Credit Card Processing | The 10 Most Important Factors in Credit Card Processing
Top 10 Ways to Cut Credit Card Processing Costs
- Make the switch to Interchange Plus Pricing.
- Recognize Your Business Type
- Register with the appropriate Visa/MasterCard Program.
- Understand your card mix and average transaction size.
- Make use of cutting-edge processing technology.
- Go over your statements again (at least every 6 months)
- Accept all card types and payment methods.
- Communicate with your account executive
- Request various offers for credit card processing services.
- Purchase on the basis of value rather than price.
With new taxes, technology, and laws, credit card processing is becoming increasingly complicated. We understand that all of the changes can be overwhelming.
You’re besieged with offers from credit card processing businesses that promise to save you money as a small business owner. Typically, most offers begin with a low interest rate. Each merchant services company competes for your business by offering a cheaper rate. If you’ve been in company for a while and switched processors, you’ve probably noticed that these low-ball deals don’t always work out.
In fact, between 2000 and 2010, the average retail credit card processing rate increased from roughly 2.00 percent to 2.66 percent, not considering other fees such as statement fees, batch fees, and PCI fees. Despite a significant decline in debit card rates and an increase in debit card usage, this increase has occurred. What is the reason for the increase? One of the most common offenders is the use of reward cards. The expense of those fancy awards, airline miles, and so on is passed on to retailers via banks.
The second major factor is a lack of knowledge about merchant processing. The banks teach merchants how to react to low rates. The issue is that there are 440 Visa/MasterCard/Discover rates, but the banks only offer you the ones with the lowest transaction fees.
“What is your rate?” is not the right thing to ask. “However, what is your effective rate?” says the narrator. The effective rate considers all Visa/MasterCard/Discover categories for which a transaction can be eligible. Knowing your effective rate will help you estimate the true cost of your processing more accurately. A simple formula can be used to calculate your effective rate.
Monthly Processing Charges / Monthly Processing Volume = Effective Rate.
If you process $10,000 in volume per month and your processor charges you $300, your effective rate is $300.
$300/$10,000 = 3.00%
This tutorial will walk you through ten critical ideas for lowering your card processing costs. Each essential strategy is explained in full below. You will become an expert in credit card processing by following these procedures, and you will be doing yourself a favour by cutting your processing costs to the utmost extent possible and saving significant amounts of money.
10 Crucial Points
- Pricing Plus Interchange (IC Plus)
This type of pricing was previously only available to Fortune 500 firms. That is no longer the case. Even small businesses can now benefit from IC plus pricing discounts. Because banks are unable to maximise their earnings, banks are unwilling, and in some cases outright refuse, to provide IC plus Pricing to small enterprises. They’d rather sell you the far more profitable Enhanced BillBack or 3-Tier pricing.
Because of the latest Durbin Amendment, you must migrate to Interchange plus pricing in order to realise the cost savings. Merchants who do not use interchange plus pricing will see their savings go to the processor, who is not required by law to reduce rates. (For more information, check the Durbin Amendment Savings section at the conclusion.)
Many ISOs (independent credit card processing organisations) will provide you with IC Plus pricing. You should accept their invitation. There are numerous respectable ISOs available on the market.
What is the benefit of Interchange Plus Pricing?
As previously stated, there are 440 Visa/MasterCard/Discover categories, and you want each of your sales transactions to fall into the lowest rate group feasible. Each transaction is assigned to the proper category by IC Plus Pricing, which then charges the relevant fee. This is something that no other pricing strategy accomplishes. The most typical pricing approach, 3-Tier, for example, puts each transaction according to the preferences of the processors. Most transactions are placed in the mid- and non-qualified levels rather than the qualified tier by the processors. These identical processors, on the other hand, will sell you on the qualified rate tier. This is a classic bait-and-switch scenario.
The cost of IC Plus is straightforward. Your rate is made up of three different elements.
