Credit Card Processing Fees

This is the largest piece of the cost of accepting credit cards that you can control. Interchange fees, Card Mix, and Average Ticket all offer some opportunities to limit your credit card processing costs, but who you choose to trust to share in your business profits is up to you. If you look at your processor as an advisor who makes more money when you make more money it will help you choose the right partner instead of the person with the best sales pitch.

Credit Card Processing Fees are all charges above the mandatory Interchange Fees charged by Visa, Mastercard, Discover Card, and America Express. They can come in three different forms, Interchange Plus Pricing, Tiered Pricing, and Fixed Pricing.

Interchange-plus pricing (also called Pass Through or Cost-Plus Pricing), breaks down the charges going to Visa, Master Card, Discover Card and American Express, allowing you to see the markup your Merchant Services Provider is charging you for processing your transaction. This is the most transparent pricing model, but it also makes your statements harder to read. In most cases, that will be a small price to pay, as interchange-plus pricing rates are usually lower overall than tiered rates.

Tiered pricing is, unfortunately, still the most common pricing model available, and the one most processors offer to their merchants. We don’t like it, and won’t offer it. Tiered pricing simplifies a huge number of processing rates into three basic tiers: qualified, mid-qualified, and non-qualified. Which tier a particular transaction will fall into depends on a number of criteria, which are set by the processor. These criteria include things such as card-present versus card-not-present transactions, whether the transaction was processed on the same day it occurred, and which one of a host of possible categories the items purchased fall into. Tiered pricing may seem tempting, because it simplifies a lot of variables into just three tiers, making your monthly statement much easier to decipher. Unfortunately, while the numbers may be easier to understand, they’ll often be a lot higher than you were expecting. Tiered pricing models make it impossible to tell how much of a processing charge is going to the issuing bank, the credit card associations (i.e., Visa, Mastercard, etc.), and how much is going to your Merchant Services Provider. Tiered pricing also leads to a very deceptive marketing gimmick: the provider will advertise the lowest possible (i.e., qualified) rate, but most transactions won’t actually be qualified, and will process at a much higher rate.

Fixed pricing is similar to tiered pricing, but the three tiers are blended together into a single flat rate for all transactions. This rate is, naturally, quite a bit higher than what you’d pay under a tiered plan. However, the lack of a monthly fee can make it more affordable overall for small or seasonal businesses.

Why we feel Interchange Plus Pricing is the best option
While the actual numbers can get pretty complex, at its core interchange-plus pricing is quite simple. The pricing model consists of two elements: an “interchange” and a “plus.” The interchange is the percentage of the transaction that must be paid to both the issuing bank and the credit card association. Because your credit card processor has to pay this charge, they’ll pass it on to you. The plus is the amount over and above the interchange costs that you’ll also have to pay to your processor. It’s their markup for processing your transaction, and it’s designed to cover their costs of doing business – and also to generate a profit.

Interchange-plus pricing is sometimes referred to by alternate names, such as interchange pass through pricing or cost-plus pricing. These different terms all refer to the same thing.

Interchange-plus pricing rates are usually expressed as the interchange rate plus a markup, which can be a percentage, a flat per-transaction fee, or both. An example would be interchange + 0.20% + $0.10 per transaction for a retail transaction.

You own a retail store and have a merchant account with Association Merchant Services (AMS). A customer comes in and purchases an item for $100.00 (including tax). They pay with a Mastercard Consumer credit card. The interchange cost is 1.580% + $0.10, or $1.68. AMS passes this cost on to you, plus a markup of 0.20% + $0.10, or $0.30. Your total cost for taking the credit card is $1.98, or 1.98%.

How Will Interchange-Plus Pricing Save Me Money?
The fundamental flaw with the traditional tiered-pricing model is that it hides the interchange costs and allows processing companies to charge more of a markup. By consolidating a wide variety of rates into a smaller number of tiers, processors can essentially “round up” to the highest rate in each tier. While this may make your monthly statement a lot easier to read, it also means you’ll be paying higher rates for a lot of transactions – and you probably won’t be able to tell which transactions are being charged abnormally high rates.

By showing you the actual interchange costs, interchange-plus pricing allows you to more easily see what the markup is. This in turn encourages processors to set more reasonable markups. The credit card processing industry is highly competitive, and processors know that many merchants will sign up with the company that offers them the lowest rates. This transparency in separating out interchange and markup costs generally results in lower overall rates, and most interchange-plus pricing plans will cost you less money than a tiered-pricing plan. However, you should be aware that there’s nothing stopping a processor from charging you an unreasonably high markup or raising their rates after an initial trial period. The difference is that it will be a lot easier to spot, especially if you shop around or review your statements regularly.

Make no mistake, your credit card processor, like you, needs to make money to survive. Your goal should be to find a processor you trust can give you the right mix of processing cost, equipment fees, and continued service.

Finally, remember what we were all told as kids, “if it sounds too good to be true, it is”. Trust your credit card processor only if they can verify what they promise you.