When it comes to merchant processing, there is no uniform method of charging fees to merchants. Fee structures can vary from processor to processor and even from account to account. The differences between these fee structures can mean a lack of transparency and a significant excess of costs for your business. For that reason, many processors will make it difficult, if not impossible, to switch to the optimal fee structure for your business, giving vague explanations about potential risks for your business or misrepresenting costs. So, what is the best structure for your business? We break them down below.
The first, and least transparent, fee structure is flat pricing. Used by large, name brand Point of Sales and processing companies like Square and PayPal, flat pricing applies a single cost to all transactions, with premiums being applied for things like online transactions and keyed-in transactions. For example, with Square, retail merchants pay 2.5% + $.10 for tapped, dipped, and swiped payments and 3.5% + $.15 for keyed transactions. This appears beneficial because merchants know exactly what they will be paying for each transaction. However, there is a very good chance that merchants are overpaying with this fee structure. The average interchange rate is significantly lower than 2.5-3.5%, meaning that merchants are paying a large premium, known as a discount rate, to these processors. While it is nice to have a consistent fee for forecasting purposes, this fee structure is costing your business a good deal more of your transaction volume than others might.
The next fee structure is bundled pricing. This fee structure is used by some of the larger processors but is the less transparent option that most of these processors offer. This plan is structured in a similar manner to flat pricing, but typically has 3 tiers of pricing (qualified, mid-qualified, and non-qualified) instead of a single, flat rate. Qualified, mid-qualified, and non-qualified refer to different pricing of interchange rates. For example interchange rates up to 1.75% might be treated as qualified and priced at 2.1% + $.20, interchange rates from 1.75%-2.3% might be treated as mid-qualified and priced at 2.8% + $.25, and interchange above 2.3% might be treated as non-qualified and priced at 3.3% +$.25. It’s not difficult to see why bundled pricing is a bad idea. For one, the processor offers no insight into the actual card types and interchange that the merchant is processing. Second, this pricing model can cost the merchant a significant amount of money, especially for rates on the lower end of the pricing tier. For example, if a transaction has an interchange rate of 1% + $.10, in the situation above the merchant would pay 2.1% +$.20, a 1.1% + $.10 markup above mandatory pricing as opposed to as little as a .35% markup for other cards.
The final, and best, option is interchange-plus pricing. As the name implies, this fee structure is priced as a markup over interchange. Instead of a transaction hitting at a single flat rate or a specific tier of different rates, transactions are uniformly priced at an addition to interchange. So the overall cost of the transaction would be the card’s interchange rate plus an additional percentage of the transaction plus a per-transaction cost. For example, a card that has an interchange of 1.75% + $.10 would be charged an additional .45% + $.10 for an overall cost of 2.2% + $.20. This markup usually doesn’t change from card to card, except for some cases where American Express has a higher markup. This is far and away the best option for merchants from both a pricing and transparency standpoint. Pricing is not subject to an interchange rate’s proximity to a flat pricing rate as set by a processor, meaning that overall costs will be much closer to the mandatory interchange cost. Merchants will have optimal transparency into their business because card types and interchange rates are displayed in order to demonstrate consistency of pricing. Do you think you may be paying too much for merchant processing? Along with sub-optimal fee structures, your processor could be overcharging you for a number of other rates and fees as well as misrepresenting the mandatory rates that card brands charge you. We can fix all of that for you. Not only can we change your business to the correct fee structure, we can also optimize your processing rates and fees to assure that you are paying the bare minimum to bring in revenue. Attach your most recent statements and enter your information below, and one of our payment industry experts will reach out with our free, no obligation 11-point audit.