The ERR Pricing Trap

June 11, 2013

In recent weeks I have personally spoken with numerous merchants who want to try and understand their monthly statement better. It seems like some providers of credit card processing have come up with a game: “confuse the merchant”. Different combinations of low rates and high fees or vice versa. One pricing structure that I have seen quite often lately is referred to as bill back or ERR (Enhanced Recover Reduced).

ERR is presented as a simple and clear pricing system for merchants. This couldn’t be further from the truth. While on the surface the one flat rate for every transaction seems easy to understand. While the (usually) low rate will seem enticing from the merchants point of view because it is only one rate as opposed to the hundreds that exist in the current interchange chart, the processor isn’t telling the whole story. Whoever said “if it sounds too good to be true, it probably is” was a very wise person. The secret behind ERR pricing is the second charge for mid or non-qualified cards. This is the difference between the flat rate and the actual interchange rate for the mid or non-qualified cards with an additional surcharge tacked on.

baitandswitchIn essence the one, low flat rate that these processors will reel merchant s in on and then slap them with high, additional surcharges is a classic case of “bait and switch”. Often seen in “big box” retail stores, bait and switch is when a business will advertise a low priced product that is not available. Then will substitute a higher priced product for the customer to fill the void of a missed opportunity. The legality and fine print often associated with this tactic exploits some loopholes and seems shady to the average consumer. Whether legal or not, at the end of the day the consumer is often left feeling taken advantage of.

The “trap” part of this pricing usually comes in the form of a term on the contract a merchant is asked to sign. These usually are around 36-months but can be any length of time. Processors will often convince decision makers that there is a need to sign for a term to get the best rates. Yet this is simply not true. And if the merchant decides he would like to get out of the contract before the full term has expired there are more often than not hefty early termination fees.

On the flip side to questionable business tactics and non-transparent pricing is interchange plus pricing. Here at HMS we believe that the customer should never walk away feeling like they lost and that a business relationship can be a win-win situation for both the merchant and Host.

man_holding_head_on_side_of_bedEvery business that takes credit cards, bar none, has to pay interchange rates. Bottom line. Full stop. What differentiates each processor is what they choose to charge on top of this. Those that don’t mind if they can sleep at night tend to markup interchange with exorbitant rates and/or backdoor fees. We prefer a more upfront and fair approach.

So let’s quickly recap. Enhance Recover Reduced makes it difficult for merchants to accurately calculate their effective rate as the “bill back” amount is often reflected on the next month’s statement. This roundabout and confusing pricing structure is not clear and easy to understand upfront. That in and of itself is reason enough to switch to a processor that provides the clearest pricing available. Take a look at this Statement Breakdown that outlines how to read and understand our statement vs. the rest.

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