Understand Credit Card Processing Rates – Watch Out for Hidden Fees and Sudden Changes
I’m sure you’ve been there. You open your monthly credit card processing statement and almost faint when you see how much you’re being charged. Shocker! Your credit card processing company has raised your rates! Again. When did that happen? Likely there was a brief message on the bottom of your last statement notifying you they were raising their rates but here it is: because you don’t understand credit card processing rates, you are open for being grossly overcharged.
This is all too common. Some credit card processing companies will raise clients’ rates each year and most don’t even realize it. Often the rate the salesman quotes you will only be for the first year. They move on to signing new accounts and leave you in the capable hands of the bank you’re processing with. First, it is very common for banks to increase a merchant’s rates after the first year. And banks can increase fees as well as create new ones anytime they want. Especially if you don’t get a rate lock guarantee.
But don’t worry. Many fees are negotiable and (some) rate increases are one of those things you don’t have to accept. Before we can talk about what to do when your processor raises your rates, it’s good to understand where the rates come from.
Your rates will include three types of fees: The Interchange Rate fees, Assessments, and Processing Fees and assessments.
Understanding Payment Processing Rates – Interchange, Interchange Plus
Interchange Rate fees will account for a majority of your processing costs. Interchange is set by the major card brands and passed through to you by your processor. These fees go to the banks that issue cards such as Wells Fargo, US Bank, and Chase. These fees are non-negotiable.
Then you will have assessments- these fees go to the card brands (Visa, MasterCard, Discover Amex). They are also non-negotiable.
Finally, you have the mark-up and processing fees. These are the fees over and above the base fees that your processor charges you for processing. These are all the fees that are negotiable.
It’s important to know whether your rate increase is a result of an Interchange rate increase or your processor raising your rates.
The card associations review their fee schedule twice a year- in April and October. If they decide to increase rates, they will make a statement and notify merchants of the effective date. Rates were set to increase in April of this year, but due to Covid-19, the card brands decided to postpone the increases until 2021. So if you experienced a rate increase recently, it can’t be blamed on the Interchange rates.
On the other hand, that means your rates will go up next year since your credit card processing company will be passing these increases on to you. Now is the perfect time to review your rates to see where you can lower them. That way when the Interchange rate increase goes into effect, it won’t be such a hard blow.
Understand Credit Card Processing Rate Increases
If you just got a rate increase, your rates are most likely higher than they need to be. It’s highly unlikely a processor booked your account at such rock-bottom rates that they’re losing money. So, given that they were making a profit already, they are raising your rates to increase their profits.
Unless, of course, there was an increase to Interchange, which we know we can’t do anything about. You should be able to negotiate Interchange-Plus pricing with a lifetime rate lock.
Credit Card Processing – True Costs, Effective Rate
The only way to know your true cost of credit card processing and understand credit card processing rates is to calculate your Effective Rate. Every processor’s rates and fees are different. Comparing quotes is like comparing apples to oranges. They can quote you a low rate with high per-transaction fees and assessments that increase overall costs. Or, you can get a quote with a higher percentage rate but low per-transaction fees and assessments. The quote that seemed high based on the rate could effectively cost less than the first quote.
Calculating the effective rate is the only way to know your true costs. To calculate your effective rate, divide the total of all of your monthly fees by your total sales volume. This will give you the true percentage rate your processing is costing you.
What is Tiered Pricing?
If you’re still processing under a Tiered pricing model, it’s time for you to look for a new processor. Tiered pricing has many variables and is difficult to figure out. Only the processor really knows how they are charging you. It is also very easy for processors to hide extra fees and charges within the tiers.
With this pricing model, the processor will group card brands into separate tiers or “levels”. Instead of charging the interchange rate that goes with each specific card type, cards fall into one of the tiers. There are generally 3 tiers, with the first being the cheapest and the third being the most expensive. They often refer these to as qualified, mid-qualified, and non-qualified. The processor then sets a rate for each tier. Every card that falls into that tier will assess the rate for that tier, regardless of the actual rate for that card.
The problem is that the processor decides which cards fall into each tier. So that means that they can charge you 2.25% for a card that is 1.65%. And the processor can decide to “downgrade” a transaction that would be “qualified” to the mid-qualified tier. This means you will pay an even higher rate. So they decide the rate, and they decide which cards fall under each rate. Therefore, it’s very hard to know what you’re being charged and where you’re paying too much.
Tiered Pricing Exceptions
The exception: there are a few situations where a very high-risk business can only process payments through a bank that specializes in high-risk merchant accounts. Sometimes those banks do not offer interchange-plus pricing and they will book the merchant on the Tiered Pricing model. In these instances, it’s very important to work with an experienced high-risk merchant account provider known for their integrity.
