Information on Merchant Accounts,
Ecommerce and Credit Card Processing

December 11th, 2006 by Jamie Estep

MisShaping the merchant account industry…

Filed in: Merchant Accounts, My Favorite Posts | 9 comments

I often receive questions as to why merchant service providers so often are just simply trying to rip businesses off. A recent question got me to thinking of what had caused the shift in what should be a great service, into something that rarely reflects a good or honest industry. This is a quick analysis of how some past decisions in the processing industry have influenced the way the industry is often viewed, and why there are so many companies doing bad business.

(Take this article with a grain of salt, as I am not touching on positive aspects of the industry, which there are many.)

A little history:

In the US, merchant accounts were traditionally controlled by banks. Elsewhere in the world, banks still have this same unchecked control over credit card processing. At some point, banks in the US began to give up their control over processing, and a group of businesses called ISOs (Independent Service Operator’s) were born. ISOs perform the same service that banks did, but created some much needed competition in the industry. Fees and prices went down almost overnight, and the acceptance of credit cards spread much more rapidly due to the lower cost to businesses. Since ISOs were specifically devoted to providing merchant services, their levels of knowledge and customer support became superior to banks. The few ISOs at the time got really big, and started allowing smaller ISOs and sales agents to operate under them. This branching created a massive service industry in a short amount of time, empowering thousands of companies and individuals to provide merchant accounts.

Processing equipment in the beginning:
In the beginning, equipment for processing was usually giving to businesses to use for free from banks. The cost of accepting credit cards was high, and banks pretty much just gave equipment to businesses just for processing with them. With the increased competition from ISOs and the subsequent lowering of fees to accept credit cards, equipment turned from a merchant account feature to a commodity. Equipment became a way for banks and ISOs to make some upfront money on their merchant accounts. Since processing become cheaper, in theory this would not have been a problem.

Lease abuse creates the foundation for bad business:
Providers realized that one of the best ways to make money was to lease equipment to their customers. Leasing became the standard, and stayed that way for over ten years. A low cost lease (~$25 / month) fronted the provider much more money than would have been made by selling equipment or giving it away. But, higher cost leases of $79 or more were common, even for equipment costing under $200. On a 48 month lease a provider could easily make $2000 upfront for each lease they signed. For a medium size organization bringing in 500 accounts per month, this would easily equate to 1 million dollars in extra profit each month. This cash flow from leases allowed even smaller ISOs to get very large and have very high revenue and profit. ISOs that heavily abused leasing had extremely high cash-flow and made this industry look like a gold nugget for anyone looking to make a quick buck. A lot of ISOs sprung up only with the intention of capitalizing on the ability to make money from high cost leases. High cost leases also tarnished the integrity of the industry as this cash flow was entirely at the expense of businesses. I still come across businesses locked into $79 / month and higher leases, as some banks and ISOs still dupe unsuspecting business owners into these ridiculous contracts.

A shift:
Sometime between 1999 and 2002, after the .com crash, leasing began to rapidly lose it’s appeal. Several merchant service providers (Merchant Warehouse is the first I know of starting in ’98) started selling credit card equipment online for very cheap, and leasing no longer seemed practical for many business owners. During this time several leasing companies also halted new leases, and lease provider’s practices came under scrutiny. Many ISOs lost their entire cash-flow overnight with the fall of prominent leasing companies.

Free terminal programs re-emerged in 2004 when United Bankcard and later Total Merchant Services revived the practice. Although United claims that they invented the free terminal program, they only re-invented it. It has however been an effective marketing tool for them. Now, most businesses either get a free terminal or they purchase one with very little markup when they first sign up for a merchant account. Both of these practices have their advantages and disadvantages.

How competition took a wrong turn:
At some point in the development of merchant services, the actual fees associated with processing became the primary competition focus. ISOs fought, basing their marketing and sales strategy solely off of their price. Since every ISO pays almost an identical cost, the industry shifted from a service driven industry to a price driven industry. ISOs began further and further discounting their services to make themselves appear the cheapest, and eventually hit their cost or below it. In response to no longer making money, many ISOs began getting creative with their fee structures. A business would sign up for a merchant account thinking they were getting a great price, and would get hit with a ton of other padding fees, or their provider would simply raise their rate. Things like monthly, convenience, yearly, and other fees become more common as ISOs had to make money somewhere. The industry ramped onto a self-destructive path, and still has not stepped off of it or even taken the steps to change it’s path.

Effects on the provider-customer relationship:
Processing companies have rarely been regarded as honest companies and taking this route did a few things. As more and more businesses started getting ripped off, the trust that these businesses had for service providers degraded more and more. Businesses locked into leases or contracts realized that they were being taken advantage of. Customer loyalty has become almost completely non-existent. ISOs started using termination fees more to keep customers with their business, and it doesn’t look like that is going to change any time soon. This has contributed to the further separation of businesses from ISOs. ISOs also make the mistake of isolating themselves from their customers, believing that they are better than the businesses that use their services. This can be party attributed to the business practices passed down from banks into the processing industry, but mainly ISOs just believe that their knowledge empowers them (which it very often does).