Processor Rate + Interchange + Visa/MasterCard/Discover Assessment Fee
There are 440 rate categories in Interchange. Only roughly 60 categories will apply to the majority of businesses. That’s still a lot of money. The prices range from 0.95 percent plus $0.10 for debit cards to 3.25 percent plus $0.10 for some business cards.
The assessment fee is the rate charged by Visa, MasterCard, and Discover for each transaction. This cost is now 0.11 percent + $0.02, and it is not affected by card type or transaction type.
The rate and/or transaction costs charged by your processor are known as the processor fee. This is the only element of the interchange fee that the merchant can negotiate. When dealing with potential processors, keep this in mind. This cost is the same regardless of the card or transaction type.
You simply sum together all the components to reach the final rate. A Visa Retail Transaction Rate, for example, would look like this:
1.54 percent + $0.10 percent + 0.11 percent + $0.02 percent + 0.10 percent + $0.13 percent = 1.75 percent + $0.25 percent
Keep in mind that swiped transactions have a lower success rate than entered transactions. Business card swipes and keyed transactions have greater rates than consumer card swipes and keyed transactions. Transactions made with a debit card have lower rates than those made with a credit card.
Keep in mind that you want to lower your effective rate when choosing your pricing approach. The lowest rate is less relevant than the rate range. Only one transaction type is eligible for the lowest rate. The rate range applies to all cards and determines your effective rate in the end.
- Recognize your company’s type
Visa and MasterCard add discounts to your rates based on pricing indicators or business classifications. Visa/MasterCard used to charge a single fee for all industries at first. Some businesses refused to take credit cards because they believed the rates were too high and would eat into their profits. One of the largest holdouts was supermarkets. As a result, Visa/MasterCard began to offer special pricing to certain industries, card kinds, and processing techniques. This explains why there are 440 different rate classifications. Credit card acceptance in supermarkets, petrol stations, and fast food restaurants became possible as a result of these reductions.
Your company might be eligible for one of Visas or MasterCards special programmes.
If your average transaction is less than $15, for example, you may be eligible for the small ticket programme. If you’re now paying 1.64 percent + $0.25 each transaction, you may earn rates as low as 1.65 percent + $0.04 under the small ticket programme. Your processor will very certainly add another six cents to cover its expenses. You’d still save fifteen cents every transaction, or 1.5 percent, on a $10 transaction.
Most industries, including restaurants, B2B, MOTO, fast serve restaurants, convenience stores, hotels, gas stations, supermarkets, charity, insurance, utilities, and government, have Visa/MasterCard programmes.
- Make sure everything is in order.
To take advantage of the savings, make sure you’re processing under the correct business type once you’ve determined your business type. You’ll need to inquire with your processor. If you’re not correctly set up, you’ll need to figure out why and rectify it. Your processor may not have put you up under the incorrect business category on purpose, but it has benefited financially from you. This is why you must always be on the lookout for bids for your merchant services. Don’t become too comfortable with your present provider since, like it or not, many of them are looking out for your best interests.
- Be familiar with your card mix and average transaction size.
Personal cards, rewards cards, corporate cards, debit cards, and purchase cards are just a few of the card types available. The rate you pay is directly influenced by the type of card you use. Having a summary of the different card types can help you save money on processing fees.
You’ll also need to know what percentage of transactions are swiped, keyed in, and business card transactions. Let’s imagine your processor offers you a low swipe rate, but you prefer to enter in the majority of your transactions. Another scenario is if you have a low consumer card rate despite the fact that you mostly accept business cards. Remember that many processors may sell you a low rate to get you to use their services, but that rate may not be applicable to the bulk of transactions. It’s possible that a higher rate will apply. As a result, you must be aware of your card transaction mix.
If you’re not sure what cards you’re using, your processor should offer a webpage where you can check your transactions. The websites of certain processors offer in-depth evaluations of your transactions. Make the most of this useful information.
There are few exceptions to the IC Plus pricing, which gives the largest savings for most firms. If you take 95% personal cards swiped through your credit card terminal, for example, you’d be better off with a cheap 3-Tier pricing structure. The rationale for this is that you can expect nearly all of your transactions to qualify at the lowest qualified rate, with only a few at the higher mid- and non-qualified rates.
