SAVE MONEY FOR YOUR BUSINESS


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Q:  I have a Merchant Processor and they told me that I already have a low rate.   Why should I spend time looking into this further?

This is the first question that people ask us and we explain that there are significant differences between merchant processors (MP) and that the overall effective rate that they are paying can be much higher than they were led to believe.   We have found that almost no one checks their actual effective rate after setting up an account with a MP, as you expect the rate to match what you were told.   Unfortunately, the effective rate can vary greatly if you have signed up for a Tiered rate plan instead of an Interchange Plus rate plan.

The credit card processing industry is one of the most opaque areas for a business to easily gather information and make an informed decision.  Information on fees, charges and equipment costs is not readily disclosed and it is almost impossible to understand how much credit card processing is going to cost you until after you have signed up with a MP and received your first statement.   Many MPs also expect you to sign a long-term contract for their services, which means that you could be stuck with unfavorable rates for a year or more.

To help you combat this lack of transparency, we have put together in-depth information on credit card processing terminology, options and fees, along with equipment options and online payment options.   We hope that this information will help you learn how you can significantly reduce the cost of this service for your business.

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Q: I thought that every business received the same credit card processing rates and fees. How can you lower my rates and save me money?

The first thing to understand is that not all merchant processors charge the same rates for credit card processing. There are two primary pricing models that merchant processors use to price their services:

  • Tiered Pricing Model
  • Interchange Plus Pricing Model

Except in extremely rare environments, tiered pricing models are going to cost you significantly more money. This is why there are so many merchant processors that only offer this as an option, as the merchant processor makes more money at your expense. For almost every business, an interchange plus model is going to cut your costs while providing complete transparency about how fees are assessed and calculated.


Tiered Pricing

We find that most businesses are using a MP that is using a tiered pricing model to determine the rates for each credit card transaction.  In these plans, the MP assigns each transaction to a specific tier which determines the specific rate for that transaction.  Here are sample tiers used by a MP:

Tier 1

(Qualified or QUAL)

1.64 %


  • swiped non-reward credit cards
  • swiped debit cards

Tier 2

(Mid-Qualified or MQUAL)

2.64 %


  • swiped reward cards
  • manually keyed-in consumer non-reward credit cards
  • manually keyed-in debit cards

Tier 3

(Non-Qualified or NQUAL)

3.64 %


  • business-issued credit cards
  • upper-level reward cards
  • manually keyed-in rewards cards
  • e-commerce transactions that are processed without the customers billing address

 

The first thing that you can see is that there is a big difference between the rates for each tier.  The second, and most important distinction, is that the processor ultimately makes the decision as to which tier a transaction is assigned.  The processor makes more money when your transactions are ‘downgraded’ to a tier with higher rates, as they are still paying the same Interchange fees to the banks regardless of which tier your transaction is assigned.

 


Interchange Plus Pricing

This model has two components:  Interchange fees and the Plus fees.

Interchange fees are the wholesale credit card processing fees – the fees charged by Visa, Mastercard (MC), Discover and American Express (Amex) processing systems (this money goes to the banks), along with the card association fees (this money goes to Visa, MC, Discover & Amex).

Plus fees are the fees charged by the merchant processor and are typically referred to as ‘markup’.   Each processor that offers Interchange Plus pricing will have fees for each transaction, whether a percentage fee or a flat rate fee or some combination of each fee type, which is essentially their gross profit for offering their processing services to you.

To get your rate for each transaction, you take the Interchange fee (wholesale) and add the Plus fee (markup) to get your final rate.    If it sounds too simple, its because it is simple and easy to understand pricing – and easy to confirm each month that the rates that you are being charged are the correct rates.

On average, most businesses can cut their processing costs to an effective rate of between 2.0-2.5% for card-present storefront transactions.

Here are [tabbylink offset=100 tab=3]sample Visa/MC rates for Interchange Plus[/tabbylink] using our preferred vendor, who charges fixed margins of 0.25% and $0.10 per transaction (markup).


