The tiered pricing scheme is evil whether being used with a high risk merchant accounts or traditional “retail” merchant account to accept credit cards.  I say it is evil because tiered pricing is designed to deceive and maximize the profits of your payment processor.  Whether your business is a restaurant, an eCommerce business, or a high risk business one of your business’s largest fixed cost can be your merchant account to accept credit cards.   Managing the cost of your merchant services is a necessary evil of owning a business and the most efficient way to manage that cost is to understand how merchant services rates work.

The first question business owners always ask when it comes to shopping for a merchant account provider is also the most irrelevant! Don’t bother asking a merchant account sales representative “What are your rates?” ever again, at least not before you know how they are going to be charging you.  Here’s why.

The easiest way to exemplify why to never ask that question again is to look at an example of a fictitious business model.  Let’s talk about Joe.  Joe owns an eCommerce clothing shop who is not considered to be a high risk merchant account.  Joe opened his merchant services bill yesterday and nearly fainted!  For his month’s sales of $100,000 his merchant account provider charged $4500 – that’s 4.5% of his gross sales!  When he signed up for the account he was told his rate was 1.75%.  How did his rate turn out to be more than double what he was promised?  Simple – Tiered rate processing.  On top of that Joe’s bill might as well have been written in Chinese – he did not understand a single thing except the bottom line!

As it turns out Joe’s merchant services rate did start 1.90% for “Qualified” transactions but he also had to pay 3.25% for “Mid Qualified” and 4.7% for “Non Qualified” transactions.  

Tiered pricing is evil because it is deceptive

Before we dive into Joe’s real rates you first need to understand why there are different rates to begin with – where does the cost of credit card processing come from?

In the merchant services industry the cost of a transaction is referred to as Interchange and no, there are not just 3 card types in Interchange.  There are literally hundreds of card types – each with their own cost of transaction associated. Although there is no need for you to have a comprehensive understanding of interchange – all business owners should have a general comprehension so that they can avoid being taken advantage of.   When a merchant service provider places your business on a “tiered” pricing system, that payment processor is able to take those hundreds of card types and choose which card types fall into which tier based on their interchange cost.  Just let that soak in for a minute…  That means that one merchant account provider offering rates that start at 1.90% could be much more expensive than another processor offering the exact same thing!

Now let’s get back to Joe at 1.90%.  His payment processor chose to only put regulated and unregulated Debit cards into his qualified transactions and “basic” Visa/MasterCard transactions into his Mid Qualified category – meaning that all other transactions fell into the “non qualified” category.  His processor made an average profit of over 1.8%!!!  By being able to choose what card types fell into which tier Joe’s credit card processor was able to mask the amount of profit they were making.

What can you do to protect yourself and your bottom line from deceitful merchant services rate billing methods that place your business at risk?

Simple, do not allow any merchant account sales representative to talk you into tiered, bucket, bill back or any other method.  Insist that you be quoted in true interchange plus pricing and make them give it to in writing that the rates are fixed.  This is only way you will be able to transparently know how much your merchant services is costing you.  With interchange plus pricing you are charged the interchange cost, which is not negotiable and goes to the Card Brands and Card Issuing Banks, plus your merchant services provider fee.  This fee is shown in Basis points above interchange, a small per transaction fee, and generally a monthly fee for statements and/or secure gateways.  

One Basis Point = 0.01% so look at it this way if you are paying 25 basis points above interchange you know exactly what the card brands are making, exactly what the card issuing banks are making, and of course exactly what your payment processor is making.  In this case for every $10,000 in sales volume you do the processor is receiving $25 for their services, compliance, and liability.

When you insist on interchange plus pricing quotes you are empowered with truly being able compare rates and services.

Tricks with interchange plus pricing!

Watch out for high per transaction fees – especially if your average sale is low!  Remember with  Interchange Plus pricing all rates and fees are above what is listed in interchange.  Now in Joe’s case, being an ecommerce merchant, most card types already have an interchange per transaction cost of $0.20 so if a processor tries to slip a an extra $0.20 – $0.25 per transaction on top of that your effective rate (total processing cost divided by your sales volume) can be extremely high!

Watch out for processor assessments!   Visa and MasterCard do charge assessments that are not negotiable, however, many times processors may try and trick you by adding onto them.  Visa and MasterCard Assessments are clearly stated on their websites.

Review your statement every month!  Unless you are working with a reliable merchant services provider like Bankcard Brokers always be on the lookout for changes in your merchant account statement.  Always start by calculating your effective rate – don’t know how?  Give us a call!  If you do and something seems different simply call your processor and have them review it with you.  Additionally pay attention to any announcements at the end or on the back of your merchant services statement – if there are any plans to adjust your rates this is where it will be contained.  Always call about rate adjustments.
If you think you are either paying too much for your merchant services to accept credit cards or just not getting the service your business deserves give Bankcard Brokers a call and one of our certified payment professionals would be happy to review your statements and consult with you.