You might be better off with a specific B2B pricing package if you take a lot of business cards. The majority of small business owners are uncertain about their card mix. Typically, the card mix is all over the place. In this instance, the IC Plus cost is preferable.
You will save money if you know what your average transaction is. Your average transaction can be seen on your statement, or you can just divide your monthly volume by the number of transactions in a month. This is vital to know since you may be eligible for the small ticket programme if your average transaction is less than $15. Pin debit savings may be beneficial to your business if you have a high average ticket.
- Make use of cutting-edge technology
A few years ago, there was a story about a merchant who paid a lot of money for one of the first credit card terminals, the VeriFone Zon Jr. XL. He’d heard so many horror stories about fellow merchants being duped by terminals that he vowed to never buy another one.
A merchant services representative came into his store one day and examined his statement. His rates were extraordinarily high, he noted. When he viewed the Zon Jr. terminal, he realised the surcharges were due to outmoded equipment. The sales representative attempted to persuade the merchant that he required new equipment in order to save money. The Zon can only read one track of information encoded on the back of a credit card’s magnetic strip, according to the sales agent. Both tracks had to be read by Visa/MasterCard. The merchant was adamant in his refusal to budge.
After another five years, the Zon finally gave up. The merchant came up with the cash to buy a new machine. He noted that his processing charges per transaction were roughly two percent lower the following month than the month before. The salesperson was correct. The merchant saved a few hundred dollars by keeping his old equipment, but he lost thousands of dollars in fees by processing transactions incorrectly. The lesson of the story is that in order to maximise your savings, you must use cutting-edge technology and equipment.
PCI Compliance is another thing to consider. PCI Compliance is a programme developed by the credit card processing industry to combat fraud by requiring merchants to adhere to security requirements. Some outdated terminals are no longer PCI compliant, and businesses who continue to use them risk incurring significant fines if their terminals are hacked.
- Go over your statements again.
The majority of merchants rarely, if ever, review their monthly statements, which is a bad idea. Because many CPAs are inexperienced with statements, don’t expect your accountant to study and spot abnormalities on your statement.
Examine the statement for any changes in rates or fees, as well as any other abnormalities.
The two months of the year when you must evaluate your statements are April and October. These are the months when the Visa/MasterCard Association meets to determine rates for the year, and your rates will almost certainly be raised during this time. If your rates have been raised, speak with your dedicated account executive or your processor’s retention department and politely request a reduction. If they refuse, change processors because it is clear that they cherish those few additional pennies more than your business.
7. Accept all major credit cards and payment options.
If you want more sales, make it as easy as possible for your customers to pay, according to an old business saying. That means Visa, MasterCard, Discover, American Express, JCB, and debit cards are all accepted.
Because the fee is too high, several merchants refuse to accept American Express. The issue you must ask yourself is whether you are willing to pay greater transaction costs in order to gain a sale or if you are willing to lose the sale in order to save money on higher transaction costs. Accept American Express if the former is more important to you.
Pin debit used to be the best option to cut processing expenses a few years ago. That isn’t always the case these days. Interchange rates for signature debit transactions have been reduced by Visa and MasterCard. The transaction fees charged by debit networks have increased. Pin debit is still a wonderful way to save money for merchants with high average transactions because debit transaction costs are so much lower.
If you’re a retailer, see if your processor provides a check guarantee. Many check assurance firms, such as Telecheck and Certegy, offer rates below 1% if you actually want to cut your transaction expenses. Then, because some people still write checks, put up a sign saying that you accept them.
8. Contact your account manager on a regular basis.
Do you have an account executive who is solely responsible for your account? Are you aware of your account executive’s name? If not, you’ll need to find a new processor who will assign an account executive to your company. Because the credit card processing industry is undergoing so many changes, you must be proactive in your reaction. You require the assistance of a go-to person. That’s your own account manager.
