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Understanding Merchant Rates and Fees Can Save You Money

Kevin  Clements
by Kevin Clements October 26, 2016
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As the saying goes... “Knowledge is Power!”
This is equally true when it comes to merchant rates.

Discount Rates, Per Item Fees, Interchange Rates, Dues and Assessments, Network Access Fees, Downgrades, Reclassifications, PCI Program Fees, IRS Reporting Fees, Statement Fees, Minimum Fees, Non-Compliance Fees... where does it end?

As the number of components and the complexity determining merchant pricing continues to increase, the frustration of small businesses continues to rise. Reconciling all the charges to is no simple task. Most businesses don't even try.

The keys to succeeding are:
• Lowering your "Effective Rate" - the actual rate paid after all merchant fees
• Locking in discount rates & surcharges contractually for multiple years
• Negotiate lower American Express rates - accepting AMEX can increase your sales.

The first step is to understand the various fees and where they come from. Let's break it down.

Interchange    .62% - 3.25%
Interchange is the amount paid to the Card Issuer as compensation for expenses incurred in providing lines of credit to card holders.
• The interchange rate is non-negotiable
• It is set by the networks (Visa, MasterCard, and Discover)
• It makes up the largest component of merchant costs

Interchange rates are one of the most complex areas of merchant rates. There are now over 350 Interchange categories. The networks regularly publish the rates for each base on Card type (debit card, credit card, reward card, business card), Industry type (retail, restaurant, hospitality, super market, etc.), Processing Environment (swipe, mail/phone, Internet, etc.), and transaction amount. All banks and merchant providers pay the same rate.

Dues & Assessments    .10% - .12%
This is a flat amount paid to the Credit Card Association (Visa, MasterCard or Discover).
• The rate is non-negotiable
• It is Visa, MasterCard and Discover's cut of the merchant charges
• It makes up the second largest component of merchant costs
This cost is the same same for everyone and is not negotiable.

Discount Rate + Surcharges = Processor Fees
Unlike Interchange and Dues & Assessments that have set pricing, the Discount Rate and Surcharges (sometimes grouped together and called Processor Fees) is the part of the transaction that is "anything goes." The less the merchant understands, the more they will pay. There is no limit/cap on the fees the merchant account provider can charge. Nor does the processor have to disclose their discount rate which makes it easier for them to charge anything they want.

Discount Rate    .01% - 4.0%
Simply put, this is the additional transaction percent the Merchant (you) pay to your Merchant Provider. It is part of the Merchant Provider's cut of the transaction. Sound simple? Well, not really. Generally, merchants are offered one of two types of discount rates, either Tiered Pricing or Interchange Plus. Some Merchant Providers offer a mix of these two types. The belief that Interchange Plus offers the "best rate" is a common misconception. More on this later.

Surcharges    .10% - unknown
Merchant Account Providers can use several deceptive billing billing tactics to charge additional fees and percentages. This is the area where minimum charges, statement fees, support fees, network access fees, downgrades, reclassifications, etc. come into play.

Tiered Pricing vs. Interchange Plus

Tiered Pricing
Most Merchant Providers only offer a Tiered Pricing structure to their Merchants. As discussed earlier, the Interchange rates vary by card type, industry type, and processing environment, which results in over 350 categories or rates charged. To simplify this for Merchants, most Merchant Providers break the associated fees into three categories -- Qualified, Mid-Qualified and Non-Qualified -- which together are called Tiered Pricing.

The low rate advertised by Merchant Providers is the Qualified rate. The actual rate charged to the Merchant is determined by first setting a baseline rate known as the Qualified rate. (If you accept debit cards, you may have two Qualified discount rates: one for credit cards and one for debit cards.) The next highest tier is the Mid-Qualified tier, which is the sum of the Qualified discount rate and the Mid-Qualified surcharge. The top tier is the Non-Qualified surcharge tier, which is the sum of the Qualified discount rate and the Non-Qualified surcharge.

To determine if a transaction falls into the Qualified discount, Mid-Qualified or Non-Qualified tier, the Merchant Provider creates and maintains what is called a qualification matrix. The qualification matrix uses the interchange reimbursement fee the provider is being charged to determine which tier rate the merchant must pay.

The Merchant Provider determines what transaction types fall into each of these categories and their surcharge amount for Mid-Qualified and Non-Qualified transactions. The fantastic advertised rate of just 1.69% may only apply to a small percentage of your daily transactions. You need to know what a Merchant Provider charges for Mid-Qualified and Non-Qualified transactions. And because each Merchant Provider creates their own qualification matrix, you need to review your statements to see what percentage of your business falls into each tier. This can vary greatly from one Merchant Provider to another.

Interchange Plus
Large national retailers, such as Costco, have Interchange Plus structured merchant accounts. Merchants with an Interchange Plus structure pay three fees: The published Interchange rate, the Dues & Assessments, a negotiated Interchange Markup percentage and a transaction fee.

