Interchange Reimbursement Rates and Credit Card Processing Pricing Explained
Accepting credit cards
has become a necessity for most businesses today. Unfortunately, navigating the landscape of the merchant services industry can be challenging to say the least. The most common questions I hear from potential merchants are “What will my rate be?” and “How much does it cost to accept credit cards?” The real answer to this question is “it depends” although understandably that isn’t what most business owners want to hear. American Express is pretty straightforward, but also expensive, at around 3.5% for most hosting companies and related businesses. However Visa, Mastercard, and Discover are each known as card associations that each have their own rate sheets known as Interchange Reimbursement Fees. These fees make up the majority of what you pay to your processor
and they vary greatly depending on the card type accepted. You can learn more about Visa and Mastercard Interchange rates at the following URLs:
I should warn you that Visa is the best place to start. Their rates and categories are much simpler by virtue of the fact that there are fewer of them. This means that the cost to your processor varies depending on what type of card your customers use.
So to price a merchant account
, your provider is going to do one of three things. You can get a flat rate, generally comprised of a discount
(percentage) and a per item (transaction) fee. Unfortunately, to get a flat rate, you end up with a rate high enough to cover the highest possible Interchange
category. While the idea of a flat rate sounds appealing, it almost never represents a good deal for the merchant.
The second option is tiered pricing
. The most common type of tiered pricing is called “three tiered” with separate rates for qualified, mid-qualified, and non-qualified transactions. Each tier contains a number of Interchange categories. The Interchange rate for qualified cards on swiped transactions is currently around 1.51% plus 10 cents
per transaction. While this gets you more granular pricing depending on the type of card, mid-qualified and non-qualified cards (typically business and rewards cards) often have surcharges ranging from anywhere from 1-3% over the “qualified” rate for standard non-rewards, non-commercial credit cards. Although this pricing scheme is better than paying one high rate for all card types, each tier still is generally priced high enough to cover the rate for the most expensive card in that category. And what’s worse, it allows many processors to quote a “qualified rate” that seems very low only to hit unsuspecting customers with very high surcharges that are difficult to understand on their statement. There are other variations of tiered pricing that add tiers for debit cards
or delete the “mid-qualified” tier.
Continue Reading - Merchant Services Interchange Fees, Part 2