confusing credit card processing rates

Understanding Merchant Account Processing Rates

Businesses are always looking for the lowest credit card processing rates they can get. One can hardly blame them. It’s expensive to accept credit cards. At the same time, salesmen are eager to constantly sign new accounts and build their portfolio. Sometimes they even have monthly minimums they have to meet in new account volume or be fired. So when they come in to offer you a quote, they only have one goal in mind: to get you to switch your processing over to them. 

To get you to do this, they have to give you an incentive. So it’s in their best interest to promise to save you a lot of money. They will offer to prepare something called a “savings analysis” for you. A savings analysis is a type of quote. The salesman will look over your current rates and write up a quote that looks like it beats that rate. But only by a margin. 

So they come to you with a quote that sounds fantastic and you sign a new contract and switch your processing once again.  But inevitably, a couple of months later, you notice that your rates are not at all what they promised. You call, they give you the run-around and you wind up frustrated and feeling duped. 

Interchange or Pass-Through Pricing

Why does this happen? Well, first of all, there are many types of billing structures for credit card payment processing. There is interchange plus or pass-through pricing, flat-rate pricing, and tiered or bundled pricing. There are also several processors who all bill differently. All their statements are broken down differently, and some are notoriously hard to understand. Salesmen know this and use it to their advantage when crafting a savings analysis.

There are many ways an unscrupulous or uneducated salesman can write up a deceptively low quote just to earn your business. Here are some of the most common ways to make the savings in a cost analysis seem much larger than they will actually be.

Understanding Interchange Categories

Let’s talk a bit about interchange. Interchange refers to a set of fee categories for processing payments for every card type on the market. There are hundreds of interchange categories that correspond to every card type on the market. And there is a separate fee for each one of these categories. Therefore, your statement will show many categories and fees depending on the cards you accepted in any given month. 

The fee schedule is set by the card brands such as Visa, MasterCard, and American Express. Visa and MasterCard both publicly post their interchange fees on their website. Amex and Discover do not.  The fees go to the card-issuing banks that provide credit cards to customers such as Wells Fargo or Chase. These fees are non negotiable and are the same for every processor. Interchange fees are the base of your processing fees and make up the majority of your costs. Everything else is the processor mark-up and assessments.

Sometimes, in order to quote you a lower overall rate, a salesman will give you a quote using mostly cheaper interchange categories. They leave the more expensive card type categories out of the quote. However, it is highly likely that you accept some card types from these categories. This will make your savings analysis look very good. Buty, when your actual processing comes in, it’s much higher than quoted because of those more expensive categories. Sometimes this is done intentionally to make your quote look low. Other times it is because they don’t understand interchange very well. Or they don’t have access to data regarding the average interchange mix for your industry. 

Tiered and Bundled Merchant Account Processing Ratesmerchant services rates

When they start talking about qualified rates, they’re most likely quoting you “tiered” or “bundled” pricing. The most common tiered pricing will include three levels, qualified, mid-qualified, and non-qualified. All the interchange categories are divided up and fall into one of the three levels. The salesman will quote you a very generous rate for qualified transactions and not really talk about the other, more expensive tiers.

What they don’t tell you is that they can decide which cards fall into each tier. So they can decide that most of your card types are not considered qualified and bump them to the mid-qualified rate. But they don’t tell you they have control over this. When your rates come back higher, they can still stand behind their quote. After all, you are getting the rate they quoted you for qualified cards. It’s just that most of the cards you accept aren’t qualified. 

Even when we are not talking about savings analysis, this type of deceptive pricing is the chief reason we advise most businesses to find a processor who offers interchange-plus pricing.

Watch for Mark-Up Quotes

Another sneaky trick to make your quote look lower is to only quote the mark-up. Any other fees and assessments are left out of the quote. But all those extra fees are being charged on your current statement, so they’re not even comparing apple to apples. It’s not necessarily lying so much as it is leaving information out of the equation. 

Therefore, it’s important to calculate your total “effective” rate and not just the processing rate. To calculate your effective rate, add all costs involved, including rates, fees, assessments, and any other costs, and divide it by your total volume processed. This will give you the true total cost of your processing or what’s referred to as your “effective rate”. If you just look at your processing rate and don’t take all the other fees into account, you could actually pay more. This is one way for a savings analysis to focus on one rate while glossing over other, sometimes excessive fees. 

