Has this happened to you? A credit cards merchant account salesperson sold you on a really low credit card discount processing rate. You thought you negotiated a pretty good deal. But lo and behold, you realize that you're paying twice as much as you expected! What happened? And what can you do about it?
The culprit is merchant lack of understanding of "Interchange", the price structure of credit card transaction processing. Without this knowledge, the process of selecting merchant account service processors is usually limited to phoning every processor in the yellow pages and signing on with whoever quotes the lowest 'rate'. The reasoning is: 'low rate' equates to 'low cost'. Therein lays the problem.
"Interchange defined"
Interchange is the wholesale price structure of credit card transaction services charged by Visa USA and MasterCard Worldwide to processors. The processors in turn mark up and re-sell these services to credit card accepting businesses, not unlike any other wholesale-retail relationship. Wholesale interchange is exactly the same for all U.S processors large and small, although low-risk and mega merchants enjoy the volume leverage of being able to purchase processing services from processors at smaller profit margins than small businesses are.
The flaw in the 'lowest rate wins' strategy is that merchants mistakenly assume the low rate quoted will apply to all of their transactions. This is not the case. Interchange in fact comprises some 125 separate rate categories, each of which is assigned a unique qualification criteria and corresponding price structure. The typical merchant will knowingly or otherwise process cards in several of these categories, not just one, and will pay appropriate surcharge rates for each. The low advertised rate is nothing more than a starting point for the entire spectrum of interchange charges.
Reasons for processing surcharges include:
How a card is swiped affects rate. For example, manually keyed in (as opposed to swiped) transactions always result in surcharges. The same is true for card-not-present transactions, inaccurate or omitted data entry situations, address verification mis-matches, and other scenarios.
The type of credit card processed accounts for many increased pricing criteria. Among them: Business (as opposed to personal) cards, foreign cards , rewards cards, purchasing cards and so on always result in increased rates.
POS equipment may affect rate structure. Older equipment unable to accommodate fully compliant processing software may lead to transactions being downgraded to higher rates.
The significance of this to the merchant is:
When a credit card processing service is selected solely on the basis of one singular advertised 'cheap' merchant account rate quote -often a loss leader--by necessity (unless the processor is able to survive re-selling at or below his cost--which we all know doesn't happen) the advertised teaser rate will apply only to a limited number (if any) of the credit card transactions processed by the business, based on very narrow interchange criteria. The remainder of the merchant's transactions that do NOT meet these criteria to qualify for the low rate quoted will be downgraded to a higher rate interchange category, thus allowing the processor to make up his margin and then some.
These higher rate categories will include ALL of the following:
non-swiped sales
rewards card sales
business card transactions
foreign cards
government purchasing cards
everything except personal swiped domestic cards
These non qualified fees compensate for, probably many times over, the low teaser rate afforded by the minority of the transaction volume. As a result, the actual fee paid by the merchant won't remotely resemble the low rate expected. This results in a quite unusual circumstance that many people find impossible to grasp: The lowest rate quotes result in the HIGHEST net cost to the merchant, not the lowest as one might expect. . Strange but true.
Three strategies to avoid this pitfall:
When evaluating a credit card acceptance account (or shopping for a new account), insist on disclosure of all interchange rates involved, not just the 'advertised' rate. The goal is to get the lowest rates in the interchange categories where your business will be, not just the lowest top tier rate quote.
To circumvent rate downgrade increases for incorrect data entry procedures, insist on on-site training by your processor to assure that your staff understands the proper procedures necessary to qualify for the lowest rates. Merchants using no frills processors who skimp on training and support-skimping on services is how they are able to offer cheaper rates in the first place-- are particularly vulnerable to unnecessary non-compliance surcharges.
Have your processor audit your merchant statement periodically to detect any changes in your credit card qualification criteria mix and make adjustments as necessary. Some merchants are still using the same antiquated processing schedule they used on the day they first opened their doors. A program geared to how you do business today, not five years ago, may result in significant processing savings..
