As the use of credit cards, debit cards, and alternate electronic payment methods continues to grow, small and large businesses alike will find the utilization of credit card processing services a necessity to remain competitive.  The fees associated with credit card processing are often accepted as a necessary evil, and are overlooked as a place for negotiation and cost savings. With the right provider, knowledge, and enough leverage, even a small business can minimize their merchant account costs. Learning to navigate the cost structures present in the market can reduce the burden on the merchant and lead to more transparency between the merchant and service provider.

Before diving into the payment structures, the transactions fees must be understood.  Each time a payment is processed, the transaction will be charged an interchange fee.  This charge is non-negotiable as it is set by the payment networks and will be passed through to the merchant by the merchant account provider.  Interchange fees vary depending on the type of transaction.  This fee varies depending on if a physical card was present, if a signature or PIN number was captured, and which card network is being used (VISA, MC, etc.). 

On top of the interchange fee, each merchant account provider will charge a markup.  This markup is the provider’s direct fee for processing and settling each transaction.  This fee is set by the merchant account provider and is one area for negotiation when choosing a supplier.  Additional ad-hoc fees exist as well such as chargeback fees, tokenization and encryption fees, and batch fees. However, the interchange fees and their markup comprise the majority of the cost, which is why choosing the cost structure that offers the best value for your business is important when negotiating a merchant account agreement.

Cost Structures

The first type is a blended cost structure.  With this, all transactions are charged the same fee regardless of the cost of the sale or type of transaction.  This fee structure offers very little transparency into which level of clearance (interchange rate) each transaction receives and the associated cost.  As a result, the blended rates run the risk of being higher than other payment structures, especially for businesses that primarily processes card present debit transactions.  One upside to this fee, however, is that there is typically not a monthly charge associated which makes it a reasonable choice for a business that processes a low volume of credit card transactions.

Another type is a tiered or “bundled” fee structure.  Tiered pricing operates similarly to the blended structure, however it breaks the transactions into three categories rather than treating them all as equal.   Each transaction is either marked qualified, mid-qualified, or non-qualified.  Qualified transactions are awarded the cheapest rate and must meet a list of criteria such as the card being present in the transaction and the customer’s signature being collected.  If one item from the criteria list is not met, the transaction may be downgraded to mid-qualified or non-qualified rates.  While this structure offers better pricing than the blended structure for a business with high volume card present transactions, it still lacks transparency into what the actual interchange cost is versus what the merchant is paying.  Additionally, qualification criteria can be increasingly complicated, leading to more transactions not clearing at the preferred rate.

The final structure type is what is known as interchange plus.  With this model, the credit network fee is clearly listed per transaction, and the markup is fixed and listed separately.  This structure allows for the most transparency into the true cost of each transaction, and offers room for negotiation of the markup fee charged by the merchant service provider, especially for large volume merchants.  While the visibility presents the opportunity to receive lower pricing, it is not a guarantee.  It is critical to audit the interchange costs to ensure that the amount being passed through matches the published rates from the card networks.  Additionally it is important to negotiate a markup that is competitive within the market. While the rate must be shown separately, it is not required to be a reasonable rate.  With the right expertise, this desirable structure can greatly reduce the overall cost of your payment processing services.

Regardless of which fee structure best fits your business model, Source One Management Services has the knowledge and expertise to pinpoint opportunities for cost savings and process improvement in the merchant accounts category.  For more information on our full suite of services please visit our webpage.
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Jennifer Engel

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