Are you Paying Too Much for Credit Card Processing?
By Vincent Bordenca, CFO, Alliance Merchant Services Canada Inc.
Credit card processing seems like a maze of rates and fees, conflicting information, and confusing costs that eat into your bottom line. However, with a little background and the tips in this article, you’ll be able to quickly identify if you’re overpaying and how to get great pricing once and for all.
Understanding Processing Costs – Credit card processing costs have three components
- Interchange (which is collected by the banks)
- Assessments and dues (which are collected by the credit card brands)
- The processor’s markup.
The first two (inter-change and assessments/ dues) are the same no matter which processor you use, but whether your processor charges you the actual cost or inflates your pricing depends in part on the pricing model. There are three common pricing models available: interchange plus (also known as pass-through), tiered (also known as bundled), and flat rate.
Interchange Plus or Pass-Through Pricing – Interchange plus or pass-through pricing looks complicated, but is often the lowest cost solution. With interchange plus, your processor charges you the actual cost for interchange and assessments and then applies a small markup separately. –
This allows you to see how much you’re paying in non-negotiable (wholesale) costs, and how much you’re paying to the processor as profit. The processor’s profit is the only place you can save money, so being able to see how much they’re charging you is crucial if you want to avoid overpaying for processing.
Flat Rate –Flat rate processing is what it sounds like–you’re charged a flat rate no matter what. That flat rate includes interchange and assessments plus the processor’s profit. If words “qualified,” “non-qualified,” “mid-qualified,” and variations, like “nonqual” or “nqual.”.
These words on your statement indicate that you’re on a tiered pricing model and that your processor has decided to charge you more for those transactions—even if they tell you that it’s out of their control or the card companies set the “non-qualified” transactions.
How to stop overpaying: Look for a competitive interchange plus processor. Credit card processor comparison sites can give you real numbers with no tricks or sales calls.
You may be tempted to negotiate with your current tiered processor to get lower rates, but with tiered pricing, that won’t necessarily affect your total cost. Your goal is to pay the lowest overall for credit card processing–not have a low “qualified” rate that most of your transactions don’t receive. Tiered pricing processors are happy to lower your “rates” because they know that doing so doesn’t automatically mean you’ll pay less.
What to look for if you’re not currently taking cards: There are a few ways to identify tiered pricing on a processor’s website or in the mer- chant agreement you’d be asked to sign.
On a website, keep an eye out for too-good- to-be-true pricing, usually 0.3% or less. You might see things like, “Rates starting as low as 0.19%*!” In many cases, the pricing will have an asterisk after it, and the fine print will mention that it’s for qualified transactions only or that it’s for a particular type of transaction, like PIN debit cards.
If you don’t see anything about pricing, you can also ask the company directly. If the sales rep tells you about qualified rates and non-qualified rates, you’ll know it’s tiered pricing and to steer clear.
Flat Rate Processing –Another sign that you’re overpaying for processing is if you use a flat rate processor but aren’t the type of business that benefits from it. Flat rate processors often charge one rate, like 2.75% or 2.9% + 30 cents, for all your transactions.
The problem is that the flat rate includes interchange, assessments, and the processor’s markup, so you don’t see the savings when your wholesale costs (interchange and assessments) are lower.
Some types of cards are generally less expensive to process while others are more expensive. The flat rate must cover all of the possible costs, or the processor will lose money. That means that if you take a lot of cards that cost the processor less, you pay more than you have to and they keep it as higher profit.
Some businesses are attracted to flat rate processing because it looks simple. Just don’t confuse simplicity with competitiveness. When it comes to flat rate processing, there are very specific circumstances for when it’s a low-cost option.
The rough rule of thumb for in-person transactions is that flat rate processing will probably be least expensive if your average transaction is less than $10 OR if you process less than about $2,000/month in credit cards. Flat rate processing can therefore be a great option for coffee shops, food trucks, and other small-ticket businesses.
How to identify flat rate: Flat rate processors often explicitly say that their pricing is flat rate. Common rates are currently around 2.75% for in-person transactions and 2.9% + 30 cents for online transactions.
How to stop overpaying: If you’re not a low-ticket or low-volume business, switch from a flat rate processor to a competitive inter- change plus processor. You can use credit card processor comparison sites to make it easy to see real numbers for your business and choose the right option.
Free Equipment – You know the old saying, “There’s no such thing as a free lunch.” That applies to credit card processing, too. Some companies sell you on the idea of free equipment, knowing that many businesses don’t want to fork over a few hundred dollars for a credit card ma- chine. But free equipment comes at a price, usually in the form of higher rates and fees for each transaction.
If the processor gives you a free machine, they must make up that cost, and the easiest way to do it is to charge you more for your processing. Additionally, they don’t lower your rates or fees once they’ve recouped the amount of the machine, so the extra charges become more profit for them.
What to do instead: Purchase or rent a machine outright. Basic chip card-capable machines start at around $300. It’s worth the long-term savings to come up with the money to purchase the machine outright. If your finances allow, you can also use business credit cards or short-term loans for more expensive models or if you’re purchasing for multiple locations.
It may be tempting to lease a credit card machine, but be aware that leasing is one of the most expensive options and is usually paired with a 4-year non-cancellable lease. If you already accepted free equipment: Many processors that offer free equipment also set up businesses on a tiered pricing model, so be sure to check your statements for the other signs that you’re overpaying. If you are, it’s worth your time to research options for switching. However, since you received free equipment, be sure to check your contract for any details about what happens when you leave. Are you required to give back the equipment or purchase it? Is the equipment universal and able to be reprogrammed by another processor? Knowing the answers to these questions will help in your decision about when to switch and to whom.
There are many ways that processors can sneakily overcharge, but you can spot the most common ones by looking for the signs mentioned in this article.
This Article was originally published in the Summer 2017 Issue of Office Today Magazine