The following information will take the mystery out of credit card processing!
Everyone involved earns a portion of the fee that is paid by the merchant. Most of the fee is collected by the card issuing bank, the payment brands and then the acquiring bank makes a very small portion.
1. The CARD ISSUING BANK this is the bank that issued the credit card. Example Chase Bank®, Wells Fargo® or Bank Of America®
2. The ACQUIRING BANK is the processor that communicates to receive an authorization on a credit card.
3. The PAYMENT BRANDS are Visa®, MasterCard®, Discover® and Amex®.
Interchange Plus Pricing vs. Tiered Pricing
When a potential new customer calls in, nine times out of ten the first question they will ask is, “What are your processing rates”? Most people just want to know what are the rates and they don't consider all of the other factors that are important when it comes to shopping for a merchant account.
Throughout the industry it is common to find merchant service providers advertising flat percentage rates for tiered pricing. In fact, I see television commercials or come across websites that have flat rates advertised without the company having any information about the merchant, products and or services being sold and the type of business. Something else I have noticed, is that I have yet to find a merchant service provider that addresses interchange pricing.
What is interchange pricing and why is it important?
First, it is critical that we understand how the industry is structured and operates. Visa® and MasterCard® are organization(s) or conglomerate of banks. These banks get together and decide what interchange is going to be based on the type of credit cards that are being used in the market. For example, consumer credit cards, debit cards, rewards cards, corporate credit cards, etc. all have different rates associated with them. The second factor is how the credit card is processed or performed. For example, is the card swiped through a machine in a retail location? Is the card number keyed into the machine or keyed in through the internet? Is the business a retail or internet merchant? All of these issues affect the rate the merchant will pay when it comes to processing the credit card.
The card issuing bank now comes into play because the banks set up interchange rate charts that are tied to the customer's credit card. So, when the transaction is performed a rate applies to that card. Now is where the issue of a flat tiered rate or interchange pricing comes into play. If a merchant is setup on a flat tiered rate plan, the transaction defaults into one of three tiers. If the merchant account is *setup under interchange pricing then the merchant pays a pre-determined amount above the rate tied to that credit card.
Here are links to download the interchange charts from Visa® and MasterCard®.
What happens to your rates over time?
Both Visa® and MasterCard® adjust rates twice a year. Every spring and fall these go into effect. Now this is what the processors love because it gives them a reason to raise your rates and make more profit on your account. Typically when rates are adjusted some rates increase and some actually decrease, however if you're setup on a tiered program you won’t ever see your rates decrease because the processor will keep the difference as profit. Frequently new interchange levels are added by Visa® and MasterCard®. So let's say you have 30 interchange levels that are getting billed at the qualified rate and Visa, MasterCard either increases one rate or adds a new interchange. What happens is most processors will raise the entire tier on the merchant to compensate for the increase even though maybe only 5% of your transactions would be affected by this increase or new interchange level. So every 6 months you will notice that your rates will be increased. When you have an Interchange Plus program you will always pay the exact interchange level cost. So you know the processor isn’t making anything extra on your account and if a rate decreases that saving will be passed to you as well. This is a much cleaner way to do business without hiding information from you as a merchant. Most agents don’t even know how Interchange Plus pricing works, therefore they sell you what is easiest or what they can make the most money because that is what they are taught by the processor.
How do I know if I am being charged a tiered rate?
The easiest way to tell is that the agents will use terms such qualified rate, mid-qualified rate or non-qualified rate. Here is how those rates are generally determined:
Qualified Rate – A swiped card in a retail location.
Mid-Qualified Rate – A rewards cards, keyed in transaction with address verification.
Non-Qualified Rate – A keyed in transaction without address verification, a commercial credit card or a foreign issued credit card.
What happens with a tiered pricing program is that there are essentially three pricing buckets and each bucket will get 30 or more interchange rates bundled into a specific tier. Regardless of the interchange level that applies to the credit card, it will default to the next highest level so that the processing bank does not lose money on a transaction. So, a rewards card has a higher interchange rate than a debit card. No matter how the transaction is processed, the rewards card automatically defaults to the Mid-Qualified rate even if it was a swiped transaction causing the merchant to pay a higher fee. The merchant will not typically know that this is the case because the monthly statement usually does not list this level of detail. These statements tend to hide the fees through inconsistent categories, surcharges, past posting and hidden costs.
