Reading and understanding your card processing statement can be challenging! So you have chosen your merchant services provider because the agent wowed you with this great rate that will save you a bundle on your card processing fees. You open your statement and you have no idea if you are getting the quoted rate or not, because it seems to be in some language handed down from the ancient aliens that landed here 4,000 years ago. You give up and hope beyond hope that what you were told is true.
Am I right? You have done this, whether you like to admit it or not. Don’t worry – you are not alone. I have heard it a million times: “I have no idea what I’m paying, I can’t make heads or tails of that statement!” Today I will cover how fee structures are comprised and hopefully give you a few tips on what to look for.
BASIS POINTS AND DOLLARS
Basis points are the root of all card processing fees and are most usually combined with a dollar figure. So most everything is expressed in a (% + $) fashion, in combination or separately. A basis point is 1/100th of 1 percent or 0.01 percent. One basis point is $0.01 (1 cent) for every $100 in sales. It’s very important to understand basis points and the dollar amount associated.
Now that we’re clear on that, there are two main methods to structure card processing fees: a system called “interchange plus” and one called “tiered pricing.”
INTERCHANGE PLUS METHOD
With this system, the structure will look like this: interchange + dues and assessments + processing fee = total transaction fee. The interchange rate (IC) and the dues and assessments are administered and set by the card brands (MasterCard, Visa, Discover). To me, this is the best system because the pricing is straightforward and processing companies cannot play with the figures. The IC is the amount that pays the issuing bank of the credit/debit card for the card use. This amount is collected from you, the merchant, as part of the total fees you pay. It goes to the issuing bank to cover its cost of the cards, rewards, advertising, risk of loss, fraud protec-tion and infrastructure (computer networks, etc.). The IC is set in stone and must be paid, no matter what processor you use. IC rates are adjusted twice per year (April and October) by the card brand for their more than 36,000 member banks that issue the cards.
There are currently more than 500 different IC rate categories. The categories are determined by card type, whether it is swiped or keyed, risk of card type, nature of the business where the card is used, detail of information and whether there were errors committed in its processing. All the IC tables can be obtained by going to www.visa.com and www.mastercard.com. But you have no idea which card your customer is giving you. It is not marked to indicate in any way. So you are always at the mercy of the card brand IC rate. Whatever it is, it is.
IC rates are always expressed in the “% + $” fashion. For example, a Visa CPS/Retail Signature Rewards is 1.65 percent + $0.10. All processors pay this same rate on this card, as it is collected from you.
The dues and assessments fee is also set by the card brands and is collected from you by the processor along with the IC and paid to the card brand. Currently, the set dues and assessment fee is 11 basis points (0.11 percent). Interchange and assessments are the true, call it wholesale, costs that all processors pay the card brands as they are collected from you.
Now, for the “plus” part, or the processing fee part of the equation. This is the part of the fee structure that is variable and is controlled by your processor. It’s also expressed as a “% + $” and added to the IC and assessments, as the cost to you to actually handle the transaction. A typical processing fee might be .10 percent + $0.10. It’s important to understand here that the agent may only be quoting you this portion and not telling you the rest of the story. This is a tactic used by many unethical agents on the phone or on the Internet. Many a savvy, educated business person has been duped by this. Always deal with someone face-to-face, locally. But make sure they live nearby or at least in your region. A good number of them pass through town and twist your arm, then you never see them afterward.
So, using the Visa Signature card example from before, you would pay (IC – 1.65 percent + $.10) + (A- .11 percent) + (P – .10 percent + $.10) = a total of 1.86 percent + $.20. On a $100 transaction, you would pay $2.06. But the problem is all these different components are listed separately and usually on different pages on your statement. And if you don’t know exactly what to look for, it’s hard to determine any of this. Your best bet is to have a knowledgeable professional in the card processing industry review your statement and give you the cost breakdown in easy-to-understand terms.
TIERED PRICING METHOD
If you’re on this method, there are usually three to four fee tiers: qualified, mid-qualified, non-qualified, and sometimes a qualified debit tier. These are also expressed in the “% + $” format and are comprised by grouping all the different interchange categories we discussed to fall into one of these tiers. The processor decides which tier all the different categories will fall into. The card brands have a guideline, but do not monitor how they are followed by the processors.
The qualified tier is usually the main rate and lowest rate quoted and the main part of the contract, also known as your base rate. Again, beware – this may be deceiving because the processing company decides which IC categories will fall here, and quite frankly there are only about five categories out of the more than 500 that are even considered “qualified” by the card brands.
The mid- and non-qualified tiers are actually surchargesadded to the qualified rate. Typical cards that may fall in the mid-qualified tier are transactions that are keyed and rewards cards. Keep in mind about 70 percent of the cards out there are rewards cards of some type. Here is where the majority of your cards are going to fall. So, if your mid-qualified tier is at 1 percent + $.10 and your qualified base rate is 1.74 percent + $.20, all of a sudden you are paying 2.74 percent + $.30 on the majority of your cards. Is that what you signed up for? In the example before, you paid $2.06 on a $100 sale. With this method, you pay $3.04.
The non-qualified tier should be the least utilized. The basic cards that fall here are business or corporate cards and they should be a small percentage of the cards you take in. But you may have a lot of cards falling here if you or your staff members are not properly processing the cards. Examples would be keyed in rewards cards, cards that are keyed in without all the information requested by the prompts, and transactions with a tip adjustment of more than 25 percent of the authorized amount. You will see these on your statement as “EIRF” or “cleared standard.” These are easily avoidable and if you see them on your statement, training needs to take place, because it is costing you big time. If your non-qualifi ed surcharge is 2 percent + $ .10, you paid $4.04 on that same $100 sale. The cure and rule is swipe, swipe, swipe, always, always, always!
As you can see, the processing company makes a lot more money off you with the tiered method because they can be more deceiving and manipulate the numbers – or should I say the “basis points” – a lot more.
A multitude of other fees appears on your statement that I will review in my next article – the list is too lengthy to include it here. But I hope to have enlightened you enough that you try to pick out some of the things we discussed here.
The take away today is: educate yourself and/or have a local professional help you. Work with someone local that you know and trust. Develop that relationship with an agent who will be honest and forthcoming, and will help you grow your business. Then occasionally ask that person, “What does this say?”
What pricing method are you on?
Rick Montgomery is a former bank executive with more than 20 years of experience in commercial lending. In 2007, he started Northern Air Merchant Service, locally providing solution-based services to small businesses. Rick may be contacted at (715) 889-2409, or readers may visit his website, northernairmerchantservices.com.