Choose Interchange-Plus Pricing
Insist that your credit card processing rate is based on the Interchange-Plus pricing model. And that your processor bases your pricing on “true” published interchange rates. Visa and Mastercard publish their interchange rates on their website publicly. Currently, Amex and Discover do not publish their interchange fees for the public to see. However, if your processor is giving you a published rate for Visa, then they likely are for all of the card brands.
With this pricing model, the provider will add their mark-up and pass through the base interchange costs, and the assessment fees. You will see exactly what the interchange rate is for each card type and the percentage + per-transaction fee the processor is charging. It will be easy for you to see exactly what your processor is charging you. For this reason, Interchange-Plus is considered the most transparent pricing model.
Merchants can’t just take this for face value, however. Notice we said “true” published interchange? That’s because processors can charge you whatever they want. Some processors will pad the base interchange rate for each card type when they list interchange rates on your statement. For example, let’s say the interchange rate for a basic credit card is 1.65% + 0.10 per transaction. But when you look at your statement, this category is listed at 1.70% + 0.10 per transaction. The processor is padding the interchange rate on top of charging their mark-up.
When you insist on interchange-plus pricing based on “true” published interchange, you know what you’re being charged, and that there are no hidden mark-ups.
How to Lower Your Credit Card Processing Rates
Once you’ve negotiated a fair rate in your interchange-plus pricing, it’s time to take a look at all the other assessments. Remember, almost all fees are negotiable and others are simply avoidable.
Penalty fees are of the avoidable type. Processors can charge a penalty if the merchant is not doing something properly. Merchant must follow a protocol for authorization and settlement of transactions. Merchants must also complete their PCI Compliance for security protocols. If either of these is not done, they can charge a penalty. The best way to avoid penalties is to follow protocol.
If a lot of your transactions are being flagged for “protocol” it’s in your best interest to find out the cause. Not just to avoid penalties, but to avoid potential fraud as well.
Processing statements are pretty complicated even for seasoned merchant account providers to read. So obviously it’s pretty confusing for the merchant. You’d be hard-pressed to find a merchant that reads their entire statement and understands every single charge listed on it. Unfortunately, this makes it easy for some processors to hide extra fees and assessments.
There are some fees that must be charged to cover the costs of doing business. But they shouldn’t be excessive, and the processor shouldn’t double-dip. By that, we are referring to fees where you would pay one or the other, but not both.
The important thing to keep in mind is that all these fees are negotiable. You might not eliminate the fees entirely, but you can drive them down to a fair price.
Annual, Statement and Monthly Fees
Common cost-of-business fees include an annual fee, a monthly fee, and a statement fee. Banks charge an annual fee for each account. Your merchant account provider passes this on to you either as an annual fee or by breaking it up monthly. Make sure you pay either an annual fee or a monthly fee. They should not be charging you both.
Most processors will charge the merchant for preparing their monthly statements. Usually, merchants can access statements online for free but will pay a fee to have paper statements.
ETF – Early Termination Fees
First of all, we would never recommend a merchant sign a contract with a credit card processing company. The only time you’d pay an ETF is if you had signed a contract. Most reputable credit card processing companies won’t require a contract. Why would they need to? If they’re offering you a fair deal, they won’t be afraid you’ll leave.
But, if you do sign a contract… Not all terms will include an early termination fee, but if they do, it shouldn’t be an extreme penalty. If the terms include an ETF, it should be under $300. This isn’t supposed to be used as a tactic to scare you into staying.
What are Batch Fees?
Almost all merchant account providers will charge a fee for batching out their sales at the end of the day. This is not necessarily an obligation. It depends on the merchant and the type of business if there should be a batch charge. It may not be cost effective for merchants to pay a fee every time they send a batch.
Customer Service Fees
Absolutely do not stand for paying a fee for customer service. This should be an inherent right. Besides, you are already paying a monthly or annual fee for using their “service”. You should be able to negotiate this fee right out of the quote. But if they’re asking for this, how much can you trust them, anyway?
One more thing to keep in mind…
If you want to have more control over your business costs for accepting credit cards, it’s important to understand your rates. Your goal is to negotiate the best rates for you at a fair price for your processor. But to do this, you need to know how they are making their profits. Remember, many of these fees are not written in stone. The salesman trying to board your account will work them into his quote because it adds to his profit margin.
On the other hand, you don’t want to sacrifice expertise, quick funding, and customer service for a rock bottom rate. Merchants need to consider the whole picture to find the right combination of price and service value.
When your credit card processing company raises your rates, keep calm and shop on.
Yes, you can negotiate with your processor to lower or eliminate a proposed rate increase. You can also negotiate your current rates. That’s because banks want to keep your business. They will often lower your rates if you come to them with a lower quote from a different processor.
Most merchants are super happy they got their bank to lower their rates. This is because they view changing credit card processors as a headache they don’t have time for.
But why would a merchant want to stay? They overcharge you for possibly years and only lower rates when they’re forced to or risk losing your account. And you reward them by continuing to process with them?