Doctor, how much are you paying in merchant processing fees every year?
Too much, probably.
By Billy Parra, Select Merchant Solutions
You have to accept credit cards at your business. That is a reality. What you don’t have to do is accept bad merchant processing fees. In this article we’ll discuss how to get the best rate on your processing fees and, just as importantly, how to keep them low.
Merchant processing is an unregulated business. Any person or company can become a merchant processor, which can lead to unsavory and unfair business tactics. Knowing this, how do you negotiate and get a fair rate?
First, let’s discuss who gets the money from the fees you are charged as a merchant.
There are three companies that make money on every credit card used by your customers.
- The bank that issues the credit card. They get about 90% of the fees. This is called Interchange Rates. There are over 600 different Interchange Rates.
- Visa, MasterCard, Discover and Amex all get a piece of every transaction.
- Fees added by the processor. This is the only negotiable fee. The processor is the company that sets your rate above cost, ie the Interchange Rate.
Now, let’s discuss what types of processing fee programs are available. The two most popular merchant processing programs are:
- Tiered pricing
- Interchange Pass Through pricing.
Which one is better for the merchant?
Unfortunately, Tiered pricing, also known as bucket or bundled pricing, is the most common pricing model offered. It is popular because it seems easy to understand for the merchant. Tiered pricing takes the hundreds of processing rates available and puts them into 3 basic tiers: Qualified, Mid-qualified and Non-Qualified. The percentage rate of each tier is set by the processor. The different types of charge cards available, all with different Interchange Rates, are put into one of the three tiers at the discretion of the processor. Card present and card not present transactions are put into different tiers.
Tiered pricing is easy for the merchant to understand since it puts all the different credit cards and how they are rung up into three basic tiers. This allows the processor to place a card with an Interchange rate of 1.59% into a Mid-Qualified tier of 2.25%, or a card that has a rate of 1.95% into a 2.85% Non-Qualified tier. This makes the actual fees higher than they should be, and also allows the processor to run a deceptive marketing sales tactic. They will advertise Qualified rates at a very low percentage, but they will place most cards in the Mid- or Non-Qualified tier.
Below are some examples of Tiered pricing merchant statements.
Interchange Pass Through pricing shows the actual Interchange Rate of the type of card and how it is rung up. It also shows the fees that go to the card brands (Visa, etc). It then shows the consistent discount rate that the processor is charging the merchant. It is a harder statement to read but the rates are ultimately lower than Tiered.
There are different Interchange rates for debit, credit, rewards, business, corporate, gift and other credit cards. There are also different rates for how they are rung up: card present swiped or card not present keyed. The card brand fees are a small percentage, but they do get a piece of every transaction. The discount rate the processor adds is their profit. A good discount rate is 0.10% and $0.10 per transaction over Interchange.
Here are some examples of Interchange Pass Through statements.
The top example shows the discount rate and the bottom one shows the actual Interchange Rate for the cards used by the merchant’s customer.
What is your real All-In Rate?
You are already using credit cards at your business and you think your rates are going up. How do you calculate your All-In Rate?
Take your total fees for one month and divide them into your total credit card sales for that month. (Total fees/Total sales volume = All-In-Rate.)
For example: $800 in fees/$30,000 in sales = 2.67%
If your All-In Rate is over 1.9%, you should have a merchant processing company do a rate analysis of a recent merchant statement. Our average All-In-Rate for the thousands of customers we have is 1.7%.
Let’s look at the potential savings over the course of a year using the 2.67% All-In-Rate above with our customers’ average All-In Rate of 1.7%. We are assuming annual credit card sales of $360,000 in each case.
All In Rate of 2.67%: Annual Fees = $9,600
All In Rate of 1.7%: Annual Fees = $6,120
Savings to you over 12 months = $3,480!
What else can you do to keep your All-In Rate low?
- Demand free equipment. Do not rent or lease equipment.
- Get in writing that the processor will never raise or pad the discount rate above cost they are charging you.
- Negotiate so that you can cancel your contract at any time without fees or penalties.
Send our company, www.selectmerchantsolutions.com a recent merchant statement so we can do a rate analysis. We never raise the rate above cost we quote. We offer free equipment. We also allow our customers to cancel the contract at any time without fee or penalties.
Director of Sales