Pricing Structures and How Credit Card Processors make Money

As a credit card processing agent since 2003, the most common things I hear from a business owner is “What is the best rate that you can offer me?” The question is intended to mean the best overall cost; however, if the agent just wants to make the most money he can off of you, he can provide a very low initial rate and add up to 45 other fees.

I’ll cover the additional fees in another blog, this one will cover the four primary methods of pricing a merchant.

Regardless of how you process, there are three components that make up the cost. Interchange, Dues & Assessments (D&A), and profit that is split between the processor and the agent.

The long version of explaining Interchange took a 29-page chapter in my 2012 book Credit Card Processing for sales agents. The short version is that MasterCard, Visa, and Discover have created about 700 levels of Interchange that compensate the bank that issued your customers’ credit cards. The rate is based on the type of client and risk and whether rewards are offered. Interchange rates will be expressed as rate plus fee per transaction (X.XX% + $0.YY) and varies for each transaction

Dues & Assessments are fees charged by the brands (Visa, Mastercard, Discover, American Express) on every transaction with a card with its logo through its network. As with Interchange, it has a rate and a transaction fee, but is lower than Interchange or Profit (0.1X% + $0.0YY).

The Profit is what drives the processor and agent to offer the account. The profit in most cases is less than Interchange. Profit is also expressed as a rate and transaction fee (X.XX% + $0.YYY).

Your business has Tiered pricing if you see “Qualified”, “Mid-Qualified”, or “Non-Qualified”. In a tiered scheme, 700 Interchange levels are squeezed into 3-8 tiers. It is sold to merchants using a Qualified rate that only applies to a few Interchange levels with everything else defaulting to more profitable Mid- and Non-Qualified levels. The Dues & Assessments used to be included but are now usually added to the statement. I should note that tiered statements are difficult for competitors to read as each processor is the sole judge of how to assign the Interchange levels to the tiers.

Many companies now offer Cost Plus Pricing. This pricing style is used by many more ethical agents and companies because statements are easy to read and clearly show profit. Ethical agents do not mind showing our profit level because we strive to deliver the value. In a cost-plus environment, statements will indicate the complete Interchange and Dues & Assessments being charged along with the profit rate and transactions. A word of caution, if you see “Surcharges” in the area showing Interchange levels, the Interchange levels are likely being inflated. Several processors have told the FTC that since the statements say Surcharge and not Interchange, that they should not face penalties. Be advised that Interchange Levels are posted publicly on the Card brands’ websites.

An increasingly popular choice is the Flat Rate. Square uses this pricing structure. 2.75% for swiped or 3.50% + $0.15 (per transaction) if keyed. Business owners love Square for two reasons. 1. Because they don’t face other fees, like Statement or PCI fees. 2. Because the fee is predictable and consistent. For average transactions under $10, Square or PayPal would offer the best pricing for merchants as it will be less than Interchange on Regulated debit and close to it on other Interchange levels. For transactions over $50 Square is rather profitable and over $500 transactions they are averaging much higher profits that most processors. The main problems that most have with PayPal and Square are the ability to speak with a live person and that they allow customer returns with little or no dispute ability. PayPal and Square are what is known as Aggregators. They are the merchants of record and then they extend the service to others. If their Chargebacks exceed 2%, they can lose their processing ability.

The fourth method is one that many agents and processors are promoting. This method is a cash cow for both processors and for sales agents. The pricing type is known to business owners as Cash Discounting. It is presented to business owners as a way to get rid of costs for credit card processing by letting the customer pay for using their card at checkout. I need to make clear to business owners that if you are charging a service fee, then removing for cash or check, then you are violating Visa rules and may be subject to huge fines. Both raising prices to create a cash discount and applying a service fee (unless government or school) violate Visa. You won’t receive a letter, they will just fine you through your processor.

You may ask how Cash Discounting is a cash cow. If you recall, we said that Interchange + Dues & Assessments + Profits equals the total fees being paid. By dividing the total fees by the total sales, you get the effective rate. Most retail stores are between 1.9% to 2.6%. Let’s say the calculation for your store comes to 2.25% for $100,000 in credit card sales per month and that 1/3 of your customers use credit cards. This would mean that you pay $2250 a month for processing. The profit would be the $2250 minus the Interchange and D&A. Now say you do the cash discounting and don’t lose any customers. Your customers are paying 3.99% so the processor collects $3990.00. Since Interchange and D&A remain the same, this adds $1740.00 in profit while you hold the risk for being fined or having customers mad at you.

If you would like an evaluation of your processing statements, or have any questions please email me at billpirtle@gmail.com. I will only contract with merchants in my geographic area, but I will be happy to help anyone who asks, if I can.

2018-12-14T18:38:38+00:00
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