As your Merchant Services provider for accepting card payments, Bank A has assured you that you have the best rates possible. They’re always friendly and helpful when you need to call, so you’re pretty sure you’ve got a good thing going. When you look at your monthly statement, you tend to peruse it to see the cost, but there’s so much there you don’t know what is, you just tend to skip over it, and look for the bottom line of your total fees. Then you move on to something else.
Through-out the day you might get a call, or several even, offering you lower rates than you’re paying now, or a new type of pricing plan that’s assured to lower your cost. You’re pretty sure your rate is 1.29% and a $0.15 transaction fee, as that’s what you were quoted when you signed with Bank A. You know you’re paying more than that, due to all the fees on your statement, but Bank A has told you that’s the card brand fees, and there’s nothing they can do about those, “everybody pays those”. That’s true, but it’s also misleading. Your rate at 1.29% does cover most debit cards, but it doesn’t cover the wholesale cost of any credit cards. Those cost more, some a lot more, so what happens to those transactions? Since the 1.29% you were quoted doesn’t cover the Interchange rates (wholesale cost) of credit cards, the 1.29% is pushed aside, and the cost of that transaction is defaulted to the Interchange rate (wholesale) of the card with a surcharge added for the markup. That surcharge can be pretty hefty, and hard to identify looking at your monthly statement. It can push the cost of the transaction well over 3%. The surcharge is not a card fee you have to pay, if you had a more honest rate, as the 1.29% was too low. There are also other varying factors that can affect the cost of a transaction, but they’re a bit convoluted, so I’ll skip those for now.
Is There A Better Way?
There are other types of pricing as well, like Interchange Plus, where a small percentage rate, and a small transaction cost is added to the wholesale rate of each card out there. There are different kinds of flat rate pricing like PayPal, Square, and Stripe, where they charge a fixed percentage, and sometimes a transaction fee on every transaction. Their usually around 2.75% – 2.9%. Most debit cards are regulated to .05% on Interchange (wholesale), that’s a pretty big mark up to get to 2.75% with the above pricing type. One of the newest ways is to charge a flat monthly cost plus the wholesale cost of the cards you accept each month. This can truly be the fairest pricing type of all the above.
Finding the True Cost of Your Provider
With all that said, there’s really only 1 rate that matters, it’s your “Effective Rate”. That’s your total monthly cost of accepting cards payments calculated into a percentage, including your statement fee, your provider’s markup over wholesale, card fees, everything. There are tons of articles out there on how to find your effect rate, and it’s really pretty simple. Just divide your total monthly fees on your statement, by the total in card sales you did for that month. This is as I said, the main rate that matters. It’s your true cost for accepting cards.
Keeping in mind when considering your effective rate, there are some cost factors you cannot control. As I mentioned above, the Interchange Rates are the rates the banks charge for their cards, known as the wholesale rates. Depending on what type of business you operate, can affect the types/cost of cards you see each month.
A bakery will accept mostly debit cards, which have a lower percentage, but a higher transaction fee. Since the average ticket for a bakery is usually low, the transaction fee becomes a bigger part of the cost of the transaction. However, a B2B merchant has a higher average ticket, but B2B transactions are most often cards with higher percentage rates due to the types of cards businesses use, but the transaction fee is less of the overall cost of the total sale, so the effective rate for B2B can be a lot lower than a bakery even though most of the cards used have a higher Interchange cost.
You Have Good Rates, but a High Effective Rate
As I mentioned above, the Effective Rate is your total cost in a percentage. So, the 1.29% Bank A gave you is too low, and with the added surcharge, it becomes a much higher rate. Also, rates aren’t everything, some of the fees on your statement can be fees your provider put there for their profits, and you assumed they were card fees due to the terminology, or acronyms that were used. It can truly be hard to identify what fees are legitimate card fees, and what fees are put there by your provider. That’s what made the aggregators like PayPal, Square, and Stripe look so attractive, no fees. In reality though, you’re paying the card fees all wrapped into one price, but you’re also paying a huge markup over debit rates, and a lot of credit cards.
Some do ask about the statement fee, but that’s usually all. A few ask about all the monthly fees we as a provider charge. That’s wise, but not all encompassing.
Getting to the Bottom Line
One good tip I can mention is to ask for a real statement with the pricing you’re being quoted in. They can block out any merchant information from one of their accounts, but you can see all the cost. Then keep that statement if you go with them, and compare to your first 2-3 statements after signing up. Another tip, that’s a little time consuming, is go over each and every box on the Merchant Processing Agreement you’re considering signing with the Agent that’s signing you up. I mean absolutely every box, every number, before you agree to sign. Empty boxes should be either zeroed out, or struck through. If you were told there’s no cancellation fee, make sure that box is pointed out to you, and has a zero or is struck through. Many times, I’ve heard that box was empty when signed, but now you’re being told there’s a cost for cancelling.
The bottom line is, do your research. Look for reviews on the internet, look at the BBB for that provider, and search their name with the word “complaint” after their company name. It might take trying 2-3 providers, but in the end getting your Effective Rate down is the most important thing you can do to lower your cost of accepting credit cards and increase your profits.