What we get in the end:
After all the cards are played, we end up with a service based industry competing only on price to a bunch of businesses that don’t care who they use because they will immediately switch as soon as there is any problem, or the next lower offer comes around. There is no real trust between the business and the provider, and as a result, there is no loyalty between the provider and the business. Businesses expect ultra-low processing rates, and providers are trying to figure out how to be fair and not lose money.

The bad providers keep the entire industry in a stalemate, as they keep focus on the price of services, while continuing to rip their customers off with other fees, increasing rates, and absurd contract terms. This in turn pushes the cycle of mistrust, and entices the good providers to remain in a price competition with the bad ones.

On the bright side:
There are still good providers out there. These companies don’t exist just to rip businesses off, and they do provide a needed and honest service to their customers.

The best way to find a good provider is to initially take price out of the picture. Find a provider that your business colleagues recommend, that has a good rating with the BBB, that doesn’t use high pressure sales, that didn’t first solicit you, and that has fair fees on their application. Find 4 or 5 companies that match some or all of the above criteria, and get some info from them. You should find a provider that has fair fees, is completely upfront with you, and you feel comfortable with.

In the end, Knowledge is the most powerful tool for any business looking for a merchant account. A basic knowledge of the industry will greatly benefit any business looking for merchant services, and the industry itself.

9 Responses to “MisShaping the merchant account industry…”

  1. John Conde December 11, 2006 at 3:11 pm

    Your last two sentences sum up the cure to this industry’s ills. Educated merchants not only do themselves a great service by finding the merchant account provider who will give them a good deal with an honest plan, but it will force the dishonest providers to either clean up their act or get out of the business.

    The biggest problem is that there is so little unbiased information out there that it is difficult for merchants to educate themselves. Even an inquisitive merchant will have difficulty finding good information as a quick search will turn up “informative” sites that stand only to advertise the merchant account provider that posted the content. How many sites exist that actually contain unbiased and useful information for merchants? You can count them on one hand and probably have fingers to spare.

  2. Jason Bordeaux December 13, 2006 at 12:25 pm

    Fantastic! You nailed it right on the head – especially the “on the bright side” portion!

    I work in merchant processing sales and I am going to direct every merchant who is disillusioned by the industry to this post.

  3. salesstrategy January 1, 2007 at 10:11 pm

    Commenting to this “Effects on the provider-customer relationship”
    I think the payment processor need “standardization” endorsed with trusted seal from Online Banking Governess to build trust and bring consistency.

  4. John Messmer May 16, 2007 at 7:36 am

    I appreciate all the good info here and on the merchant services account blog this site links to. However, where is the info on the actual specific Merchant Services Providers (MSP)? I am totally stuck as to how to find a good MSP. You can’t google for it because there’s too much crap to sift thru to know what’s what.

    Can you provide detailed analysis on the actual merchant service providers like there is on the gateway providers and shopping cart solutions?

    Many thanks in advance!

    John Messmer

  5. jestep May 17, 2007 at 8:07 am


    The reason that I don’t have any specific information on MSP’s is mainly in effort to keep this blog/topic objective. Since I am associated with a few specific ISO’s, there is no way that I can possibly be completely objective when talking specifically about MSP’s. Whether positive or negative, my personal ties would create complications, and I think that visitors would question the validity of the information here, if I went down that path.

    So in lieu of being specific, my mission is to educate and let people make their own decisions, but hopefully with enough knowledge.

    If you can think of a way for an objective discussion about specific MSP’s to happen here, it is something I would definitely be willing to look at.

  6. stephen June 3, 2008 at 9:31 am

    My x-wife is excited about becoming a sales agent for an ISO/MSP. She doesnt know how hard it will be to get sales. Unfortunately it looks like merchants are pitched all the time by sales guys and gals who claim that they can do better by mostly ethical folks, unfortunately the few unscrupulous ones seem to get the press. Without being too negative would one reccomend me to advise her to stay away from this industry?

  7. Daniel Levin March 17, 2009 at 10:55 pm

    This may be off topic, but does anyone know how much money the merchant account industry as a whole make per year?



  8. Andrew Herndon August 12, 2009 at 10:14 am

    I believe the main concern of business owners should not only be of increasing their bottom line profits, but most importantly to increase their awareness of what it truly means to be PCI Compliant. Not protecting your consumer and your business will victimize you in this world of Identity Theft and Credit Card Fraud. It’s not a matter of “IF”, it is a matter of “WHEN”; and the consequences are astronomical. For example: your business, customer loyalty, CC/DC Privileges, as well as your integrity would be at stake (to name a few) for complacency of said issue.

  9. Koby September 24, 2009 at 12:55 pm

    I am a merchant that was just uneducated about all this stuff and began getting many calls(15+)since I signed my business up for a sales tax permit. I just happen to meet a nice gentlemen in this industry by accident who which was not pushy and directed me to a website that seems to be an industry website where i could watch a video on PCI compliance. Does not mention any processor in general but did show me that price may be the littlest concern I have about processing a credit card for my salon. Anyway I decided to go with John because he cared more about what was going to keep my business safe. He also made many comments mirror those above that you need to be comfortable with who your dealing with. To date I have had 0 problems and am able to view my transactions, and all my costs daily associated with the transaction. All I wanted was honesty and transparency. If anyone is interested his number is 817-368-1510. He seems to have a wealth of information on PCI.