show a business owner, you know, what these transactions are actually looking like behind the scenes, but who is gonna be the, you know, the advocate for them in that process of choosing a processor?

Brian: It’s a great question. And the answer to that would be someone like Kel and myself. And it goes back to your customer service and doing the right thing and having a local rep. So if, I guess, let me back that up. When looking at who to choose for processing, I would always recommend someone that is based in the city or town where you currently live. So if you call their support line, which is another tip when looking at processors, if you’re considering moving to another company or you’re just starting a business, excuse me, moving to another processor or you’re just starting a new business, I would call that processor’s support line, see if you can understand them, for one, if they’re actually there. I mean, I would suggest calling at 11:00 at night. I mean, I wouldn’t wake up to do that. But if you think about it, just to see, you know, what kind of level of service that they have. But to answer your question, other than the business owner themselves, the only person that’s really going to look out for them in this situation would be someone like Kel and myself.

Alec: Right. So looking for processors who are specifically building their business to advocate for the businesses, for the business owners.

Kel: I’m sure there’s a lot of third, we call them third parties or middlemen. I used to be one of them. So I know that there’s people that are trustworthy out there. But I think, you know, asking some key questions about their organization, their support, really finding out how that agent, or that representative, that advocate is compensated is important. You know, part of the reason I love the company that I work for is they set up a compensation model where we don’t get paid money if somebody decides to come work with us. We get paid residuals. We’ve got some skin in the game every month if our clients are happy and satisfied. So if we just sold somebody to sign a piece of paper so we could take advantage of them and they leave in two months, then we’ve just wasted everybody’s time.

We’re building something, we’re building partnerships, and somebody that wants to partner with you and doesn’t disappear after the sale because they got a nice paycheck and they make little to nothing after the fact you don’t answer their phone. You know, those are the things that you really need to think about because we are not…I know Heartland is not the cheapest out there, but I know we’re the best. So you’ve gotta find somebody that’s gonna be that advocate for you, that’s gonna be the best for you. You know, Heartland may not always be the best scenario depending on the company or how they operate or the technology that they use. But asking those key questions about their organization, about what type of pricing model that they have, you know, how is their customer service? Like Brian said, maybe call that 800 number, really see if they pick up or if you hold for 30 minutes.

Alec: That’s a great idea for buying anything now that I’m thinking of it. Just call their 800 number first and see.

Kel: I actually run meetings and I’ll call our 800 number because I want people, you know, we have about a thousand folks in Indiana, not India, that, you know, pick up the phone inside of 30 seconds. You’re talking to somebody and they’re W2 employees of our company, you know, domestically and everybody needs to have some sort of support, you know, and somebody local that they can maybe text or call in the event that they have an issue. So that’s very important.

Alec: That’s huge. That’s huge for our listeners, too. You know, when they’re looking at choosing a processor to choose somebody who’s in their city, someone they can call who has the same time zone. That’s huge. So with all the innovations that are going on within this industry, customer engagement, the point of sale, the different ways that processing is changing over the years, do you find that people change processors often?

Brian: We do. And it really depends on the business and size of business. And I’m sure people are thinking right now, well, why do people change. And Kel may have experienced something different, but typically, it’s because the business owner was approached by someone who said, “We’ll be able to save you money.” And, of course, everybody wants to save money. I won’t say, that happens all the time, but it’s very common is, like we talked about earlier, saving money for first couple of months, then they’ll look at their statement again, see or look at it in detail. Six months later, go, “Wait a minute, now I’m paying more than I was or the same and it’s getting higher and higher and higher.” So that’s something that we do see.

Alec: Wow. And how can they avoid that, you know?

Kel: I think, you know, having that advocate that really breaks down some of these areas. And the biggest, if you speak to somebody that is trying to sell you credit card processing and their only value proposition is, “Hey, we can save you money,” I would be a little fearful. Get the information from these folks. Check out the organization. You know, maybe they can really save you money. I know that some of the folks that are with me could save some money, whether or not that would stay the same in six months, who knows? But just asking, you know, a simple question or having businesses understand that when they’re accepting credit cards and the fees that they pay, we’ll break it down to the dollar bill. So you’ve gotta, for every dollar that is spent for processing the volume that you have on a monthly basis, 97, 98 cents of that goes back to the bank that issued the credit card that was accepted in your place of business for your products or services.

The other 2 or 3 cents goes to the processor. So what happens, and this is I can say probably 50, 60 times over the past couple of years at Heartland where somebody has come to me and said, ”Hey, you know, this guy came in and he said he can save me this amount of money.” And the irony behind this is they said they could save more money than we were even charging them. So that’s almost like saying, “Hey, we have figured out a way to make banks take less money,” when Wal-Mart can’t do that. You know, and they’ve got some pretty high-powered attorneys. You know, having the understanding of where those fees come from, that’s why business owners get lied to and make switches because they don’t understand that that 2 or 3 cents goes to the processor.

And there are ways, in the next segment, hopefully we can talk about software that does actually allow you to make the banks take less money because it’s about risk and it’s providing more information at the point of the transaction that it’s almost like applying for instant rebates at the time of the transaction. That mitigates the risk and inherently lowers the cost for businesses, especially that are accepting cards from other businesses, commercial, purchase, corporate type cards. We can talk about that a little bit.

Alec: Yeah. Well, let’s go ahead and talk about that and tell us a little bit about those tactics and avoiding that.

Kel: So when we talk about terminals POS systems, typically those are what we call level-one sort of authorizations. Level one is very basic and information that’s being sent over to the card issuing bank to let them know, you know, this is a rewards card or this is a debit card, something simple in that manner. Then you have what’s called level two. And level two, if the company is charging a sales tax for their goods or typically don’t for services, sometimes do, if they’re charging a sales tax, they can utilize a better software, which doesn’t necessarily cost you more money.

