What you need to know about low-cost credit card processing
FLAT RATE PRICING. There are many necessary costs involved in running a business, and credit card processing is one of them. As a savvy business owner, you probably already realize how important it is to accept credit cards. After all, they are consumers’ most preferred payment type, and businesses that don’t accept them risk losing out on customers, sales, and many other benefits.
No one wants to pay more than necessary for any good or service. But with all the payment processors out there promising “low-cost” credit card transactions, it’s hard to know how one differs from another, and what to expect from “low-cost” processing.
Let’s take a look at the various considerations for credit card processing rates, fee and pricing structures, and what you should pay attention to when choosing your credit card processor.
Types of credit card fees
Interchange and assessment rates and fees
Certain fees are usually non-negotiable, including interchange and assessments. Interchange and assessment fees are determined by the card associations and are charged to payment processors, who then collect the fees from their merchant clients. Interchange goes to the authorization network (the banks that issue credit cards) to pay for the verification and routing of funds, and assessments go to the card brands (Visa, MasterCard, etc.) for the privilege of using their cards. The interchange rates are based on how a transaction is conducted—whether it’s swiped, dipped, keyed, conducted online, and well as the merchant’s business type, size, and many other variables.
In addition to collecting interchange and assessment fees for the card brands and networks, payment processing companies also known as “acquirers” also assess fees to cover the costs of the services they provide to merchants. Unlike interchange and assessment fees, this type of fee can vary by processor and can sometimes be negotiated.
Fees in this category pay for services such as equipment rental, payment gateway access, PCI compliance programs, minimum processing amount, online reporting, and many other value-added services that make payment processing convenient and reliable for merchants.
Sometimes card processor fees are listed separately from interchange and assessment fees, but some processors bundle them into one rate. It’s important to talk to your credit card processor about their particular fees including what they are for, how they are collected, and whether you need the particular service associated with the fee.
Popular processing pricing structures
Pricing structures can vary widely and are complex by nature. It’s important to note that one pricing model isn’t inherently better than another. It all depends on your business and the variables noted above regarding business type, processing volume, acceptance methods and so on. Let’s take a look at some of the popular pricing strategies used by processors.
Flat rate pricing
Flat rate pricing consists of one set discount rate plus a per transaction fee for all transactions. It may also include a monthly fee. This strategy is commonly offered by payment facilitators (PayFacs) that don’t require a merchant account, but is also sometimes offered by standard merchant services providers.
This type of pricing is typically non-negotiable. Every transaction receives the same rate though the amount the merchant pays overall will fluctuate depending on volume. This appeals to businesses that value simplicity since the cost is somewhat predictable and easy to understand.
Bundled or tiered pricing
In a bundled or tiered pricing model, transactions are typically categorized into different pricing tiers—qualified, mid-qualified, and non-qualified—based on their risk factors like whether the card is present, whether it was swiped or key entered, whether PIN or signature is captured, and the actual cost of the transaction. Qualified transactions are the safest and therefore have the lowest rate whereas non-qualified transactions are the riskiest, cost the most, and therefore have the highest rate.
This type of pricing generally requires a merchant account and can save money in the long run for larger, more complex businesses due to their processing volume and card acceptance variables.
Interchange Plus Pricing
The fees that credit card processors charge for their services are in addition to the interchange and assessment fees they collect on behalf of the card brands and networks. They are usually included in the rate percentage and per transaction fee you pay. But some providers offer Interchange Plus Pricing where the processor’s fees are assessed separately from interchange and each fee is broken down on the monthly statement. This is great for transparency but it can also make the pricing seem complex and your monthly statements may be more difficult to read and understand.
Know what you’re paying for
As with any product or service, “cheaper” can mean inferior, and could actually end up costing you more. So make sure you are comparing apples to apples, and not apples to oranges when you’re considering payment processors. If one processor costs more than another, make sure you understand what the difference in service is between them, and negotiate when appropriate.
Taking the time to understand the basics of credit card fees, the add-ons of credit card processing services, and the difference in value they represent will pay off in the long run. Need more help? Give Vantiv a call. We support business owners looking for answers every day.