The Intricate World of Payment Processing: Part 1

In this episode of the B2U Podcast, payment processing experts, Brian Boxell and Kel Hodel of Heartland Payment Systems give tips every business owner should know about payment processing and POS systems.

Alec: Hello, listeners! Thank you for joining us for the B2U Podcast, brought to you by Our goal is to bring business resources directly to you. I’m your host, Alec Mangum, and today, we’re learning about payment processing, credit cards, and everything in between. Here to talk to us today about the ins and outs of processing revenue is Brian Boxell and Kel Hodel of Heartland Payment Systems. Brian, Kel, hello!

Brian: Thanks for having us, Alec.

Alec: Thanks for being here! So before we get started on the meat and potatoes of the questions, could you tell our listeners a little bit about yourselves, what led you to the payment processing industry, and what your roles are at Heartland?

Brian: Sure. My title is Relationship Manager, and my role is to go out and help small or medium business owners with their credit card processing. The reason I came to Heartland is it’s really kind of a broken industry, and this was a great place to start to try to fix that industry and help these small to medium business owners.

Alec: Great! And Kel?

Kel: So same title: Relationship Manager. Although, the titles don’t have a lot of bearing here at Heartland. I’ve got about 10 years of experience in the industry. I’ve been at Heartland for about five years, certified by the Electronic Transaction Association, hold a CPP designation. It’s about 1% of our industry, and it’s important to understand what experience levels people have because this is an important part of your business. It’s your money.

Alec: Absolutely. Well, thank you again for coming and joining us today. I know you guys have got all kinds of information to share with our listeners. Business and revenue, processing payment, that’s kind of a spooky topic for a lot of people as they’re going into entrepreneurship and starting a business. So let’s clear it up for them.

So the first thing with business, revenue, making money, none of that is possible without the guys behind the scenes who process the numbers. We’re not talking about accountants. We’re talking specifically about processing payment. There’s a lot of engineering that takes place, a lot of behind-the-scenes technology and transactional percentages that are being traded back and forth. What happens when someone swipes their credit card? What takes place after that?

Kel: You know, Alec, what’s interesting, and part of the reason I got into this industry is I had no idea that when I swipe my card that all of this craziness went on behind the scenes. It was almost like I was looking through a pinhole of what was happening. And this was about 10 years ago. I was with one of my friends that was a business owner. And a guy walks in the door, and he looked like he had slept in his car. In a plastic bag, paper or plastic from the grocery store, he had a high-speed credit card terminal. He asked my friend if he would like to work with him, and he would give him this free high-speed terminal. My friend shooed him out the door. He was very frustrated. And at that point, I really thought that when I swipe my credit card, that the money that I paid went right into the owner’s bank account. I thought, “Well, maybe they pay the fee at the bank,” but I really didn’t understand the industry. And when I’d asked my friend what that was all about, he pulled out his statements. He kind of ran his hand over the numbers. He didn’t have any idea. He just kind of knew what his volume was, and then how much he paid, or what was pulled from the bank. And that was really intriguing to me that, for me being a veteran, and having honesty, transparency, integrity behind everything that I do, I thought, “Hey, this is something that I would love to figure out.” And it is still complicated today, after 10 years, trying to figure out what’s going on behind the scenes.

Alec: So it’s a really complicated process after someone swipes their credit card. Can you talk a little bit about what does actually happens? What are the numbers he ran his hand over, and how has that maybe changed over the years?

Kel: Yeah, so when you look at your statement, any business owner, typically what you’ll see on there are some line items. There are usually card categories. And to take a step back, there’s actually…any business owner, when they pay for swiping that credit card or accepting that payment, it’s kind of like a three-legged stool. So the first component is whatever the bank fee is. So let’s take Wells Fargo, a large bank. They’ve issued a Visa, which is about 70% of the cards issued in the marketplace. And let’s say it’s a Rewards card that costs 1.85 and 10 cents, which is pretty common. That’s just a retail category card. So the business owner accepts that card. They pay 1.85% and 10 cents. The second leg of that stool is called dues, fees, and assessments. If anybody’s watched those cool commercials during the Olympics, and you see the Visa commercial, well, those 13 basis points or 0.13% that literally goes towards their marketing campaigns. And then you have the processor, which typically adds, and depending on volume, the risk category, maybe anywhere between 0.25 and maybe 0.50 is pretty average in our industry. So when you add all that together and that’s really what comes out of the cost or the fees for processing that transaction. So those are the categories. But when you look at the statement, the difficult part is there’s over…when I mentioned the Wells Fargo card, there are over 700 different categories of cards issued into the marketplace. So of course, the business owner wants to know what your rate is when you’re a processor, and we want to ask, “Well, what card are you talking about?” Because our cost is constant all the time, but a debit card, which we’ll get into, is a very low cost, almost like cash. But then you have some business cards and American Express, not to put those cards down because they’re viable in our industry, but they’re more expensive. We’re talking 2.89%-3.5%. So you really need to understand where your fees are coming from to be able to mitigate the risk and really leverage that understanding to keeping your costs contained.