Dangers of Low Introductory Rates

Beware when a salesman offers you an extremely low rate. Most often this is only an introductory rate and will be raised almost immediately. Unless you sign with a processor who offers a lifetime rate lock, they can raise rates whenever they want. The salesman will offer the merchant a screaming introductory rate to get the account and move on down the line. The bank will review the merchant account and decide the rates are too low. They raise the rates effective immediately. Most of the time the only notification to the merchant will be in the small fine print somewhere on the current statement. Not only do most merchants miss the message, but they don’t realize that many fees are negotiable.

Flat Rate Pricing (Square, Stripe)

Flat rate processing is difficult to cost compare. With flat-rate pricing, interchange rates are not disclosed on the statement. The flat rate they charge will be enough to encompass even the most expensive card type and any fees and assessments. Even if 90% of the card types you accept fall into the cheaper interchange category, you will pay the same flat rate. For this reason, there’s really no way to do a savings analysis with much accuracy.

Instead, get a quote from an expert that is the best deal they can give you. Ideally, they will have access to average interchange mix data for your industry to base your quote on.  Your savings will be an educated guess at best. Your rate could come in higher or lower than what you were quoted based on the actual card types you accept. It will take at least a couple of months processing to see how your average card types differ from industry averages. 

Ask for an "interchange-plus" pricing quoteHow to Get a Merchant Account Processing Rate Quote?

First of all, ask for a quote for the best deal for your business type and volume. You do not need a savings analysis. With the correct information about your business, a reputable advisor should be able to give a quote with very competitive pricing. They will need information about your industry and business type, your average transaction size, average monthly volume, the types of cards you accept, and how you process them. Once you have a quote, they can compare it to your current rates to show where you may be overpaying. 

Interchange-Plus Pricing is The Best for Merchants

Note: Some high-risk businesses are limited in the processors that will take them. In these cases, often merchants have no choice but to accept a tiered pricing model. But these special instances are a topic for another article since then we have to go into hard to place business types.

Interchange plus pricing is the most transparent pricing model because there is nowhere to hide fees. Interchange fees, the mark-up, and additional fees and assessments are all disclosed openly. 

With interchange-plus and a lifetime rate lock, you don’t have to worry about ridiculous rate hikes. Yes, your processing fees may be increased. But not by your processor. Twice a year, the card brands assess their interchange rates. At that time, they may decide to increase interchange rates. In fact, both Visa and MasterCard were to increase interchange this year but delayed the increase due to the Covid crisis. 

Make them show you where they are finding the savings. Ask your salesman to show you the math and explain their credit card processing rates. Most of the time they won’t be able to. Make sure you get a written quote before you give them your current statement. A lot of salesmen don’t like to give you a quote without looking at your current statement. They may even tell you they can’t give you a quote without it. Yes, they can. Is it harder? No. it’s just harder to beat your rates because they don’t know what you’re paying or where they can trim the fat. It’s true that many statements are difficult to understand. But an experienced advisor will be able to go through your quote in detail and explain exactly how they came to their numbers.

credit card processing rates slowly increase.Confirm Your Quote

Make sure the rates you were quoted match the actual credit card processing rates in your merchant agreement. This agreement is a binding contract. Once you sign, it doesn’t matter what they promised you. I hate to say that some salesmen are unscrupulous enough to quote you a low rate and then put higher rates in your contract, but it happens all the time. 

How to Choose a Credit Card Processor 

If you find yourself paying more for processing than you were promised, it may be time to move on. Even if you have a cancellation fee, it may be more cost effective to pay it. A lot of times a company will lower your rates to match a lower quote. My question to you is if they could’ve offered you lower credit card processing rates in the first place, why didn’t they? Do you really want to stay with someone who was happy to charge you more until you forced them to lower your rates?

Better to start thinking about your processor as a partner in business. After all, you can’t accept payments without them and you’re trusting them with all of your funds. Find one you can trust. One that offers competitive pricing with a lifetime rate lock and excellent customer service and stick with them. Technology changes and improves and you will want to keep your relevant. As the payments landscape evolves, they will be the ones to keep you on top of the game. 

It’s our goal to bring integrity to the credit card processing industry. We use interchange-plus pricing because we believe it is truly the most transparent pricing. We strive to be truthful with our clients about their processing options and rates. This allows us to provide the most competitive and dependable solutions for our clients.

All of our advisors are certified by the ETA, a designation rare in our industry. Holding ETA certification shows they’ve dedicated themselves to achieving the highest industry education. In addition, they’re committed to abiding by the Association’s Code of Conduct, professionalism and personal integrity. 

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