The culprit is merchant lack of understanding of "Interchange", the price structure of credit card transaction processing. Without this knowledge, the process of selecting merchant account service processors is usually limited to phoning every processor in the yellow pages and signing on with whoever quotes the lowest 'rate'. The reasoning is: 'low rate' equates to 'low cost'. Therein lays the problem.
"Interchange defined"
Interchange is the wholesale price structure of credit card transaction services charged by Visa USA and MasterCard Worldwide to processors. The processors in turn mark up and re-sell these services to credit card accepting businesses, not unlike any other wholesale-retail relationship. Wholesale interchange is exactly the same for all U.S processors large and small, although low-risk and mega merchants enjoy the volume leverage of being able to purchase processing services from processors at smaller profit margins than small businesses are.
The flaw in the 'lowest rate wins' strategy is that merchants mistakenly assume the low rate quoted will apply to all of their transactions. This is not the case. Interchange in fact comprises some 125 separate rate categories, each of which is assigned a unique qualification criteria and corresponding price structure. The typical merchant will knowingly or otherwise process cards in several of these categories, not just one, and will pay appropriate surcharge rates for each. The low advertised rate is nothing more than a starting point for the entire spectrum of interchange charges.
Reasons for processing surcharges include:
How a card is swiped affects rate. For example, manually keyed in (as opposed to swiped) transactions always result in surcharges. The same is true for card-not-present transactions, inaccurate or omitted data entry situations, address verification mis-matches, and other scenarios.
The type of credit card processed accounts for many increased pricing criteria. Among them: Business (as opposed to personal) cards, foreign cards , rewards cards, purchasing cards and so on always result in increased rates.
POS equipment may affect rate structure. Older equipment unable to accommodate fully compliant processing software may lead to transactions being downgraded to higher rates.
The significance of this to the merchant is:
When a credit card processing service is selected solely on the basis of one singular advertised 'cheap' merchant account rate quote -often a loss leader--by necessity (unless the processor is able to survive re-selling at or below his cost--which we all know doesn't happen) the advertised teaser rate will apply only to a limited number (if any) of the credit card transactions processed by the business, based on very narrow interchange criteria. The remainder of the merchant's transactions that do NOT meet these criteria to qualify for the low rate quoted will be downgraded to a higher rate interchange category, thus allowing the processor to make up his margin and then some.
These higher rate categories will include ALL of the following:
non-swiped sales
rewards card sales
business card transactions
foreign cards
government purchasing cards
everything except personal swiped domestic cards
These non qualified fees compensate for, probably many times over, the low teaser rate afforded by the minority of the transaction volume. As a result, the actual fee paid by the merchant won't remotely resemble the low rate expected. This results in a quite unusual circumstance that many people find impossible to grasp: The lowest rate quotes result in the HIGHEST net cost to the merchant, not the lowest as one might expect. . Strange but true.
Three strategies to avoid this pitfall:
When evaluating a credit card acceptance account (or shopping for a new account), insist on disclosure of all interchange rates involved, not just the 'advertised' rate. The goal is to get the lowest rates in the interchange categories where your business will be, not just the lowest top tier rate quote.
To circumvent rate downgrade increases for incorrect data entry procedures, insist on on-site training by your processor to assure that your staff understands the proper procedures necessary to qualify for the lowest rates. Merchants using no frills processors who skimp on training and support-skimping on services is how they are able to offer cheaper rates in the first place-- are particularly vulnerable to unnecessary non-compliance surcharges.
Have your processor audit your merchant statement periodically to detect any changes in your credit card qualification criteria mix and make adjustments as necessary. Some merchants are still using the same antiquated processing schedule they used on the day they first opened their doors. A program geared to how you do business today, not five years ago, may result in significant processing savings..
About the Author:
Learn more about credit card processing. Stop by Amber Love's site where you can find out all about credit card processing services and what it can do for you.
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