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Do you actually know what you’re paying for credit card processing?  Do you understand your merchant statement?    Do you know there are different types of pricing programs to choose from? If you never had a credit card processor analyze and explain your statement to you, you probably could use some helpful knowledge about your processing.

 

Many businesses and companies neglect to understand and review their merchant statements from their credit card processors.  There are actually several ways to reduce your credit card processing costs. You may think you know what your rate is, but in all actuality, it is not as simple as just one rate.   If a processor or bank quotes you a rate and only one rate, you need to ask more questions, because they are not telling you everything.  There are two different types of credit card processing pricing structures:  3 tier pricing and interchange-plus pricing, also known as pass-through pricing.   The most common type of pricing in the industry is 3-tier, also referred to as bundled pricing.  Knowing the basics of credit card processing is the key to saving you money.  If you feel you do not have the time or patience to learn the basics on your own, find a merchant service provider or credit card processor who is willing to provide you a with a free consultation including rate comparison and statement breakdown.   A review of your merchant statement by a processor can give you the basic understanding which can lead to a significant savings for your business every month.  The more volume you are processing, the more a savings will benefit your business.

 

The following tips can help you understand the basics of credit card processing rates and fees

 

3 Tier pricing
 

Discount Rate is the percentage rate a merchant pays of the dollar amount of transactions processed. 

 

Your transactions will fall into a category depending on the type of transaction processed.  The transactions are graded according to the level of security of the transaction.

 

A qualified transaction is a face to face transaction where the card is present for swiping, inspection, and signature. Retail stores typical transactions fall into the qualified rate. The transaction also must be transmitted within 48 hours or it may be downgraded.  This qualified rate is the lowest rate a merchant will pay since the card is present and there is less chance for fraud or misuse.

 

A mid- qualified transaction is usually a transaction processed over the phone, over the internet, or by mail.  These are called MOTO transactions. Also, reward cards fall into this category.

 

A non-qualified transactions include those made with business cards or do not meet all the qualifications by Visa and MasterCard to be applied to the lowest possible rates.  Address verification also plays a role in determining which category a moto transaction will fall into. 

 

In order to receive the best possible rate for all of your transactions, you should work with a processor who will explain the criteria as well as how to meet those criteria when as often as possible. 

 

 

Fees
 

Transaction fees:  A flat fee charged for each transaction.  A transaction is any communication between your terminal and the processor.  When you have a lower average ticket sale, a high transaction fee can add up!  If you have higher average ticket sale, the transaction fee is not as significant.

 

Statement fees:  Statement fees are typical among all processors.  This fee is charged once a month regardless of the amount of dollars you process.

 

Batch fee: This is charged every time you batch out, which you should do once a day to avoid downgrades from transactions sitting too long before being transmitted.  Transactions are downgraded when they are transmitted beyond 48 hours from the transaction taking place. This means you will no longer qualify for the lowest possible rate.

 

 

Minimum processing fee:  The minimum processing fee is charged only if you do not process enough to meet the minimum requirements.  Most businesses will process enough to meet the minimum.  The typical minimum fee is$25.00.  This means your total discount rate percentage charges must add up to $25.00.  If you fall short of the $25.00, you will be charged the difference.

 

 

Interchange-plus pricing:
 

If you are a business processing on the 3 tier or bundled rate, you definitely should consider going with Interchange-plus or pass-through pricing.  Usually sophisticated, high volume companies will choose this type of pricing because they are able to pay interchange and assessments plus a small independent fee for each transaction. The processors independent fee is fully disclosed and may be either a percentage based fee or a transaction based fee. 

 

Interchange rates are set by Visa and Mastercard.  Interchange rates are broken down into about 180 Categories for each and every type of credit card transaction. 

 

The 3 tier pricing or bundled pricing is easier for merchants to understand, but many times does not fully disclose details and does not allow merchants to take advantage of the lowest possible rates .  Interchange-plus pricing will pass the actual Visa and Mastercard interchange rate right to the merchant. The merchant will be sure to receive the lowest possible rate for each transaction plus a small independent processing fee to the processor.

 

Every processor charges merchants a fee for their service whether on interchange-plus or 3 tier pricing.  The cost to the payment processor is the interchange rates set by visa and mastercard.  The processor’s profit is any percentage points charged to the merchant above their cost.  The processor will charge a fee either in percentage of dollars processed or a transaction fee for each transaction. 

 

 

The benefit of interchange-plus pricing is that you know exactly what your processor is charging you above the interchange.  When you use three tiered or bundled pricing, you do not know exactly what your processor is charging you. The processor is making different amounts on each and every category.  They are paying interchange on every transaction you process, however, you are paying one of the few rates they quoted you in your contract.   With interchange-plus pricing you are able to take advantage of the lowest possible rates for each of the approximately 180 categoires of transaction types.  Price breaks are passed on to you the merchant. Another advantage of interchange-plus pricing is that your processor is more likely to ensure you will incur the least amount of downgrades possible.  A downgrade is when a transaction does not qualify for the best possible rate. When you are set up on 3-tier pricing, you processor normally makes a larger profit if your transactions are downgraded, therefore they do not have any incentives to assist you in qualifying for the best possible rates.  With interchange-plus, your processor is making the same amount of profit whether your transactions are downgraded or not.  The profit is fully disclosed and the same for each and every transaction you process.

 

 

It is extremely important to work closely with a credit card processor to evaluate your merchant statement to make sure you understand the basics of the credit card processing. Most importantly you should understand your own statement for continuous monitoring. 

Checking your statements frequently is important to ensure your transactions aren’t downgrading when unnecessary or preventable. You also should read your contracts carefully because processors sometimes will raise your rates when your contract agreement is expired. The contracts allow for automatic renewal, so you will not notice your rates have increased. 

 

 

Choosing a credit card processor
If you think you may do better with interchange pricing, there are companies who will offer this pricing.  Find a reputable company who will review, analyze, and explain your current merchant statement to you. You do not need to go to your bank to accept credit cards. Actually, if you did call your bank for credit card processing, most likely they outsource their credit card processing to a processing company.   There are several companies you can choose from. All processors must be registered with a bank in order to sell credit card processing.  Independent credit card processing companies usually offer better pricing than your local bank and they are more lenient on approving businesses for a merchant account.  Find a company who will give you references and provides outstanding customer service.  Larger does not always mean better. If you contact a boutique style processor you can receive more personalized service than if you go to you bank.    Larger processors usually have large call centers set up for customer service needs.   All processors must be registered with a major bank. However, when choosing a boutique-style processor, you must find a reputable company to be sure they provide excellent customer service.  Knowing the basics of credit card processing can save you money.  Find a merchant service provider or credit card processor who is willing to provide you a with a free rate comparison and statement breakdown. .  All merchant service providers will need and usually request a current merchant statement to be able to give you an analysis or consultation.  A review of your merchant statement by a credit card processor can give you the basic knowledge so you will understand and save money on your credit card processing. 
 

Sherene Costanzo is the Vice President of GlobeEx Corporation, a consulting firm for businesses and an independent agent for credit card processors and merchant services providers.   She has a BA degree in Business Finance.  You may contact her for more information at 1-866-502-8472 or by e-mail at sherene.costanzo@yahoo.com .  For a free evaluation of your credit card processing statement, simply e-mail it or fax it to 954-252-2247.
 

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This entry was posted on Monday, February 11th, 2008 at 11:27 am and is filed under Uncategorized, Business, Ask an Expert, Credit. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.