With Interchange Plus pricing, the merchant will get charged the actual interchange rate plus the mark-up margin. For example, if a merchant pays 25 basis points above interchange and they process $10,000.00 at a particular interchange level, then the merchant knows they are paying $25.00 in actual credit card processing fees. Additionally, the monthly statement will contain these transparent details. As a business owner, you can forecast and budget for the amount of the actual fees and price your products and/or services accordingly.
This presents an opportunity to the business owner to educate themselves as to how certain transactions are processed and why. If certain transactions are not being processed correctly to take advantage of the best rate, then a business owner can teach their employees how to do it correctly to save on fees. This takes more time and energy on the front-end, but it can literally save you thousands of dollars in processing fees.
This is the way that large merchants have had their credit card processing fees assessed for many years. Now, it is possible for small to mid sized merchants to take advantage of this pricing as well. GDpay is a company that is leading the way in educating business owners about interchange pricing and how it can benefit their bottom line. Contact an agent at GDpay for more information today!
The way a merchant processes customer returns has a huge impact on the amount of fees a merchant pays. So many times I speak with merchants and they never ask what happens if a client returns the merchandise. Well, in our society it is impossible to do business without accepting returns. So, what is the best way to process a return?
The amount that a merchant processes on credit cards will have an impact on the best way to process returns. For example, if you process $50,000 a month or more you may qualify for a program called Net Billing. If you process less, there are other “methods of the trade” that you can implement to save your company money.
Gross vs. Net Billing
When a merchant is on a tiered pricing program and when a customer buys a product in a particular month the merchant will be charged the fee for the transaction in the same month. Now the customer returns the product in the following month and the merchant is charged the same fee to credit the customer's card. So, if the tiered price level is a 2% charge, the merchant is charged 4% on the transaction totals and no merchandise was sold. If a merchant is processing $50,000 a month or more, they can be put on Net Billing which means that they are not charged to credit the customer's credit card and they will receive a credit for the fees associated with the initial transaction. Just by adding Net Billing, a merchant can save thousands of dollars on these types of transactions.
There are eligibility requirements for Net Billing and the monthly processing amount. So, I encourage you to speak to an agent about your specific situation for all of the details. It is imperative that you understand the most cost effective ways to process returns and to train your staff appropriately. This can result in large savings over time.
The first thing you need to make sure of is that your transactions are face to face. Note that certain processors setup the PIN Debit pricing differently. Some charge the interchange rate and a transaction fee and other just charge a flat transaction fee. Click here for the Pin Debit Transaction costs Visa Debit Interchange. If your processor has you setup with the interchange rate and a transaction fee you need to make sure the transaction fee isn’t higher than running the debit card without the PIN on a regular credit card network. If you are billed ONLY a transaction fee then your average ticket size needs to be at least $35.00. The higher your average ticket size the more money you will save because no percentage is paid to run the transaction. Some processors even charge additional monthly access fees when setting up PIN debit. I recommend going with a vendor that will give you a FLAT transaction fee with NO additional monthly fees.
Your employees will have to ask each customer if the transaction is credit or debit which takes extra time when checking out. So if SPEED is a concern then PIN Debit might not be for your business. If you already have existing equipment then most of the time you can just add an encrypted PIN pad to the pin port in the back of the terminal. Some of the equipment has an internal PIN pad built in the machine. In this case you will need to send your equipment to the processor to get encrypted.
The reason why debit transactions cost less to process is because the cash is in the bank to cover the transaction. Also once the PIN is entered on a transaction the risk goes from the card issuing bank to the customer. So if a customer demands his money back it’s fully up to the merchant if they decide to process a refund. Credit cards fall under the credit card association rules and regulations and the card issuing bank decides if a transaction amount is given back to the customer. This is also called a chargeback. I will be going more in depth on this subject. Here is a link to Visa’s® Rules and Regulations Click Here. The rules book is over 350 pages so I will go over some basic information.