As stated earlier, the Interchange rate is a published rate and non-negotiable. The Dues & Assessments is a flat percentage paid to Visa, MasterCard or Discover and is non-negotiable. The transaction fee is a flat authorization or communication fee (such as pre-authorization) charged, usually $0.10 - $0.15 each.

The Interchange Markup fees are percentages added onto the interchange reimbursement fee. The percentage is measured in units called basis points. One basis point is equal to 1/100 of a percent. So, a transaction with a 25 basis point markup is 0.25% over the Interchange reimbursement + Dues & Assessments fees.

At one time, Interchange Plus pricing was available only to large national merchants. Today, due to competition and Merchant education, this pricing structure is becoming more widely available to smaller merchants and new businesses. 

Which Structure is Best  --  Tiered Pricing or Interchange Plus?
You can find an unbelievably long list of Merchant Providers offering Interchange Plus today. This fact alone should raise a red flag of caution. All of these companies proclaim that Interchange Plus is the only way for a small business to get good rates. Unfortunately, this is not necesarily true. For example, do you know what Interchange Plus "markup percentage" (basis points) represents a better rate
than you are currently paying? And don't forget all the hidden Surcharges, which can add up quickly.

Which structure is best depends on many factors. One business will benefit from a specific tiered structure over some interchange plus structures. In most cases, what determines which structure is the least costly depends on the specific provider and how the tiers and/or surcharges are setup. Some Merchants even offer a base qualified rate, then all non-qualified credit cards are charged at an Interchange Plus rate.

What Next?  How do I lower my total cost for accepting credit cards?

The key to lowering rates really comes down to what is the actual percentage you are paying after taking to account ALL fees you are being charged.

To find the "true" rate you are paying for accepting credit cards, let's do some simple math:
       All Fees & Charges* / Total Credit Card Charges** = Your total Cost as a % of Sales
       * Total ALL the Fees, Discounts, and charges of any type or form on your statement.
       ** Total Amount Paid by your customers, before any fees paid.

This is what we call your Effective Credit Card Rate. This number should definitely be south of 3.4% and in most cases better than 2.8%. Armed with this information, start talking to Merchant Providers. If you are paying more, you should start shopping for a lower effective credit card rate TODAY!

Follow these Rules when shopping for a good Merchant Provider:

Rule # 1 - Comparison: A good Merchant Providers will ask to see a copy of your most recent Merchant Card Processing Statement. This a copy of your statement, they cannot evaluate how to best serve you. If they feel they can ask you a few questions and find you a good program without seeing your current statement... just walk away.

Rule # 2 - Fees: Ask about their fees. Transaction fee, monthly statement fee, PCI compliance fees, non-compliance fees, etc. Everyone will pay Transaction fees and PCI Compliance fees, but the fees amounts will vary between Merchant Providers. The Transaction Fee should only be 10 cents per transactions. PCI Compliance fees may be assessed monthly or annually.

Rule # 3 - Setup Charges: Find out if you will be charged for an application fee, set-up fee or installation fee. A reputable Merchants Provider will have no application fee and minimal if any setup and/or installations fees.

Rule # 4 - Service Contracts: Does the Merchant Provider require a minimum length of service contract? In most cases, you should avoid being locked into a contract. Generally, contracts should only be required if you are a new business, you have poor credit or you have negotiated and are locked into a very low rate and fee schedule.

Rule #5 - Support & Customer Hours: Many Service hours and cost. Top notch Merchant Providers actually provide free 24/7 customer service. Do not sign-up with a company only available from 8 am - 5 pm on weekdays.

Rule # 6 - Technology: Does the company use up-to-date technology? Are they PCI Compliant? If the Merchant Provider is not well versed on PCI compliance or does not know much about the current credit card terminals... just thank the for their time and say goodbye.

Rule # 7 - Gift Cards:  Do you sell gift cards or would you like to sell gift cards? If so, this is a very important topic. Ask how the Merchant Provider handles gift cards. What additional fees are associated. Do the they charge each additional % fees and if so how much. Are you charged for balance look-ups and customer inquiries? This is often another very lucrative area for Merchant Providers. They charge for the cards, charge a % when the cards are used, and even charge you when customers check their balances. The best Merchant Providers have their own Gift Card programs and do not charge any additional fees, other than the purchase of the cards themselves.

Rule # 8 - Get Referrals:  Often the best source to find a good Merchant Provider is through a referral from another business owner. Ask other businesses who they use, then compare the company using Rules 1 - 7 above.

 

 

NEED HELP NEGOTIATING LOWER RATES?
POS Shopper is not a merchant provider, but we do have over 20 years of experience helping businesses of all sizes to reduce the rates they pay to Merchant Service Providers.

We can quickly assess your credit card needs and educate you how to negotiate the best "effective rate", meaning actual rate after all fees. Once you are armed with this knowledge, we can refer you to seasoned merchant service representatives from one ore more 1st tier companies who can help you achieve your goals. Let them compete for your business on a level playing field!

Call POS Shopper @ 877-567-5234 and ask for Kevin.

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