A qualified merchant services account executive can assist you with analysing your statement, ensuring that you are set up under the correct business type, determining the optimal pricing technique, advising you on the latest technology, resolving chargebacks, and more.
- Request multiple card processing service bids
When was the last time your statement was scrutinised? What’s more, when was the last time you looked at your bank statement? If your company is like most, credit card payments account for 50 percent or more of your total income. It is beneficial to be aware of what you are paying and to ensure that you are not overpaying.
Getting numerous quotes on credit card processing is the best method to receive the best deal. When it comes to banking, “you win” isn’t simply a slogan; it’s sound counsel. Obtaining numerous bids may appear to be time-consuming at first glance.
- Purchase based on value rather than price.
As the saying goes, “price is a one-time thing, but cost is a continuing issue.” Artificially low prices and/or “free terminals” entice many merchants into improper processing agreements. On the Internet, these discounts are continuously marketed. Some of the offerings include “rates as low as…” and “free terminal with every account.” Don’t be deceived. If you’ve made it this far in the tutorial, you’ve done a good job of educating yourself.
You’re well aware that the rate is meaningless. It’s all about the effective rate. (Your effective rate is calculated by dividing all of your processing costs by your volume.) You signed because of the rate. The effective rate is the price you pay.
Choose a company that uses cutting-edge technologies. Pay no extra fees or penalties for PCI compliance due to old equipment. Loyalty programmes, gift cards, check guarantees, online account access, and POS systems are all examples of added value. These and other services and products can provide you a competitive edge. If you don’t take advantage of these opportunities, your competitors will.
Choose a company that has a dedicated account manager. Inquire with the processor about what will happen if your account executive quits. Is it feasible to obtain a replacement? An excellent account executive may save you a lot of time and money, which is worth paying a little extra for.
Choose a reliable provider that customises its processing to your organisation’s requirements. Many merchants believe that going to their banks will fix the situation. Unlike the other items they sell, banks do not have the same level of control over merchant services. Big processors like First Data, Elavon, and Paymentech handle most banks’ merchant services. As previously said, the banks seek to make money off of you via profiting from your business. Expect to get a bad deal from your neighbourhood bank. When something goes wrong, though, expect a sympathetic ear. You shouldn’t expect your banker to be able to help you.
Second, your CPU must be able to meet your requirements. Your processor should be able to work with you to develop a plan that meets your needs if you need next-day funding, have large transactions, accept advanced payments, or wish to accept health savings cards or fleet cards. If not, look for a processor who can assist you with these goals.
Free terminal offers should be avoided. You get what you pay for, as the phrase goes, and there are no freebies. Credit card terminals are not given away for free, and the processor will make sure it gets paid for the “free” terminal it gave you. Find out how much it will cost. An outmoded terminal, a long-term commitment, or exorbitant penalties for equipment non-return could be the price.
Continue your search. Change processors if you’re not fully content with your existing one. There is a lot of rivalry for merchant service accounts. You are in control of the vehicle. When it comes to choosing a credit card processing firm, the best advise is to go with one that you believe has the most integrity and honesty. Over time, this will put you in a good position.
Savings from the Durbin Amendment
Small businesses have benefited from the largest reduction in credit card processing fees in the history of the electronic payment industry, but only if they are properly set up.
The Durbin Amendment, which was included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, has a significant impact on your credit card processing or, more particularly, your debit card processing charges. As of October 1, 2011, the Durbin Amendment affects both signature and pin-based debit interchange rates by dramatically decreasing them.
Visa/MasterCard established debit card processing rates (debit interchange rates) at 0.95 percent + $0.20 for Visa and 1.05 percent + $0.15 for MasterCard prior to October 1, 2011. The federal government intervened, led by Senator Richard Durbin, and decreased the debit interchange charges to 0.05 percent + $0.22 under the Dodd Frank Wall Street Reform and Consumer Protection Act.
In the future, merchants who handle debit cards, whether signature or pin debit, will experience significant savings on their merchant account processing statements. Debit transactions, both pin and signature, account for about half to seventy percent of all card transactions. Merchants’ credit card processing fees could be lowered in half. This equates to real money saved.