And that software that we have on our terminal, some other processors do, we’re a virtual type terminal where you may log into a portal on the web and be able to enter a card. It’s gonna ask for some particular information, get a level two verification on that card. And these cards, if you look up these business cards, you can run your fingers down your line items, if you’re one of those businesses accepting cards from other businesses, and you’ll see that those cards typically run from about 2.34% up to 3.5% for business, commercial purchase corporate type cards. These are more expensive than American Express in many cases.

Well, there’s a way to kind of erase, you know, sometimes up to a full percent from those cards if you have the proper software, if you have the education on how to use that software. And it’s very simple. It’s not anything that changes, you know, the length of the transaction or asking the customer for a lot more information. It’s just a simple understanding, proper software and an advocate that’s gonna help you mitigate that risk and help contain your cost.

Alec: Wow.

Brian: Kel brings up a good point. I mean, that’s part of our responsibility and something we generally like to do, and that is go in and look at the statements with our client and say, “Okay, well, you had 15 cards not present here, why didn’t you enter in a zip code?” “Oh, I didn’t know to do that.” Well, because they didn’t enter in a zip code, now they’re paying an extra 30 basis points, so 0.3% on top of that. But it’s fun for us to be able to go in and help the business owners identify where we can help them save money, just by a simple process change.

Alec: Yeah. Well, that’s extremely valuable for new business owners, too. You know, people who are just starting out and who don’t understand this stuff, to know that there are processors out there who are not just looking to get a contract, sign on the dotted line and peace out. They’re looking to help you through that process. So I’m sure that’s comforting for a lot of our listeners out there.

Kel: I can tell you a quick story and I’ll do a small plug. We’re endorsed by the National Association of Remodeling Industry here, the Charlotte Chapter. And one of my clients Harkey Tile & Stone. It was a funny conversation because, you know, he runs an amazing business. His father, I think he’s second or maybe third generation even, but they do like high-end countertops and stonework. And largely, I’d say 80% or more are business cards. So he had me take a look at his statement because we’re endorsed and, you know, we’re trying to create a partnership and I realized that the processor is charging him such a low rate that I couldn’t even write his business on our platform. There’s…I mean, it was below cost, but when I started looking at his business cards, I realized he was paying the high end of everything that you could pay on level one authorization.

So I said, ”Hey, Reed, I’m gonna have to charge you more for the processor, but your cost is gonna go down.” So, you know, that I’m sure made his brain hurt for a few minutes. Maybe a few actual wrinkles there in his brain. But, I said, ”Reed, do you trust me?” And he goes, ”Yeah, yeah, okay, I trust you.” And I said, ”Well, we’ll do this. You know, we won’t put you under any agreement and you can see that I’ll be able to deliver.” And the first month, and hopefully his phone won’t blow up from this, or maybe it will, it’ll be good to see how many people are listening, but he saved much more than I even anticipated by just changing the way, because he does charge a sales tax, he does have the ability to use the level two software. It’s largely a card not present sort of environment where they may capture a few cards where it’s in hand, but mainly they’re over the phone and they’re doing quotes, they’re putting in work, charging after the fact when people are happy.

But at the end of the day, you know, his cost actually came down. But as his processor, I actually charged more than his previous processor. And those are some of the things that a lot of business owners just don’t quite understand that we can help navigate, or that advocate hopefully that you have can help you navigate.

Alec: Wow, that’s great information. So is there anything else you guys would like to add for the business owner listeners out there before we sign off?

Brian: Sure. I’d just like to leave my contact information. If someone has some questions or additional questions or would like to have us come and meet with you, just let us know. But I can be reached, my name again is Brian Boxell, and I can be reached at 704-650-2519.

Alec: Awesome.

Kel: Yeah, and I think it’s important, too, that, you know, although we’ve said the name Heartland and our names here that it’s, I think it’s prudent to say that, you know, we are not here trying to give a plug on Heartland. I’ve been in the industry for about 10 years. Really, get some information on how this industry works before, you know, you put your good name on a piece of paper that has to do with your finances because this one piece is so important. Just thinking about when you sign up for a processor and you haven’t done a whole lot of research, what you’re giving out, your social security number, your federal tax ID, your checking account information, your home address, where your family lives, when you don’t have to have any certifications to work in this industry. Alec, you could be a convicted felon and be selling a payment processing.

So it’s very, very important to understand who you’re working with. And you can find me on LinkedIn, Instagram and Facebook. I’ve got a business page, just Kel Hodel and all my information is on there easily. I’m one of the salespeople that you actually can go on LinkedIn, hit the Info and you’ll see my real email address that doesn’t go to info something and often cyberspace and my phone numbers. So you can contact me because, you know, I’m one of the guys that if I see you out of the grocery store, I won’t hide behind the bananas. I’ll jump out and shake your hand because I’m proud about what I do.

Alec: Awesome. That’s great. That’s great to hear. Well, thank you so much, Kel, and thank you, Brian, for coming on the podcast. I know this is gonna be really valuable information for our listeners out there.

Brian: Our pleasure.

Kel: Thank you again for having us.

Alec: Yeah. So listeners, I hope that you found this episode of B2U podcast helpful. If you have any questions about today’s podcast or have any topic suggestions, please feel free to tweet us @CBRbiz on Twitter. That concludes this episode of the podcast. Once again, I am your host, Alec Mangum, and thanks for tuning into the B2U podcast brought to you by cbrbiz.com. Until next time, we mean business.

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