Credit card processor

In order to find the best credit card processor for your company, you need to understand all the components of the pricing structure.

Deception

If you Google for “merchant account” or “credit card processor” you will find numerous businesses offering this service. However, many of those are actually fraudulent. For example let’s take a look at this advertisement:

Screenshot - Advertisements on Google.com by services

The interchange fee imposed by Visa and MasterCard itself is more than 1.1% in most cases. Since a credit card processor has to make money on top of the interchange fee, it is highly unlikely that the fee being charged by this “credit card processor” is a mere 1.05%.

Fee

Let’s say that John bought coffee for the entire office and it cost him $100. He swiped his credit card at Starbucks and paid $100. On the credit card statement, John will see a charge of $100.00.

However, Starbucks will not get the whole $100.00. Depending on what kind of rate is negotiated between Starbucks and John’s merchant account (Chase Bank in this case), Starbucks might have to pay anywhere between 2% to 3% of the transaction amount. Let’s assume that the rate was 2%. That means Starbucks receives $98.00. What happens to the $2.00? That is divided between the bank that issued the credit card to John (Wells Fargo in this case), Visa and the merchant account ( Chase bank in this case). This $2.00 fee is also called “merchant discount”.

The credit card issuing bank takes the biggest chunk of the fee. It could be as high as $1.75 of the $2.00 fee. The fee taken by the credit card issuing bank is called an “interchange fee”. It might seem like the “interchange fee” should be dictated by the credit card issuing bank. However, the “interchange fee” is set by Visa or MasterCard and it is non-negotiable. The “interchange fee” is always made up of a flat rate for each transaction plus a percentage of the transaction amount. In the USA, the interchange fee is usually around 1.77% + $0.10 per transaction.

About $0.18 of the $2.00 fee is taken by Visa or MasterCard. This is called “assessments fee”.

The remaining $0.07 is taken by the merchant account provider. This is what is negotiable when a business is looking for a merchant account. The next chapter has more information about how to go about finding the best credit card processor.

How much money a business pays in card processing fees also depends on many other factors. One of the most important factors is whether the transaction type was “card present” or “card not present”. “Card present” is when the card holder physically swipes his card like John did when he bought coffee at Starbucks. “Card not present” is when the card numbers are keyed in either through a telephone or through a website. When John bought a book online the transaction was called “card not present”.

Since there is more risk of fraud when the card is not present, businesses have to pay more towards credit card processing fees for online transactions compared to their counterparts where customers swipe their credit cards.

Also the industry type matters. The fraud rate is generally higher for the travel, gambling and adult entertainment business. The business owners of these types of companies will pay higher credit card processing fees.

Interchange Fee

Interchange fee is the largest portion of the total fee. Both Visa and MasterCard have published a very complex set of rules which dictate the fee conditions and rates. See interchange fee rulebook published by MasterCard and Visa .

Assessments Fee

This is a small fee Visa and MasterCard charge for using their network. Both Visa and MasterCard have set assessments fee to be 0.11% of the transaction amount.

MasterCard charges an additional fee of 0.0185% of the transaction amount. They call it Network and Brand Usage Fee (NABU).

Visa also has an additional fee of 0.0195% of the transaction amount. They call it Acquirer Processing Fee (APF).

Processor Fee

This is the fee a processor charges for using their services. Usually they have fees attached with each type of service they offer. Some of the common fees are:

  • Setup fee (one time)
  • Monthly maintenance fee
  • Statement fee
  • Address Verification (AVS) Fee

Interchange plus

Some credit card processors offer “interchange plus pricing”. What this means is that these credit card processors clearly tell their clients that they will charge whatever the interchange fee is. On top of that, they will charge their processing fee. That is why it is called “interchange plus”. The “plus” stands for the processing fee taken by the credit card processor.

Since all the credit card processors must incur the same “interchange fee”, this model makes it easier to compare rates between one credit card processor and the next. Many credit card processors do not offer “interchange plus pricing” because it is so easy to compare the pricing between two credit card processors.

Business owners who use interchange plus are assured of the markup the credit card processor is earning on each transaction.

For example, let’s take a look at the website PetroleumMerchant.com. They advertise their rate as

Screenshot - PetroleumMerchant.com's rates

One basis point is equivalent to 0.01%.

Here the credit card processor is stating that the total fee incurred by the business will be the interchange fee + assessments fee + 0.01% + $0.05 per transaction. The (0.01% + $0.05 per transaction) is the credit card processors' fee.

Another example

Let’s take a look at the rate offered by Main Street Merchant Solutions.

Screenshot - Rates offered by Main Street Merchant Solutions

In this case the processor’s markup is (0.30% + $0.10 per transaction).

Notice how easy it is to compare the pricing of “Main Street Merchant Solutions” to “Petroleum Merchant”. Petroleum Merchant offers fewer services and hence their pricing is lower.

With “interchange plus”, business owners are able to compare pricing and see what services they are getting.

Tiered pricing

A credit card processor does not want to talk about hundreds of different rates to a business person. To avoid this, they usually place all the various interchange rates into three different buckets.

  • Qualified discount rate
  • Mid Qualified discount rate
  • Non Qualified discount rate

Now the credit card processor only has to talk about three different categories. But here is the catch. In the advertisements, you will see the lowest published rate. While selling the service to you, the credit card processor will always talk about the Qualified Discount Rate.

In reality, when your customers swipe their credit cards, a great many transactions will not qualify for the “Qualified Discount Rate”. What are some of the reasons why transactions will not be charged the lowest bucket rate?

  • Card not swiped.
  • Rewards cards - Cards which earn free miles, hotel points etc.
  • Corporate cards - Cards issued by corporations to their employees.
  • Customer’s zip code did not match the data on file.
  • Cards were not settled within the given time frame.
  • Other factors

By some estimates, around 80% of the transaction do not qualify for ‘Qualified Discount Rate’.

Braintree

Let’s Take a Look at the Pricing at Braintree

Screenshot - Pricing at Braintree

As we can see, Braintree offers two different prices. One rate is for qualified transactions and another one for non-qualified transactions.