For many small businesses, one of the biggest charges they face is payment processing. So getting the cheapest credit card processing rates is vital. Even minor differences can add up to hundreds of dollars a month and maybe thousands for the entire year. The problem can be exacerbated if merchants are led to believe they are getting a good deal. This usually is a result of lacking knowledge about a very complex industry and the different plans available, haphazardly picking a merchant account provider without complete due diligence, or simply clever marketing.
Below are some of the best ways merchants can get genuinely cheap rates on credit card processing, as there are so many factors that determine the rate a merchant pays for processing. Some factors are inherently part of the business that push rates higher and are out of merchants’ control, i.e., the interchange rates set by payment networks.
However, some dynamics of payment processing rates are in a merchant’s control, leading to lower rates. For example, having the latest point of sale equipment that incorporates higher security protocols and can accept several payments and card types, including EMV cards.
Below are some action items for merchants to incorporate to get the best credit card processing rates.
What are the fees you are paying for?
To get the cheapest credit card processing rates, first, understand the different fees merchants are paying for. There are multiple parties involved in processing a card transaction. There is the financial institution that issued the credit card to the consumer, think Citibank credit cards. Then there are the payment networks, i.e., Mastercard, Visa, etc. Finally, the merchant acquirer is the financial institution that processes the transaction and receives the payment on behalf of the merchants. Each of these parties facilitates these transactions to make money and thereby have their own fees they charge.
Assessment fee – the assessment fee goes to the credit card payment networks, also known as the issuing bank. These fees also happen to be fixed, and merchants have little control over the set rates.
Interchange fee – this fee goes to the financial institution issuing the card. Although this rate is fixed, it is fixed in variations. There are almost 300 different variations outlined just by Visa. Each variation can either reduce or increase the interchange rate. Examples of these variations are:
- Card type – corporate, fleet, rewards, debit, etc.
- Risk – payment networks consider how susceptible a merchant or its specific industry is to fraud.
- Payment acceptance – how is the payment accepted by the merchant, is it swiped, dipped, or tapped? Or is the card not present at all? A card not present (CNP) transaction increases the risk of fraud and chargebacks.
Merchant acquirer fee – this fee goes to the financial institution processing the payment, also known as the acquiring bank. There is some flexibility in these fees since acquiring banks compete for merchant accounts so they can be negotiated.
Don’t be fooled by the language
The merchant acquirer fee is sometimes shown as an all-inclusive number, while at other times, it is broken out. It is essential for merchants to not fall prey to the different language on how merchant acquirer pricing options are marketed.
What is often presented as simplicity masks a low-expense interchange rate transaction bundled into a much higher cost bucket. Below are some examples of the different pricing plans available from merchant processors.
Tiered pricing – initially introduced as a simplification of all the hundreds of different interchange rates into three seamless tiers, qualified, the mid-qualified, and the non-qualified. Remember, an interchange can vary by card type. So, a rewards card interchange rate for a CNP transaction will be much higher than a debit card swiped for a $5 transaction.
But none of these differences matter in terms of passing along savings to merchants opting for the tiered pricing plan. They pay a single rate, at best, within the qualified tier. Unfortunately, we never know which type of transaction falls into which tier. Even if that is disclosed, it can change without notice.
Interchange–plus pricing – Interchange–plus, or Interchange passthrough, gets priced at the credit card network’s published cost plus a markup, which is the fee the payment processor earns for facilitating the transaction. The markup will adjust based on the risk profiles of the merchant/ industries served. For example, an eCommerce store will have a slightly higher interchange rate than a restaurant or retailer that swipes all card transactions.
What can the merchant control?
Merchants are not able to control the Interchange and Assessment fees as those are pre-set. However, merchants can carefully evaluate the costs associated with the payment processor. Understand the differences between a tiered plan versus an interchange-plus.
Suppose you are a business that may be considered a higher risk because you key in transactions that take orders over the internet or phone, thereby processing CNP transactions. In that case, you can incorporate the appropriate security measures to limit excessively higher markup rates.
Businesses can also ensure that they have the latest EMV-enabled point of sale (POS) equipment to seamlessly process transactions without needing to key in data.
As merchants focus on reducing their payment processing rates, the best way for them to accomplish that is to act on factors that are within their control. There is no point in dwelling over the fact that AMEX has such a high interchange rate. It is vital to understand and take advantage of implementing security controls to reduce fraud risk and can lower processing rates.
If you are paying excessive rates, there’s no point in waiting around to get lower rates. The merchant account provider has no incentive to offer you a lower rate. Merchants would need to act on their own volition in lowering their rates immediately.