Unfortunately, many shops who take a significant number of debit cards may not benefit from the Durbin Amendment reduction since their current credit card processing plan does not allow for it. Instead, the money they save on debit interchange will go to their processors.
This is especially true for 3-Tier and Enhanced BillBack merchants. Processors aren’t required by law to lower their charges. They’re only lowering one part of your fee, Interchange, but not the other two, Visa/MasterCard assessment and processor %.
There is a technique to get around this problem and ensure that your organisation saves money on debit interchange. This necessitates a move to interchange plus pricing by the merchant. This ensures that you will receive the discount.
The reason for this is that under IC plus pricing, the processor is required to establish the interchange rate at the current bank rate before adding his portion.
Blindbid is a cost-cutting firm for small businesses. We assist you in negotiating the best deal with the leading processors. The best credit card processors compete for your business on our online forum. In the following ways, the Blindbid process saves you both time and money:
- Lowest Rates — Your business will be competed for by a number of processors.
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- Control — No bartering with sellers is allowed. You get to decide how many vendors you’d want to talk to.
- The Most Trustworthy Vendors We’ve pre-screened and aggregated the best processors in the industry, saving you time on due diligence.
The Cost of Credit Card Processing Solutions (Series on Merchant Services)
All credit card processing merchants should be aware of the costs of credit card processing solutions. Over time, the merchant service industry has created its own system and terminology. Merchant service salespeople use this phrase, and too many credit card processing merchants nod knowingly, either to avoid appearing clueless or to speed up their exit from the sales pitch. Unfortunately, failing to comprehend the words can cost credit card processing businesses a lot of money.
The merchant fees associated with processing, as well as the language used to describe them, are standard across most processors. Depending on the processor, the phrases may have slightly different meanings. Some processors prefer to employ sweet-sounding or forceful terms to represent a cost, but to credit card processing firms, a cost is simply a cost. Merchants using credit card processing should be aware of the following common costs and terminology used by the top credit card processing businesses.
The discount rate is the fee charged by a merchant’s bank (sometimes known as the “acquiring bank”). When merchants accept cards, the interchange rate is paid by the “acquiring bank” to the customer’s bank (the “issuing bank”). The interchange fee is received by the purchaser’s bank from the seller’s bank in a transaction. The buyer’s bank then pays the seller’s bank and processes the transaction’s amount. The acquiring bank then collects the discount rate plus any transaction costs from the merchant.
Merchants are frequently offered interchange-plus pricing, which is an uncommon rate option. However, for attentive and knowledgeable businesses, it may be the wisest pricing option. Simply defined, this rate is a predetermined markup plus the actual processing fees. This equals the processor’s actual interchange charges (cost of processing) plus a modest fixed margin. This method of pricing is significantly less perplexing.
The qualifying rate is the lowest cost that credit card processing merchants can charge for credit card transactions. They are charged for standard consumer credit card purchases (non-reward, etc.) swiped on-site; a signature is obtained, and the transaction is batched within 24 hours. For “regular” transactions, the qualifying rate is the percentage rate charged to credit card processing merchants. Depending on the processor, the meaning of a “standard” transaction may differ.
Some transactions that do not qualify for the “qualified rate” are charged the mid-qualified rate. Partially qualified or mid-qual rate is a term used to describe this rate. Credit card transactions that do not qualify for the “qualifying rate” may be typed in rather than swiped, the batch may not be settled within 24 hours, or the card used is not a regular card, but rather a rewards, foreign, or business card.
All transactions that do not fulfil qualified or mid-qualified standards are subject to the non-qualified rate. The non-qualified rate is the highest rate for credit card transactions charged to credit card processing merchants. This rate may be utilised if the card is not swiped, address verification is not requested, rewards, business, foreign, and other cards are used, and the batch is not settled within 24 hours after the initial transaction.