Alec: Right, right. Well, it’s a really complicated field. It’s not as simple as swiping the card and the money goes into the bank account.

Brian: Correct. And I think it’s really important to note that essentially what the processor is doing is extending a short-term loan to the business owner. Instead of them having to wait two, three, four weeks for the credit card bank to give them their money, that’s what the processor does. It gives them their money the next day.

Alec: Right, okay.

Kel: And that’s key. That’s a very good point, Brian. Because what a lot of business owners don’t seem to understand when they say, “I want my money in the bank account the next day,”…and sometimes there’s risk involved. They may have two days in a delay. But what’s really happening is when you swipe your credit card…let’s say you buy an appliance at one of the big appliance stores here in Charlotte, and it’s a $2,500 transaction. Well, Heartland, or the processor in that equation, funds that bank account of the business owner the following banking day while they’re waiting for maybe three, four, five weeks for the bank that issued that card to actually pay the processor back. So it’s a float of money. And that’s really, Brian, what you were getting to. It’s kind of a short-term loan industry, and that’s why there are some percentage points that will be paid.

Alec: Wow, that’s just an entire world I was completely unaware of. So it seems that recently it hasn’t been that way. But in the past, sometimes when using a credit card, businesses would say, “Hey, there’s a small charge with this.” What was the reason for that? Was it because of all the hard work that goes into processing a credit card payment?

Brian: That’s a great question. Typically, the business owner is trying to mitigate their cost for processing that credit card, and trying to push that on to the consumer, if you will. We’ve seen that model in several different areas, and typically it’s not something we would advise a business owner to do. Simply because why would the customer pay that fee here when I can walk across the street, get a similar product, and not have to pay that fee?

Alec: Right, and that’s why it’s kind of disappeared?

Kel: I wouldn’t say it disappeared. I think that that solution is viable in some industries. If you think about it, if you’re in a coffee shop and somebody adds a few cents based on the transaction that pays for the fees of the credit card, I think there’s definitely value in that, and most customers probably aren’t going to care. But what a lot of business owners don’t understand is there are over 70 steps to be able to put in place what we call surcharging, or maybe an absorbed cost model for accepting credit cards. And you have to, on your door, announce that “Hey, we actually charge a fee for the card that we accept,” put that at the point of sale where they’re actually processing the card. So they have to make it known. And I think that a lot of business owners, especially in a higher average ticket…imagine if you were buying appliances, and I go back to that $2,500 transaction, and somebody said that they were gonna charge you 3%. You might do a little bit more shopping. But they can get away with it. And there’s not really credit card police. You can do what you want, but you have to notify the business owner. And to do surcharging correctly, there are some legalities behind adding any fees to a debit card, which we can talk about later. But adding any fees to a debit card is against banking mandate policy, so you can’t do that. So you have to have software that would add the fee to all the other cards but not debit cards, which is pretty difficult to do in even today’s world of technology.

Alec: Okay, interesting. Let’s go ahead and move on to debit cards. How does all of this differ from a debit card transaction? And we don’t have to spend a whole lot of time on this. But I think people are interested to know. What’s the difference between a debit card transaction and a credit card?

Brian: Great question. It’s actually mandated as a part of the Durbin amendment several years ago. The large companies like Walmart decided, “Hey, why are we paying such a high rate for debit cards, or essentially the same rate for a debit card as I am a credit card?” Because as Kel mentioned earlier, it’s basically cash. So what the Durbin amendment did was cap those fees from the card issuing bank at 0.05%, or five points, and 22 cents per transaction, versus let’s say a Visa Rewards card, which could be 2.6% and 10 cents a transaction. So it’s a significant difference in regards to the fees that are levied on a debit card versus a credit card.

Alec: So it’s much closer to paying cash.

Brian: Correct.

Alec: And that’s how it’s processed faster? I guess with the credit cards, they’re giving the short-term loan. So it’s still about the same speed.

Brian: Correct. I mean, it really doesn’t increase the speed of getting that money back into the business owner’s bank account, but it does lower their fee significantly. So as a business owner, when I see someone pull out a debit card to pay for their product or service, I like that a lot more than I like seeing an, let’s say an American Express card come out.

