Credit and debit card processing fees are some of the most convoluted and complex aspects of owning a business.
iQmetrix Payments receives a ton of questions from perplexed merchants on which processors they should work with, how to decipher their monthly statements and primarily which pricing model offers them the best rates.
With confusion abound, we thought we would clear the air on merchant services pricing models. Read on as we dispel the myths surrounding three common pricing models used by processors today.
Types of Fees
To keep this post as simple as possible, we’ve decided to use two types of fees when referring to pricing models- wholesale and markup. Each pricing model uses both types of fees to charge its merchants.
Wholesale fees refer to those that the processors can’t change and that merchants can’t negotiate. This is because wholesale fees, typically called interchange, are regulated by credit card companies themselves. This is how companies such as Visa and MasterCard are charging merchants to use their system.
It is made slightly more complicated by the fact that instead of having one standard wholesale fee issued by each company, card companies set hundreds of different wholesale fees depending on a variety of factors such as the type of card (premium vs basic), how the card was entered into the system (keyed vs dipped), the settlement period, and much more.
For the purposes of this article, a markup fee is any fee that a processor charges on top of the wholesale fee. This is how a processor makes money from the merchant. Markups are variable, meaning that an overarching body does not regulate them and instead vary from processor to processor. This also means that markups can be negotiated by the merchant and serve as a competitive advantage for processors looking to offer merchants the lowest rates.
Although both types of fees are always used in card processing models, the way in which they are sliced and served to the merchant varies depending on the type of pricing model that a processor charges.
Let’s start with a simple one. The flat fee pricing model acts as simply as it sounds. Processors put both the wholesale and markup fees together and charge the merchant a flat rate percentage of each transaction made. The flat fee is applied to all transactions no matter the type of card that the customer pays with.
Example: Each merchant will be charged 2.75% plus .3 cents per transaction
Myth 1: Because this is the most straightforward model, I must be getting the most transparent pricing option
Although flat fee is conceived from a straightforward principle, its inner workings are less than transparent. Because this model combines both the wholesale and markup fees together, it is difficult to ascertain the exact markup that the processor is charging. A high markup fee ensures that no matter the amount of interchange charged, the processor will always come out on top of a transaction. On average, merchants who opt to pay a bloated flat fee are charged 20% more than those who choose more transparent models.
Myth 2: I will always end up paying more with a flat fee model because they are charging me such a high markup
We apologize if this one is a little confusing and perhaps contradictory to our answer from Myth 1. The truth is that although flat fee usually ends up costing merchants more, in some cases this model can work in a merchant’s favor. Flat fee is ideal for a merchant in cases where their business typically sees low per transaction tickets and they don’t pay per transaction fees.
Example: A merchant who owns a coffee shop is charged 2.75% per transaction but the average sale for a cup of coffee is $3. The processor only makes $0.0825 per transaction.
In these rare cases (especially because processors almost always charge transaction fees), merchants- like that of coffee companies- are at a distinct advantage. In the case of Starbucks who used Square as their aggregator, the coffee giant ended up costing Square over $30 million in potential lost revenue due to their flat rate pricing model.
A tiered pricing model (often called bundled), categorizes credit card transactions into three distinct groups and assigns a different rate to each. Transactions that fall into the first tier called “qualified” are charged a much lower rate than transactions that fall into the mid-qualified and non-qualified tiers.
Example: Qualified transactions are charged 1%, mid-qualified are charged 2%, and non-qualified transactions are charged 3%.
Myth 3: I am getting charged the lowest rates because my processor has guaranteed me an extremely low qualified rate.
The catch with a tiered pricing model is that most transactions don’t meet the criteria to belong in the qualified category. This means that merchants almost always pay transactions fees on mid-qualified and the very expensive non-qualified tiers.
Each processor sets their own rules on what makes a transaction qualified or not, from the way in which it was accepted (keyed vs swiped vs dipped), to the type of card it is, and everything in between, it’s very difficult to guarantee that a transaction will be deemed qualified. In short, even if your processor offers you a very attractive qualified rate, beware of the non-qualified fees that you will most likely be paying.
Interchange Plus Pricing
Interchange Plus is a pricing model garnering a lot of attention over the last few years. Said to be the most transparent pricing option on the market, Interchange Plus (or Cost Plus pricing) separates the wholesale fee and markup fee on a pricing statement. Processors charge the standardized interchange fee plus a competitive markup to their merchants.
Myth 4: Because Interchange plus is so transparent it should be easier to understand my monthly statement now
With interchange plus pricing, it’s just the opposite. Because this model is so transparent, meaning every fee is broken down on your processing statement each month, your statement may look a little more complicated than that of a flat fees’. Interchange Plus gives more control and transparency to the merchant, with the downside being that it is up to the merchant to truly understand their statements and all associated fees.
Although we are advocates of the Interchange Plus pricing model, we also recommend that merchants look for processors who offer top-notch client support to help them analyze their statement to ensure true transparency.
Supporting the Merchant is Key
Merchant services pricing models are complex systems made more complicated by the thousands of processors looking to pad their markup fees. Merchants who take time to understand the best pricing model for their business can easily come out ahead of those who are nervous to ask hard questions. At iQmetrix Payments, our goal is to both educate merchants and offer transparent low cost pricing alternatives.
If you’re looking to make the switch from a complicated processor to our simple interchange plus model, contact a member of the iQmetrix Payments team today.
Feature Photo: Atanas Bezov / Shutterstock.com