Merchants who accept credit cards are required to accept all sorts of credit cards from the brands they have agreed to accept. In other words, despite the fact that reward cards have higher fees, businesses who take a brand’s standard card must also accept the brand’s non-standard card. A merchant who accepts Visa® credit cards, for example, must also accept Visa® reward cards.
Processors and banks impose a variety of fees, which are often noted on processor statements. Many of these fees are industry-wide fixed costs that retailers are charged across the board. Merchants are subjected to a slew of additional costs, based on their size and type of business, as well as the whims of the bank and processor’s salespeople. Some costs are assessed on a daily, weekly, or monthly basis, while others are assessed on an event-by-event basis or as annual fees.
Charges for settlement or “batching” occur on a daily basis. When terminal transactions are settled, a “batch fee” is applied. Merchants should settle their batches within 24 hours of the transaction to reduce transaction fees. For the majority of retailers, this implies on a daily basis. Others, such as those who sell their wares at craft fairs and other events, may experience this less frequently, but their batches should still be resolved within 24 hours. The batch charge is low, ranging between $.10 and $.35 every settlement.
Although the charge is known by various names in the payment card processing business, it is very conventional. Merchants are charged monthly minimum fees as a starting point for monthly charges. If the merchant does not earn the monthly minimum or more, they must pay at least the monthly minimum fee. It is the monthly fee that a merchant will pay to accept credit cards. The monthly minimums usually range from $15 to $50.
Statement fees are monthly costs that are similar to bank statement fees in that they summarise the month’s processing. This covers, among other things, the total dollar volume, the number of transactions, and the average ticket amount. The cost of a statement varies from a flat amount of $10 to $25. Many processors provide online data access as well as monthly statements. This online service might cost anywhere from $2 to $10, depending on the processor.
There are certain monthly fees that retailers should avoid paying. Depending on your industry, it’s probably preferable to avoid credit card terminal warranty plans, and leasing a terminal with long-term monthly lease payments is rarely a good idea.
In most cases, gateway fees are billed on a monthly basis. The gateways charge e-commerce merchants and service providers who use payment gateways, as well as off-site merchants and service providers that use wireless gateways, for their authorization services. To make payment easier, these service fees may be collected on a monthly basis through their processors. Monthly fees range from $5 to $100, with per transaction costs ranging from $.05 to $.10.
Fees for retrieval, chargebacks, and ACH rejections are charged per event, and many of these can be avoided. When a client disputes a transaction, retrieval fees apply. The card issuing bank initiates a retrieval request in response to a complaint. This letter of retrieval requests all sales invoices and transaction evidence. The chargeback procedure begins with this retrieval request. The retailer is normally charged $15.00 for the request. The acquiring bank imposes chargeback fees on a merchant. When a chargeback claim by a customer is successful, the merchant is often charged a $35 fee. The ACH rejection fees are similar to the fees associated with a bounced check.
Annual fees, reprogramming costs, and set-up fees are not charged by the best credit card processing firms. Many subcontracted salespeople will charge these fees in addition to offering lower interchange rates. Processors are willing to accept cancellation costs, but they should be low and fixed, often $250 to $350. Prior to entering a contract with a processor, the merchant should be informed of cancellation fees. Avoid acquiring companies that impose varying cancellation costs. Top credit card processing businesses will go to great lengths to ensure that merchants are satisfied and that the merchant service contract is not terminated.
Be conscious of the costs that aren’t readily apparent. A salesperson may advertise absurdly low rates while taking on additional monthly fees. Many merchants appear to be overpaying for debit services, which is simply due to the fact that the service is growing increasingly popular, and the merchant is unaware of the true costs of debit payment due to the minimal risk involved. The leasing of terminals is another profit-generating strategy used by salespeople that might be avoided. Because terminal costs have dropped dramatically in recent years, merchants can and should avoid leasing equipment.
Too many merchants, in my experience, have a limited or non-existent awareness of the merchant service sector and associated credit card processing charges. By properly accepting credit cards, merchants with the right information may improve revenues while lowering costs. Lower exchange rate qualification can reduce transaction costs by training staff in suitable payment acceptance.