Have you ever picked up your business mail, opened your merchant services statement and just screamed at the top of your lungs? Don’t feel bad, so many business owners are confused by their merchant services statements that they truly have no idea what accepting credit cards is costing them! In this article we compare the 2 most common billing methods to discover not only what the true cost of your processing is but to help your business get a better value from its merchant services.
Previously we discussed what exactly is the bottom line cost to process a credit card transaction in our article on What is Interchange? Now that we know where interchange comes from and that anyone who wants to accept credit cards must pay it, how do you know if you are getting a good deal from your merchant services provider?
The first step is to know what billing method your merchant services provider is using to bill you for processing credit card transactions. I know, you are wondering why you should care about how you are being billed – you just want to know what your rates are and if you are getting a fair shake – right? Wrong, but we will get back to that in a minute. Before we look at the 2 most common billing methods let’s list the billing methods that are 100% unacceptable for your business as they were designed for one thing and one thing only – to increase the profit margins of your processor! If you are being billed in any of the follow methods or see the abbreviations on your merchant services statement it is time to start shopping for a new processor:
- Bill Back (BB)
- Enhanced Bill Back (EBB)
- Enhanced Reduced Recovery (ERR)
- Enhanced Interchange Plus
- Blended Rate
- Mixed Rate
Now that we got that out of the way let’s compare the two most common processing methods used today so that you can figure out the true cost of your merchant services and make sure you are getting a fair deal.
Since it is the most used billing method in the country let’s look at Tiered Pricing first.
With a tiered pricing structure your rates are clumped into 3-5 categories and billed in tiers. For instance:
Qualified 1.69% and $0.10
Mid Qualified 2.25% and $0.10
Non Qualified 3.35% and $0.10
Sounds simple right? Well, remember when we discussed where interchange comes from? and the fact that every processor in the country has the exact same bottom line cost – which is Interchange? Since each card issuing bank gets to set their rate for an issued card and then the interchange table takes into consideration the processing method there are literally hundreds upon hundreds of interchange rates. For instance, at the rates above you may think that you are getting a good deal, however, assuming an average distribution of card types to tiers your processor would be making a profit between 0.18% and 1.64% and $0.10 on every transaction!
Additionally, when you are billed on a tiered rate structure each merchant service provider is given the right to choose which interchange categories fall into which tier. Here is where is gets really convoluted! Because you could have 2 apparently identical proposals, however, your net effective rate with one may be 30% more expensive than another because they have so greatly limited the number of interchange categories that can be considered “qualified” – This makes it very easy to hide rates and impossible to compare one tiered proposal to another! On some transactions you could be paying your service provider as much as 1.6% or more while on others you may be paying .33% more…. Most merchants that are set up with a tiered billing method are paying 50 basis points above interchange!
Now let’s compare that to Interchange Plus pricing.
True interchange Plus pricing is exactly that. Every transaction’s true interchange cost is passed through to you plus the service provider’s mark up. This way you know exactly what the true cost of your merchant services is.
To exemplify, just imagine how nice it would be if you were able to purchase a car in the same manner! You would walk onto the lot, point at the car you like, and be handed the REAL invoice from the manufacturer. Then you would simply look at the dealer’s policy to see what their fixed markup is, say $500, whether the car costs $10,000 or $100,000. This way you get to know exactly what the dealer is making and decide for yourself if you think it is a fair deal! True interchange plus pricing is exactly that.
Lets look as 2 examples If your merchant service provider is charging you IC plus 25 basis points and $0.10/transaction your cost for a $20 purchase would be like this:
Regulated Check Card:
Interchange 0.05% & $0.21 per transaction = $0.22
Your Cost 0.30% & $0.31 per transaction = $0.37
Compared to a “qualified rate” of 1.69% and $0.25 = $0.59 OR about 59% More!
Interchange 2.40% and $0.10 per transaction = $0.58
Your Cost 2.65% and $0.20 per transaction = $0.73
Compared to the Non-Qualified Rate of 3.35% and $0.25 = $0.92 OR about 26% More!
As you can see – since there is no negotiating on the cost of interchange – insisting on true interchange plus allows you to know exactly what the cost of your payment processing is. The reality it is the only billing method which is transparent and should be insisted upon. Not only is true interchange plus pricing the only transparent billing method for your merchant services but it is also the only format that actually allows business owners to make educated decisions when selecting a credit card processing service. So if you are shopping for a new merchant service provider insist that they provide you a quote in Interchange Plus format and be very clear that you are demanding true interchange pass through. Most standard merchants that are on Interchange Plus pricing pay an average of 30 basis points above interchange.
Although, interchange Plus pricing is not necessarily a silver bullet, some service providers will pad interchange with a few extra basis points and pass it through to you at the exaggerated rate and calling it “cost plus” or “interchange cost plus” to cover some of their overhead or just to appear more competitive. This practice is relatively easy to check by cross referencing your bill with the interchange tables. However, the interchange tables can be complex to read and identify so if you would like your statement analyzed for you simply contact us at Bankcard Brokers and we would be happy to provide you with a no bull, no pressure analysis of your current merchant services!