Most businesses never think about the complexity of the merchant services world as they authorize credit cards. There are a number of ways to accept credit cards – e.g. online terminals, stand alone terminals, phone authorizations, swipers, point of sale systems, etc. In addition, there are different pricing plans that are not only extremely different from one another, but can also be extremely misleading for the merchant.
Most businesses cannot be bothered to take the time to understand how the industry works; they just want to make sure that funds end up in their bank account. But ignorance can seriously affect your businesses bottom line and it is worth the little bit of time to ensure you are getting the best possible deal.
In the following series of articles, I’ll try and demystify the industry and educate merchants on the most cost effective way of accepting credit cards. There are approximately five plans on the market today - in this article I’ll go through two of the most popular pricing plans. Next month, we’ll describe the other three.
Interchange Pass-Through
Interchange plus is the term used to describe a the pricing model where a fixed markup is applied directly to interchange fees published by Visa®, MasterCard® and Discover®. Interchange rates are the wholesale fees charged by the credit card associations. With over 150 credit cards in the market today, each of them engenders a slightly different interchange rate.
The current interchange fees can be found in Visa and MasterCard’s Web sites:
Visa interchange rates
MasterCard interchange rates
As the name implies, Interchange plus pricing works by applying a fixed markup fee to the wholesale interchange rates from Visa, MasterCard or Discover cards. This includes two basic fees: one is often expressed in basis points (i.e. bps) and the other is an authorization fee (i.e. every time a business authorizes a credit card).
The type of card authorized (debit, credit, rewards, corporate), whether it is processed online or physically swiped and other variables determine the interchange change rate. The “plus” component of the interchange-plus pricing plan is fixed regardless of the interchange rate. The interchange rate, plus the processing component will determine the total cost of the transaction itself.
This type of plan is the most transparent and cost effective pricing plan – every business should ask their processor to be on this type of plan. Being on this plan gives businesses the wholesale rates the credit card associations charge plus a fixed mark up fee – but for those of you on interchange plus plans, beware of less reputable processors who mark up interchange fees!
Being on this plan almost always reduces the fees businesses pay for merchant processing and reduce their net effective rates (NER). The NER is calculated by taking the total merchant fees and dividing them by the total amount processed, less American Express if it is billed separately.
EGIA has rolled out a very competitive interchange plus plan for its members that is extremely competitive and we have found reduces significantly the net effective rate of those members currently processing credit cards.
Tiered Pricing
Any merchant on a tiered pricing plan is simply paying WAY too much for credit and debit card acceptance – period!
Under the tiered pricing plans, a business is given a base teaser “qualified rate” (say 1.69% + a $0.25 transaction fee) for processing. But what most businesses don’t know to ask is what are their mid-qualified or non-qualified rates. Think of three buckets – a “qualified”, “mid-qualified” and “non-qualified” bucket – and the processor determines which cards go into which category and charges the businesses accordingly.
Qualified rates are only assigned to the most basic credit cards and they must be physically swiped. This means of course that any time a card is not physically present your rates jump up. Even when cards are swiped, businesses will find that only 10-20% of cards actually are considered qualified - rewards cards and corporate cards are excluded!
As a general rule of thumb, debit cards not swiped, rewards card that earn hotel/airline miles are generally considered mid-qualified. Mid-Qualified rates are generally 2.5%-3.5%, and additional authorization fees apply.
Business cards, International cards, plus basic cards and reward cards not swiped do not fall into the Mid-Qualified category are considered Non-qualified. These generally receive a rate of 3.5%-4.5%. Naturally, additional authorization fees apply
We see merchants all the time that are on this plan and think they are getting a great deal, but actually end up with higher processing costs.
We have found that bookkeepers and accountants like this pricing plan because it is easier to understand and read on a merchant statement – unfortunately, this increases profits for processors and ensures merchants do not get the most competitive rates possible. Savvy businesses always ask for “interchange plus” pricing.