Even though the percentages may seem minuscule on paper, a business owner may stand to lose thousands of dollars per year if a wrong credit card processing service provider is selected. This is because in today’s shopping environment, it is not unusual to find merchants relying exclusively on credit card sales because customers find that payment mode most convenient as they are spared of the hassle and risk of carrying cash. Unfortunately credit card processing terminology is not exactly comprehensible to the majority of merchants signing up for credit card acceptance services, and consequently they run the risk of being ripped off by the acquiring banks. Depending on the volume of sales, the charged fees can vary by hundreds or even thousands of dollars every month and the business can save valuable money if they make sensible choices while engaging a credit card processor.
Credit Card Fees Explained
Credit card service providers charge merchants an interchange fee on every transaction. The amount of the fee is decided by the card networks and the proceeds are shared between the networks and the banks that issue the credit cards. The fee comprises a flat per transaction component together with a percentage of the value of the sale transaction. The percentage varies according to a number of factors such as the type of the card being swiped, nature of the merchant, the card issuer and other complex considerations. An additional fee is often charged by your credit card processor on similar lines.
There is a great deal of opacity regarding the interchange rates being charged to the merchant. Hardly ever does any credit card services provider disclose the components of the fee but prefers to present to the merchant a flat base rate, often referred to as the discount rate. The discount rate is actually a sum of the interchange rate charged by the card network and the issuing bank. While the interchange fee by the network is fixed, it is the fee that is charged by the card issuer that accounts for the difference in transaction rates between merchants and needs to be lowered to the maximum by merchants.
The Transaction Categorization Mess
There is also a very messy situation in the determination of payment shares between the network and the issuer due to the complicated qualification system that categorizes transactions. There are more than 125 categories specifying the fees to be charged per transaction depending upon a variety of factors such as the business nature of the merchant, kind of credit card used, the transaction value, etc. In an apparent procedure to simplify interchange rates, the 125 categories are condensed into three tiers referred to as the Non-qualified, Mid-qualified, and the Qualified by averaging the interchange rates and adding a margin.
The pretext of simplification however means that each of the three rates is typically higher than the applicable actual interchange rate for the individual transaction. Under certain situations, the tiered discount rate quoted by the card processor may in fact be more than double the specific interchange rate. If the sales volumes are high, this can leave the merchant bleeding. Once you understand this, it will be easier for you to reduce cost of accepting credit cards.
Making Business Size Matter
The more the credit card transaction value the merchant notches up the better the scope for negotiating the fees. Businesses that record around $20,000 of credit card sales can bargain for eligibility of Interchange Plus rate that allows them to pay the rate of interchange charged by the network plus a flat fee. If your sales volume does not get you the Interchange Plus rate, at least you should scout around and explore the options with a few acquiring banks to get the benefit of the least rates before taking the plunge and signing up. Make sure that your service provider gives you a level of service that you are comfortable with.
Author bio: Bryan Stokes is a senior banking professional with years of experience in merchant account management. He has penned a number of articles on how to reduce cost of accepting credit cards by small businesses.