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Credit Card Processing: Why Your Low Rate May be Costing a Fortune by Jonathan Hewitt
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The most diligent business people will do their homework when shopping for a merchant account. They'll get multiple processing quotes from different providers and negotiate the lowest rates to get what seems to be the least expensive processing solution.
Here's the kicker, merchant accounts with very low discount rates are not always less expensive than accounts with higher rates. If fact, more often than not - they're substantially more expensive. In this article, I'll explain how merchant account rates work and I'll cover the vital question that you need to ask providers in order to get the least expensive rates for your business.
The merchant discount rate that businesses pay to process credit cards is based on VISA and MasterCard's interchange fees. Basically, interchange rates are the wholesale processing rates paid to the issuing bank of a customer's credit card. Understanding interchange is crucial to getting the best merchant account rate. If you're unfamiliar with interchange fees,[link widoczny dla zalogowanych], take a moment after reading this article to learn about them. It really is money-saving knowledge.
Merchant account rates are structured one of two ways. The first and most common is a tiered rate structure,[link widoczny dla zalogowanych], and the second is something called an interchange-plus pricing structure. Since tiered pricing is most popular and most pertinent to this article, that's the one I'll be addressing. However, interchange-plus pricing is the best and most transparent form of pricing. You can read more about interchange-plus pricing by following the link in the resource box at the end of this article.
Tiered merchants account pricing functions by taking the hundreds of VISA and MasterCard interchange fees and categorizing them into two or three categories. The first rate category is called the qualified rate, and the second and third categories called mid-qualified and non-qualified represent surcharges that are applied to the qualified rate. For example, a typical three-tiered merchant account pricing schedule would look something like this:
Qualified Rate: 1. 79%
Mid-Qualified Surcharge: 0. 25%
Non-Qualified Surcharge: 0. 60%
Understanding how hundreds of interchange fees are packed into these three categories is the key to recognizing the best processing rates. Industry professionals refer to each tier of a merchant account as a "bucket, " and payment processor can choose which bucket an interchange rate will qualify to.
Simply put, merchant account providers have the ability to control which fee category interchange rates will be charged to. They can conceivably offer a merchant account quote with a qualified discount rate of 1. 50% and still make a profit by routing the majority of charges to the mid and non-qualified rate buckets. Rate as low as this are very appealing at first, but once it becomes apparent how interchange fees are being routed, they're worthless because they're virtually unattainable.
This tactic is referred to as "inconsistent buckets. " Inconsistent buckets make it possible for merchant account providers to make rates appear a lot better than they actually are. By quoting an unreasonably low qualified rate and then routing the vast majority of interchange fees to the mid and non-qualified surcharge buckets, shifty providers can win business over honest providers that are actually offering a better merchant account.
In order to find the best merchant account rate, you need to ask a provider how they will be routing interchange fees. How interchange fees are applied is more important than the rates and fees you're quoted. A low rate is worthless if very few of your transactions will ever qualify to it.
If you're already processing credit cards, now is a good time to call your provider and ask them to explain how they're routing interchange fees on your account. You may be surprised at the answer. If you're in the market for a new merchant account,[link widoczny dla zalogowanych], don't be blinded by numbers. Make sure to ask each provider that you receive a quote from how they'll be qualifying the different interchange fees. Don't pick the quote with the lowest rate - pick the quote with the lowest rate that will apply to the majority of your transactions.
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