My Credit Card Processor Raised My Rates – Now What?
Your monthly credit card processing statement arrives in the mail, and your merchant services provider has raised your rates. What can you do?
In this article, we cover the different types of price increases, including which ones are avoidable, and how you can stop them.
Types of Price Increases
When your processing fees go up, it could be because Visa and Mastercard have raised interchange rates OR your processor raised their rates OR both. When Visa and Mastercard raise interchange rates, there’s nothing you (or your processor) can do to lower them. However, processor rate increases are avoidable.
Determine the Source of the Increase
In credit card processing, an increase can be the result of a few different things, some of which are in your processors control and some of which are not. You’ll need to first determine if the increase was your processor’s doing, or Visa and Mastercard’s doing.
Visa and Mastercard may increase interchange rates or assessment fees. If they do, there’s nothing your processor can do to lower those fees. However, your processor could add to it, making it a greater increase than necessary.
If Visa and Mastercard raise interchange fees, you’ll need to confirm that you’re receiving the increases at cost, without additional charges.
To do that, you can compare your interchange rates from your recent monthly statement to Visa’s and Mastercard’s published interchange rates.
Keep in mind that there’s no standardization to interchange category descriptions in processing statements. What Visa or Mastercard call an interchange category might not be how your processor lists it on your statement. So do not hesitate to contact them and ask direct questions about any concerns or discrepancies that you see.
Is it true that my processor didn’t raise the rates, Visa and Mastercard did?
Processors may tell you that your processing costs went up because Visa and Mastercard raised pricing.
This is sometimes the case, but not always. Keep in mind that your processor will include notices about price icnreases on your monthly statement.
In some cases, the notice will simply state an impending rate change. In other cases, it may list the interchange categories and rates that changed.
For example, here’s a statement that lists interchange rate increases from the card brands that occurred in October 2019. (Statement has been enlarged, not all categories shown.)
However, even when Visa and Mastercard do raise rates, processors may raise your pricing MORE THAN Visa / Mastercard did.
To understand how that happens, it’s important to understand the different rates and fees that make up your total processing cost.
Parts of Processing Fees
We’ve covered the components of processing costs thoroughly in a previous blog post - credit card processing rates and fees
Interchange: Typically, the largest part of processing costs. Interchange fees go to the banks that issue cards to your customers.
Assessments: Fees that go to the card brands (Visa, Mastercard) themselves.
Markup: The rates and fees that go to your processor.
When your processor charges you for processing, it includes all three of these components in one way or another. It may list them separately or bundle them together, but all three pieces are always part of the total cost.
There are hundreds of different interchange “categories” but the rates are almost always a percentage and a cents fee. (E.g. 1.65% + $0.10.) Several assessments can apply to a single transaction. Assessments include both percentages and cents fees.
Your processor doesn’t control interchange or assessments. If Visa decides to raise its interchange fees, your processor can’t do anything about that. The processor will pass along the fee increase to you.
The processor only controls their markup, which is in addition to interchange and assessments. They can charge a percentage, cents fees, monthly fees, or some combination.
So, when Visa or Mastercard raise the interchange rates or assessment fees, your costs do go up and your processor doesn’t control that. However, what the processor does control is whether it passes the increase to you at cost or if it “pads” the fee.
Additionally, your processor can raise your markup or "discount fee" at any point even when Visa and Mastercard don’t raise their interchange rates.
Let’s take a look at how price increases happen on different pricing models.
Interchange Plus Price Increases
On interchange plus pricing, the processor will pass along the interchange cost and the assessments, adding their markup on top of that. Because of this, interchange plus monthly statements are often long and look confusing, but it’s the most transparent way to show your processing charges.
With this type of pricing, you can see which interchange categories applied, and the costs you were charged for those categories.
Legitimate Interchange Rate Increases vs. Padded Interchange
With true pass-through interchange plus pricing, your processor will charge you the “true” cost of interchange and assessments. If you were to compare your interchange charges from a monthly statement to the published interchange charges, they would match.
If Visa or Mastercard raise interchange rates, those new rates will be reflected in their published interchange tables.
However, if the interchange rates don’t match your monthly statement’s interchange charges, your processor is “padding” the interchange fees set by Visa and Mastercard. That’s one way a processor can raise your rates while pretending the cost is out of their control.
Remember, payment processors can’t lower the interchange rates, but they can raise them.
Let’s look at this example:
Visa’s rate for a basic consumer credit card is 1.65% + 10 cents per transaction. If this interchange category is listed on your monthly statement with higher percentages or cents than that, the processor padded the interchange fee.
It can be tricky to spot this sort of thing on your own. If you suspect your processor is padding interchange, I’d strongly suggest confirming it with an expert and then switching processors.
Tiered Price Increases
Also called “bundled” pricing, tiered pricing is a model in which processors create “tiers” and then route different transactions to different tiers. A common bundled pricing model uses three tiers – called Qualified, Mid-Qualified, and Non-Qualified – but processors can use more or fewer tiers at their discretion.
The processor will apply a rate to each tier. Then, the processor will charge multiple interchange categories under one of their tiers. This means that the interchange rates that Visa and Mastercard set are essentially irrelevant to you, in a bad way.
If Visa’s interchange rate for a particular card is 1.65%, but your processor decides to route it to a tier that it sets at 2.25%, you pay the 2.25%, not 1.65%.
Additionally, processors can change which transactions route to which tier, and they can adjust the rates for each tier as often as they like.
When it comes to rate increases, if you’re on tiered pricing, it’s going to be a neverending shell game. Rather than trying to find out where the increase came from and if it can be reversed, you’ll save yourself time (and money) by switching to a more competitive processor.
Flat Rate Price Increases
Technically, flat rate pricing is a form of tiered pricing, but for the purposes of rate increases, it’s different enough to warrant its own section.
Flat rate pricing is the kind offered by companies like Square. There’s one rate for swiped transactions and one rate for keyed transactions. With flat rate, all three components of cost (interchange, assessments, and markup) are lumped together.
There’s no way to determine what portion is paying interchange, what portion is paying assessments, and what portion goes to markup.
This also means that it’s impossible to separate interchange price increases or markup price increases. Flat rate processing statements don’t show interchange detail, meaning you won’t know which interchange categories applied to your transactions.
Since the costs are lumped together, only the processing company knows how much they make vs. how much goes to interchange and assessments.
Ending Price Increases
You can’t completely eliminate increases in processing costs. When Visa and Mastercard raise rates, your costs will go up. However, what you CAN do is make sure that your costs only go up as much as Visa and Mastercard say. In other words, you can eliminate the unnecessary increases.
How? Secure True Cost-Plus Pricing and a lifetime rate lock.
To find out how much money your business could be saving in processing fees each month, contact us today for a no-obligation FREE rate quote.
Visit us online at www.TailoredTransactions.com or call us direct at (888) 669.1686