7 things business owners don’t know about credit card processing
1. How do I know if I’m paying too much?
Take the fees on your monthly statement and divide them by the total volume that your business processed for the corresponding month. Multiply that number by 100. This gives you the effective rate, or the percentage of the cost associated with the total amount your processed. If that number is higher than 2.60% then you definitely need to talk to your processor about getting better rates and fees or shop around with a new processor.
2. Where does all of this cost go?
There are 5 main costs associated with credit card processing, some that you can impact and some that based on the types of cards that you accept. The first two costs, Interchange Fees and Network Assessments, are costs that cannot be avoided.
They go to the issuing bank that your cardholder used in order to cover the costs of transferring the money to you the merchant, and also incentivize your customers to use specific cards by offering rewards points to the cardholders.
Interchange fees range between .05% and 2.95% of the monetary amount of the transaction, and between $0.04 and $0.22 per transaction authorization, depending on the card types accepted. The processor running your merchant account also adds a Discount Rate which is based on the total sales volume you process and an Authorization Fee on the total number of transactions you run. We’ll explain more about these in pricing explanations later in the document.
Processors also add Service Fees to your monthly processing. These can vary from fees that are typical among all processors, Monthly service fees and compliance fees, to some that are added purely for extra profit every month. Some processors promise a low Discount Rate but add lots of Service Fees that make your overall effective rate (See #1) higher.
You can learn more about interchange fees and the transaction cycle by watching our video.
3. How do I know if I’m on the right pricing type?
There are many different pricing types associated with merchant services; Fixed pricing, Tiered, Flat rate, Interchange Plus and the newer Surcharging/Cash Discount options. The only two options that make sense for your business are the Interchange Plus or the Surcharging/Cash Discount options.
- Fixed rate pricing typically promises a specific Discount Rate and Authorization Fee and leads you to believe that it is the cost for each and every transaction with no variation. In reality that is the cost for a very small number of transactions; typically card present with the card swiped or dipped, with all information correctly passed to the Card Networks and the card must be a credit or debit card with no rewards components. If these criteria are not met, you will be assessed a Billback or Surcharge (Not to be confused with the Surcharging pricing option). These fees are typically in excess of 1% and also includes the difference in the actual versus anticipated interchange rates. This is usually a 0.30% to 0.50% increase.
- Tiered pricing is very similar to Fixed rate, but is the worst possible pricing type. As in Fixed rate, a specific Discount Rate and Authorization Fee are quoted, and typically no mention is made of the higher Tier costs. Tiered pricing has 3 tiers- Qualified, Mid-Qualified and Non-Qualified. The Mid and Non-Qualified rates are often 1-4% higher than the rates specified in the Qualified section of your contract, and any rewards cards, key entered or card not present transactions, or issues with collecting all the required card data will signify these higher costs.
- Flat Rate pricing is the model brought about by processing companies like Square and PayPal. In most cases there is a specific Discount Rate like 2.75% swiped or dipped transactions and a separate pricing level such as 3.5% and an Authorization Fee of $0.15 for transactions entered manually or by invoice. The total amount collected covers all the costs and leaves a margin for the processor. The downside to this type of credit card processing is that in businesses that process a large number of debit cards, the cost is much higher than you would be paying on another pricing style.
- Interchange Plus is the most straightforward and transparent pricing type available. It is usually only offered to large volume merchants, those that deal entirely with other businesses, and certain industry types like daycares, schools, churches and nonprofits. This pricing type passes on the raw costs of the transaction, the actual Interchange Fees and Network Assessments and then also has a defined cost that is made by the processor. As a merchant you can negotiate the rate or transaction fee charged by the processor. Because this pricing style is free of additional surcharges and fees it proves to be the best option for traditional card processing.
- Surcharging and Cash Discounting is a relatively new processing style that allows the merchant to legally and compliantly pass on the costs of the transaction to the cardholder, thus covering all of the costs of the transaction. This processing style eliminates between 60-99% of the cost of a merchants monthly credit card processing fees based on what is being passed on to the cardholder.
4. Did I really need to purchase or lease my equipment?
This question truly depends on a number of factors, specifically the industry of your business and the functionality that you need your equipment for. There are many processors that provide free terminals, payment tablets, card readers and other forms of equipment free of charge.
If you need a more robust solution, one that may keep accurate tabs on inventory, or keep bar tabs or tables open, then you will need a point of sale system that is traditionally leased or purchased. These units vary in price based on the software, hardware needs and the brand name of the company selling them…
5. How long should it take to get the money deposited?
Most processors promise next day funding or 48 hour funding… In this day and age, with the technology and speed built into the networks, deposits should truly be made on the next business day. If you batch after 11:30 pm EST you will typically receive funds on the second business day.
6. What are the costs associated with American Express and should I accept AmEx cards?
Most merchants think that American Express is expensive and slow to pay… In the past, this was certainly the case because you had to set up an account with American Express directly and they would set your processing rate. With American Express’ new programs like OptBlue or OnePoint they allow most merchant processors to run the transaction through the same terminal while contacting American Express networks to authorize and complete the payment, and the pricing is similar to Visa, MasterCard, and Discover and included in your nightly batch. With the rise in rewards cards programs from Visa and MasterCard, you may be surprised to find out that those card types can actually be more expensive to process than American Express.
7. What is PCI compliance and how do I stay compliant?
The Payment Card Industry, or PCI as it is more commonly referred to, is comprised of all of the card organizations such as Visa, MasterCard etc. and the common set of standards that were adopted to ensure compliance and security standards for any merchant, processing company, and their own networks to protect the integrity of the transactions and the cardholders.
The standards are put in place to help merchants, financial institutions and any vendors associated with payment processing to help prevent data breaches and fraudulent usage of cardholder information. As a result, each merchant must validate on a yearly basis that they are following the standards set forth by the industry and to explain in detail how they process card transactions, store payment information or cardholder data. Failure to follow these procedures could lead to fees, fines and even having your business banned from using the networks for processing.
If you are comfortable with passing on the cost to your customer, with the new Surcharging or Cash Discount program your business can save up to 95% of the credit card processing cost by speaking with Swype Fast or by visiting swypefast.com