In the credit card processing industry, there are numerous companies offering free equipment with a credit card processing account. At first glance, this sounds like a great deal. But, is it really?
I think it is safe to say, that we have all heard of offers for free merchandise. Then, if you read the fine print, you quickly realize that nothing is free. So, how can credit card processing companies offer free equipment to potential clients? It is actually quite simple. They make up the cost of the equipment by charging higher rates. Essentially what happens is that either a particular type of credit card will automatically default to a higher tier or the way the card is processed will default to the higher tier, so that the processor can make up the cost of the equipment. There are also batch fees, annual fees, statement fees or other potential fees that can apply to reimburse the processing company for the “free” equipment. Now, I am not saying that some of these fees are not legitimate. It is important to pay attention to the amount that you are being charged for fees and to realize that they may be padded to cover the cost of your equipment.
A merchant should pay between $150.00 to $550.00 for a terminal depending on the machine's features. However, keep in mind that technology is continually changing and there are many options for processing credit cards using your existing computers and the internet. I recommend working with your processing company to understand the options they offer and how those fit with your business needs.
If the processing company charges higher than average fees and rates to reimburse the “free” equipment, eventually the merchant pays for the so-called “free” equipment within a short time frame. In fact, on average a processor will make up the cost of the equipment within the first six months of setting up the account. Everything after that is profit to the processor. The increased fees and rates are charged month after month until the contract changes or the merchant changes processing companies. This can result in a merchant paying many times over for the equipment that was initially provided at no cost.
It is in the business owner's best interests to analyze the big picture. If you plan on being in business for longer than six months, my suggestion is to buy your equipment wholesale from a reputable company and have that company set up your account independent of the equipment costs.
Another question is... What happens if you want to keep the equipment and change processors? Well, all free equipment contains a proprietary chip. If you decide to change processors, the equipment cannot be re-programmed forcing you to replace the existing equipment with a programmable one. So, you are better off not to even entertain the idea of so called “free” equipment. Also, if you cancel the contract to change processors, I have seen some cancellation fees exceed the cost of the equipment by five times!
You might be wondering if this same scenario applies to leasing equipment. As I stated, a terminal should run between $150.00 to $550.00 depending on the features you require. If a merchant leases the machine for 36 or 48 months, the same piece of equipment can eventually cost the merchant several thousands of dollars. If you analyze the contract and the lease costs, I believe that you will agree that it is in your best interests to buy the equipment outright everytime.
Leasing Equipment
Sales people love to lease equipment. Why? Because it pays huge commissions and then they are off to the next sale. I have heard so many stories of merchants getting locked into a 48 month lease paying $50.00 per month. Do the math: thats $2400.00 for a piece of equipment that could cost just a couple hundred dollars. Also at the end of each lease is a buyout which equals about another 10% of the total lease purchase. If the merchant is on a 48 month lease and never contacts the lease company to exercise the buyout then the lease company will just keep charging the merchant forever without notification.
Another trick is the sales representative says that you don’t want to buy your own equipment because if the machine breaks then it will be worthless, but if you lease your equipment it is under full warranty. The reality is no matter if you lease your equipment or buy you still risk that the equipment can break. However you can send it in for repair and it usually cost under $100.00. Plus most equipment lasts around 5 years with no problems. For the cost of the lease you can buy ten machines and keep the other nine for backup.
Another misconception I hear all the time is: YOUR equipment isn’t PCI compliant (Payment Card Industry Compliance). 99% of the time your equipment is just fine, but the sales representative is desperate for his next fat commission.
In either scenario, it is always more cost effective for the merchant to buy the equipment up front. Then work with the processing company to setup an account independent of the equipment costs. By owning your equipment, you have more options to choose the processing company and account type that fits your business needs. I will remind you that it is always important to review your contract in depth before you sign up for an account or make any decisions to change processing companies.
SOLUTIONS
-Retail
-Restaurant
-Lodging
-Petroleum
-Mobile
-eCommerce
-Business To Business
-Recurring Payments
-Retail
-Restaurant
-Lodging
-Petroleum
-Mobile
-eCommerce
-Business To Business
-Recurring Payments
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