Regardless of whether your processor uses a tiered model or an interchange plus model – the interchange prices that the merchant processor is charged by Visa, MC, Discover and Amex are the same.    Within each interchange system there are different rates for different types of cards, i.e. debit, non-rewards credit, rewards credit, corporate (business-issued) credit, etc.   There are also different rates depending upon whether the transaction was a card-present (swiped by you or the customer) or card-not-present (a sale over the phone or an online sale).

You can see the interchange (wholesale) rates for Visa and Mastercard (who publish their rates for the general public) using the following links:

Visa Interchange Rates
Mastercard Interchange Rates

 

The card association fees for domestic debit or credit card transactions are between 0.12-0.16%, which equates to

$0.12 – $0.16 on a $100 sale.    There are other small fees that can be charged by the card associations, but almost all are avoided if the business correctly processes credit cards and settles the charges within 24 hours.

There are also small fees for address verification on manually-entered transactions, batch processing fees, etc.   You can see a full list of our MP partner’s extra fees here.

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Can you show me some sample Interchange Plus rates?

The Processing Fees on a $100 Sale using our MP partner are shown below.


VISA Regulated DEBIT Card % Fees Flat Fees Total Fees
Interchange Fees
(0.05% + $0.22)
$0.05 $0.22 $0.27
Card Brand Fees
(0.11% + $0.02)
$0.11 $0.02 $0.13
Processor Fees
(0.25% + $0.10)
$0.25 $0.10 $0.35
Total Fees for $100 sale:$ 0.75
The Effective Rate for this transaction is:0.75 %

 

VISA CPS Retail – CREDIT % Fees Flat Fees Total Fees
Interchange Fees
(1.51% + $0.10)
$1.51 $0.10 $1.61
Card Brand Fees
(0.13% + $0.02)
$0.13 $0.02 $0.15
Processor Fees
(0.25% + $0.10)
$0.25 $0.10 $0.35
Total Fees for $100 sale:$ 2.11
The Effective Rate for this transaction is:2.11 %

VISA Rewards 1 – CREDIT % Fees Flat Fees Total Fees
Interchange Fees
(1.65% + $0.10)
$1.65 $0.10 $1.75
Card Brand Fees
(0.13% + $0.02)
$0.13 $0.02 $0.15
Processor Fees
(0.25% + $0.10)
$0.25 $0.10 $0.35
Total Fees for $100 sale:$2.25
The Effective Rate for this transaction is:2.25 %

 

Mastercard Merit – CREDIT % Fees Flat Fees Total Fees
Interchange Fees
(1.58% + $0.10)
$1.58 $0.10 $1.68
Card Brand Fees
(0.12% + $0.02)
$0.12 $0.02 $0.14
Processor Fees
(0.25% + $0.10)
$0.25 $0.10 $0.35
Total Fees for $100 sale:$2.17
The Effective Rate for this transaction is:2.17 %


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Q:  How can I save my business money and how much can I save?

Use a processor with Interchange Plus pricing instead of tiered pricing.  Our recommended MP partner not only offers Interchange Plus pricing, but they also have some of the lowest rates in the industry with completely transparent pricing.

Even if you are already using a processor with Interchange Plus pricing, you should calculate your current effective rate, as that will tell you what you are actually paying and allow you to compare against our MP partner’s pricing.

Lastly, you should always avoid any MP that requires you to sign a long-term contract or lease equipment.  Our MP partner does not believe in any long-term contracts (you can move away to another MP at any time), nor do they believe in leasing equipment.

How much you will save will depend on the:

  1. effective rate being charged by your current merchant processor
  2. the types of cards you process (see the [tabbylink offset=100 tab=3]SAMPLE RATES[/tabbylink] tab for rate examples from our MP partner)
  3. your average credit card sales each month

The effective rate is the rate that includes all of the fees that you pay each month for items such as: batch processing, annual merchant service fees, PCI compliance fees and monthly minimum sales fees.    To figure this out, find your statement from your current processor and add up all of the different fees to determine your total fees – some merchants total them up for you on a summary page.    Divide the total fees by your total sales for the month and then take the result and multiply it by 100 to see your effective percentage rate.

Use our [tabbylink offset=100 tab=5]Effective Rate Calculator[/tabbylink] to see how much you are currently paying and how much you can save with a lower rate.

 

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