Merchant Card Processing Rates Demystified

So now that we agree that no one has a special deal with the credit card companies, we need to discuss pricing structures. This is the one aspect of this industry that is purposefully made to be difficult to understand—at least in my opinion. Three points to keep in mind before we start:

  1. To keep things as simple as possible, I'm going to assume the merchant processor is charging you only a set percentage (ignoring per-item fees and any other add-ons).

  2. Any interchange fees I mention are taken from this document, published by Visa.

  3. The rates I use are examples and are not representative of the exact minimum and maximum of interchange. They are used only to make an example.

There are several ways merchant services can be priced: the flat rate, one flat rate + surcharge; a three-level pricing structure; or a flat rate above cost.

  • The flat rate : Made popular by companies like Square, is a bit tricky. I don’t purport to know everything but on this one I can guess. From my experience in a standard retail location approximately 80% of all transactions at cost will fall in a range between 0.05% + $0.21 to 1.65% + $0.10. So if you are being charged a flat rate at 2.5% + 10¢ for swiped and chip cards then the margin is approximately between 2.45% + $0.21 and 0.85%. In more concrete terms for every $100 you pay between $2.66 and $0.85. Convenient yes but is it really cost effective?

  • One flat rate + surcharge:  You, the merchant, are given 1.68% as your rate. A customer comes in with a credit card that, according to Visa, is priced at cost: 2.95%. That sale will then be charged 1.68%, plus the cost difference, plus an extra margin [1.68% + (2.95% -1.68%) + margin]. The margin is your merchant services provider's "cut" of the sale.

  • Three-tiered rate (sometimes called qualified, mid-qualified, or non-qualified): You, the merchant, are quoted three rates: 1.68% as your qualified rate, 2.14% as your mid-qualified rate, and 3.4% as your non-qualified rate. Think about these as low, medium, and high rates. If your customer hands you a card that Visa deems cheaper than the 1.68% rate, then you will be charged 1.68%. If another customer hands you a card that Visa deems equal to or greater than 1.68% but less than 2.14%, you will be charged 2.14%. As you might expect, if your customer hands you a card that is 2.14% or greater, you will be charged the 3.4%. Low, Medium, High.

  • A flat rate above cost (sometimes called interchange plus pricing): This is the simplest pricing to understand. Say the processing company quoted you 0.2% + interchange. You are charged cost for any and all cards your customers hand you, and then your processor takes an extra 0.2% above cost.

The best way to determine which pricing structure is best for your business is to find a merchant processor who is not afraid to educate you. (Keep in mind that you can never predict exactly what card your customers will present at the point of payment.)

Be as specific as possible when discussing rates and possibilities. If your merchant processor is too vague or speaks in generalities and is unwilling to show you interchange, think of him or her as the equivalent of a used car salesman trying to sell you a clunker.

Until next time,


The Truth about Credit Card Processing Rates

What the banks don't want you to know

If you've been in business for any length of time, you have encountered the dreaded Merchant Services Salesperson, who either shows up at your door or calls you on the phone. The visceral reaction that most people have to this encounter is not an uncommon one. And, believe me, having been in the industry for many years, that reaction is well deserved.

To be honest, I think the lack of regulation in the Merchant Services industry has caused it to become like the wild, wild west. Anyone can call an "800" number, sign a few papers, and Wham! they're selling credit-card processing.

So what's the story? How does it work?

To answer that, we have to take a step back, look at the whole picture, and treat Merchant Processing just like any other business. Let's take a clothing store as an example. That clothing store has a supplier for its hats, shirts, pants, etc. If that supplier decides to raise prices and reduce the quality of the merchandise it's selling, the clothing store can simply find another distributor. Obvious, right?

So who is the supplier when we deal with Credit Card Processing? Visa and MasterCard. And if we don't like the prices or quality of the merchandise, where can we go to find another supplier? The answer is... nowhere. Because there is only one supplier.

(Note: Visa and MasterCard have the most diversity of product, and they're the ones we associate with most when we talk about credit card processing, so I'm using them as the example. AmEx and Discover operate under a similar premise, though.)

And this notion that one processor, bank, or salesperson has some exclusive, special, get-it-before-it's-gone deal or rate that nobody else can offer? Well, it's just flat out false.

Just like every other business on the planet, if you have only one source but many outlets for a product, then it stands to reason that the base cost of the product (called interchange in Merchant Services-speak) is the same for everyone. What you should really be negotiating from company to company is margin and service. Believe me, the old adage "you get what you pay for" really does apply in this industry.

We have a lot more to discuss. I'll get into interchange and pricing in more detail in my next blog post...

If you would like a good explanation of how credit card processing works, check out Authorize.net's page Understanding Credit Card Processing.

Until next time,