Kel: Yeah, we can all thank Walmart for not only being able to buy a $6 shovel, but you have some high powered attorneys, and it makes very good sense that banks would not be able to charge Rewards-level fees to business owners when money is being pulled right from somebody’s checking account, which is so close in relative to utilizing cash. Who carries more than $20 these days? But that debit does in fact, although it doesn’t speed up the actual transaction time, that money is pulled out instantly from the account of the consumer and right into the business owner’s account. So there is a quicker transfer of money as opposed to…and that’s part of the reason. It’s almost like an ACH. That money’s going directly from one bank to another instantly, so there are some benefits of that and having available money and paying less for it.

Alec: So we can thank Walmart attorneys for that one.

Kel: Thank you.

Brian: Thank you, Sam Walton.

Alec: So POS systems are that immediate turnkey for making all of this kickstart. What are some of the innovations you guys are seeing in the POS industry, and how does that affect what you do? Point of sale, the technology. What are some of the innovations you guys are seeing?

Kel: The point of sale systems, what’s interesting about them, right now especially because of technology moving at the speed of light, literally, is that customers want to have an experience that’s simple, the least amount of friction at the point of sale. So having wireless technologies, point of sale systems where you’ve got maybe a Bluetooth or a wireless handheld device. Which if anybody’s traveled to Europe or Canada recently, you’ll see there’s a lot of tableside service in restaurants, in something called Chip-and-PIN, with increased security. But the point of sale systems literally can make or break a business, because this is something that allows…we take a restaurant for instance. With a good point of sale system, you can see the items that aren’t selling versus the items that are hot selling items, and be able to quickly adjust your menu, and what you’re ordering, and being able to manage your inventory, time and attendance, geofencing technology for those employees that may not be at a physical location, people that have services where your drivers or technicians are out in the field, and being able to understand when they clocked in. And a lot of technology just allows a business owner to be able to operate much more efficiently. And that’s a lot about understanding this industry is being able to minimize the steps involved, which can also minimize the risks. Having six solutions versus one or two, and having all that information streamlined into an accounting system, those are some of the things that POS systems now are doing. Whereas a decade ago, somebody may have a dozen solutions, where now a good POS system could literally do everything for them.

Alec: One POS system?

Kel: One POS system.

Alec: That could do everything for them?

Kel: That can do everything.

Brian: I do think it’s important to note that the value of POS systems is immeasurable. I just want to make clear that they aren’t necessary to process card payments. The only thing really necessary to process card payments are a terminal where that card can be inserted or swiped.

Alec: Right. Okay. Well, my understanding of POS systems was the terminal. So what’s the difference between that label, POS system, and a terminal where they insert or swipe a card?

Kel: And I think that we should probably take a step back and categorize the different methods of accepting a card. Because we have what’s called card-not-present, which many of my clients are business to business. They never see the card. They may be accepting that card over the phone…

Alec: Or online.

Kel: …or hand keying. It could be online. They could have a landing page or an invoicing system where they’re shooting out a payable invoice that pulls back into their system, updates into accounting. So very true, Brian. You don’t need a point of sale system. Many restaurants don’t even have a point of sale system. The larger ones typically do. A lot of the retail environment do as well, but it is not necessary. You can have a desktop terminal and be able to accept cards, or even have simply a virtual type portal where those cards can be hand keyed. And there’s some education that goes along with that just to ensure that you are mitigating risk and following PCI compliance, and just ensuring that you’re not gonna be compromised, and understand how the industry works.

Alec: So that’s the difference between a POS system and a terminal maybe. It’s the way that it’s processed, present or not present? Is that what you’re saying?

Kel: Well, point of sale systems, typically if you’re using a point of sale system, it’s gonna be in a card-present type environment, where you step into a restaurant.

Alec: Like a Starbucks.

Kel: Exactly. You could walk into a Starbucks, and they’ve got some sort of touch-based surface where they can order. However, if you’re over the phone, they can still hand key a card. You may pay with your mobile device, which is pretty common these days. With your new iPhone, you could pay with your face, pulled right off of Apple Pay. And most devices these days are going to accept the contactless payments, or NFC, near-field communication, where you hover your phone over, whether it’s a Google-based iOS or Apple, be able to make those payments, to just a desktop terminal, not even a POS system.

Alec: All right, listeners, there you have it. I certainly hope you found this episode of B2U Podcast as informative as I have. We will be releasing another podcast with Brian and Kel in which we discuss choosing a payment processor and all the things that come along with that. Brian, Kel, thank you so much for joining us today and sharing your knowledge. Listeners, if you have any questions about today’s podcast, or have topic suggestions, please feel free to Tweet us @CBRbiz on Twitter. That concludes this episode of the B2U podcast. Once again, I’m your host, Alec Megham. And thanks for tuning in to the B2U Podcast, brought to you by Until next time, we mean business.

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