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Understanding Your Processing Rates & Fees

When discussing pricing with your merchant services provider, or when shopping around for better pricing, it's important to understand the differences in the rates and fees that you see listed on your monthly statement.

Every credit card transaction has three main cost components: interchange, assessments, and processor markup.

Interchange (which goes to the banks that issue credit cards) is the same for every processor and is non-negotiable. Interchange rates and fees make up the largest portion of your overall monthly processing costs -- nearly 80%.

The card issuers; Visa, MasterCard and Discover set the interchange rates and fees. Payment processing companies have NO INPUT into what those rates and fees are.

However, there are many different interchange categories which if properly utilized can ensure that your business pays the lowest possible amount in interchange fees each month. i.e., Level 2 and Level 3, Utilities, B2B, Large Ticket etc.

Assessments (which go the card companies like Visa and Mastercard) are also the same for every processor and are non-negotiable. Several assessments can apply to a single transaction, but again, that’s not in your or your processor’s control.

Processor’s markup is the component that the processor can fully control, and it’s the component they’re talking about when they discuss their rates and fees.

To better understand how your processor is applying their markup to your merchant account, you first need to know what pricing model they have your merchant account setup on.

The most commonly used pricing models are Tiered Pricing, Flat Rate Pricing and Interchange Plus Pricing also known as Cost-Plus Pricing.

Tiered Pricing

We’ve written about the pitfalls of tiered pricing, and advise businesses to steer clear. With tiered pricing, the processor will lump various interchange categories into “tiers” and then give you a rate for that “tier.” It’s common to see “qualified,” "mid-qualified" and “non-qualified” tiers.

Tiered “qualified rates” often seem low and are used as "teaser rates" to reel you in. What the processor won't tell you is that the “qualified” rate will only apply to a minimal number of your transactions. Which ones? That’s totally up to your processor.

Tiered pricing is easy for processors to manipulate, which makes it a poor choice for businesses that are looking for transparency and securing the best pricing for their credit card processing.

Flat Rate Pricing

Flat rates are what they sound like – a single fixed rate that doesn’t change based on the card you take. However, a flat rate is not the cheapest credit card processing. Simplicity doesn’t automatically equal inexpensive.

Flat rate pricing can be an option for businesses with low monthly volume or small average transactions. If you only process a few thousand dollars per month in credit card sales, this type of pricing may work okay. This is also the case for small transactions, like coffee or fast food orders.

However, if you accept more than a few thousand dollars per month in cards, and your average transaction is larger than $10.00, a flat rate will not be your best option. Instead, you’ll want to look for competitive Interchange Plus Pricing.

Interchange Plus Pricing aka Cost-Plus Pricing

With Interchange Plus, the processor will pass the costs of interchange and assessments to you, and then charge a separate processor markup. That markup is referred to as the "Plus" in Interchange Plus Pricing.

The lower your markup, the lower your total pricing will be on a true interchange plus pricing model. So the question is, “What’s a good interchange plus markup?” For a very rough rule of thumb, general low-risk retailers could expect rates around 0.25% while online low-risk businesses will likely pay a markup rate around 0.30%

It's important to keep in mind that interchange rates vary depending on your industry, volume, transaction type, etc.

Interchange plus pricing is transparent and has the potential to help you secure the best possible pricing for your merchant services. This pricing model is what we at Tailored Transactions use for most of our clients.

Where Effective Rate Comes In

The effective rate is not a rate that anyone sets. Instead, it’s the percentage you paid when ALL fees are accounted for. It’s calculated by dividing your total fees by the dollar amount processed.

It’s possible to compare “final” rates across different pricing models if you can accurately calculate what’s the effective rate. However, a key warning is that some processors carry fees for one month’s processing across two or even three months, making it difficult to calculate the effective rate without careful statement review.

Many people that already accept credit cards and want to lower their fees make the mistake of comparing their effective rate with a processor’s “rates.” Unless you’re comparing to a flat rate solution, you’ll get inaccurate comparisons doing that.

Tailored Transactions has a partnership mindset with all of our clients. We have the expertise and experience needed to set up your merchant account in the most cost-effective manner possible.

Follow the link below to contact us for a no-obligation Free Rate Quote!

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