Merchant Account Residuals - The Cause for Chaos

There's plenty of information available regarding the "hows" of merchant accounts and credit card processing, but hardly anything covers the "why." Why is the industry so competitive? Why is it so hard to tell exactly what you're paying for? Why are pricing models for credit card processing so confusing? These are all important questions that can help shed light on why things are as they are in the payment industry.

The average business person has more questions than answers when it comes to merchant accounts. While I can't answer them all, I can bring to light the underlying cause for the complicated and often ambiguous way in which merchant accounts function – specifically how their pricing models operate.

Not surprisingly, the root of the problem is money and the number of players that want access to it. Let's be honest, no one is in business to lose money. Of course banks and providers want to profit off of your merchant account, but it's the way in which they're able to do it and for how long that makes credit card processing such an appealing industry.

The most appealing aspect of merchant accounts is that they produce residual income for all of the various entities that facilitate their operation and delivery, I.E. sale. Residual income or "residuals" as it's referred to in the industry is a positive cash flow that sustains itself for some period of time after the effort to produce it has ended. For example, it may take a sales person only a week of negotiations to sign a business into a merchant account, but the agent will reap profits from that account for as long as the merchant process with them. One week of work for a continuous pay-out isn't bad by any standards – except if you're the merchant paying for it.

Compounding the problem for merchants is the number of entities that profit from a single merchant account. Acquiring banks, third-party processors, aggregators, card issuers, independent sales organizations, individual agents and others all get a portion of the residual profit that a single merchant account generates.

At this point you may be thinking to yourself, "so what, many financial products produce residual income for the sales people and providers of the service." This is a good point and it's exactly correct. Let's take insurance for example. Premiums create a residual income stream for custodians of the account as long as the client maintains the policy. The difference between insurance and other financial products and merchant accounts is that the residual income stream that merchant accounts produce is dictated by the merchant's gross sales. Merchants pay more profits into the pockets of providers as their business increases and their gross credit card sales increase. So not only do merchant service providers gain a self-sustaining, residual income stream by signing a merchant account – that income stream grows itself!

Now you know why five sales people walk into your store each month asking for statements, or why 10% of your junk-mail each week is comprised of sales pamphlets from the newest merchant service provider. Merchant processing is a very lucrative business with a residual profit stream that can essentially grow itself. The trick is to use this competition to your advantage by getting the best pricing structure (flat rate or interchange) at the lowest rates.