Credit card processing is unnecessarily complicated, evident by most business owners’ frustration with processors and dealing with them. Luckily, a basic understanding of the different price structures processors use can help your business get the best deal and keep more of your hard earned money:
There are three (basic) types of pricing structures:
- Tiered Pricing-Transactions are delegated into tiers such as “qualified” or “mid-qualified” tiers depending on what kind of credit card is used. Therefore, when you receive a quote for tiered pricing, processors will often quote the price from the lowest tier, (debit card, card present) which is usually a tiny portion of processing volume. The transaction then downgrades into a different, more expensive tier. This process is called “marking up the downgrades” and can ending up costing the business owners 2-3 times more in processing fees.
- Interchange plus is by far the most transparent and fair pricing structure for business owners. Before, only large businesses with high credit card volumes were able to negotiate on an interchange plus basis. Now, with greater competition, many processors will offer interchange plus in order to gain more customers. Why is it so great? Well, fees are based on interchange plus and a constant processor markup. This means that no matter what credit card is used, the processor markup will remain the same (unlike Tiered Pricing). When you receive a quote in interchange plus form, you can calculate fairly easily what your expected costs will be (if you know your usual card mix).
- Third party processors (such as PayPal or Google Checkout) offer fixed rate pricing. Just as the name implies, there is a fixed rate for each transaction. This type of pricing is best for merchants who are just starting out because there are lower setup fees and monthly costs are fixed. Check out the PayPal Upgrade Calculator to see whether this type of pricing makes sense for your business.
So how do you tell the difference and get the best deal?
Unless you have determined that a third party processor is more cost effective, hands down the best way to make sure you are getting a good deal is to demand interchange plus pricing. Most processors will automatically quote you tiered pricing because they make good money that way, but if you demand interchange plus pricing they should provide it. If not, look elsewhere because you are probably going to get ripped off.
An interchange plus bid will look like this: interchange plus 0.20% plus $0.20. The plus part is the processor markup—or what they charge you for their services. It will always be less than 0.50% of your volume and $0.30 per transaction, anything more than that is too high.
Tiered pricing quotes are presented as a percentage (called the qualified rate) which is always above 1%. As mentioned above, the percentage quoted is usually way below what you will end up paying due to downgrades.
Also, make sure to stipulate in your contract that there is no cancellation fee (most processors will eliminate it if you ask) and absolutely no hidden fees.
TransFS.com is the comparison shopping site for credit card processors. Just like getting multiple quotes for airfare using Expedia, TransFS lets business owners compare top quality processors on an apples-to-apples basis and makes sure they get the best deal by not having any cancellation or hidden fees, and only interchange plus pricing.
Category: Startup Advice