October 28, 2016 11:57 AM
If you need to accept credit or debit card payments from customers for your business, it can be difficult to know which way to turn in terms of which pricing model is the best for your needs and budget. In this article, NTRCA associate member Corey Young with ProV3 Payments, outlines the three basic pricing models that credit card processors use.
In the merchant service industry, there are three basic pricing models that processors use. It is important that the business owner understands these models and why they are used. The more informed a business owner, the better chance they will not be taken advantage of.
This is, unfortunately, the most common way most credit card processors charge their merchants. Tiered pricing bundles groups of interchange rates into buckets and then charges the merchant depending on what type of card is run. These buckets are:
- Qualified – This bucket usually consists of debit cards and the most basic credit cards. This bucket almost always is for swiped cards as well. This will be the lowest rate offered.
- Mid-Qualified – This bucket is often lower tiered consumer reward cards and most likely for only swiped transactions. This rate will be in the middle, usually in the 2.5% plus range.
- Non-Qualified – This bucket is the catch-all for everything else -- if you key in a transaction, if it’s a business card, if it’s a higher reward type card. This bucket is, by far, the most expensive. The cost here is normally 3.5% and up.
The major problem with this type of pricing is that the processors do not disclose what interchange rates make up each type of bucket. They will hook the merchant with a low qualified rate and then “downgrade” 90% of cards taken to the higher buckets. With this type of pricing, you will never know exactly what you’re paying for or how much the processor is making.
When a credit card processor offers one rate for all your transaction, like Square, this is bundled pricing. The processor is taking all the interchange rates charged from Visa/MC and lumping them together and then marking them up. The processor then makes a different percentage depending on what type of cards you take from your customers.
This type of pricing is most commonly used for small businesses that may not take credit cards on a consistent basis. Oftentimes, companies that offer these types of rates will also offer other services to help the small business as well. A great example of this is Square and a company called Cuffr. They offer email invoicing, customer management and web-based payments. They only charge you when you take transactions.
3. Interchange Pass-Through (a.k.a. Cost Plus)
Cost Plus pricing is the most transparent way to price in the merchant service industry and the model
we used at ProV3 Payments as well as other companies. This model discloses what fees are going directly to the card brands (Visa/MC interchange rates) and what the credit card processor is making (the discount rate). Here are some of the most common interchange rates from Visa and their associated fees.
- Regulated Visa Check Card (This is your debit/check card) - .05% + .21/transaction
- Traditional Rewards - 1.15% + .05/transaction
- Visa Signature Preferred / Visa Infinite – 2.1% + .10/transaction
- Business Standard Interchange Reimbursement Fee – 2.95% + .20/transaction
There are over 125 of these interchange buckets for Visa/MC. Where they land is determined by what type of card is accepted and how it is processed. If it is swiped, it will be cheaper than if it is keyed in.
Cost Plus is also very beneficial because it allows you to fully analyze how you are taking payments. For example, if you take payments over the phone you might be getting penalized for not having enough information in the transaction. By analyzing the interchange buckets you might be able to save a considerable amount just by adding something as simple as an invoice number when you process the transaction.
At the end of the day the only way to really determine how much you are paying for your credit card processing is to determine your “effective rate.” You calculate the effective rate by taking the total of all your fees and dividing it by the total card volume processed. By doing this calculation you will be able to determine if there might be hidden fees, downgrades or other issues that are increasing your fees.
Corey Young is managing partner at ProV3 Payments and CEO of Cuffr. He has 15 years of experience in the financial industry and enjoys working with his clients to help them with mobile payments, web/ecommerce payments and traditional retail transactions.