I have seen a few questions on the boards regarding accepting credit cards from customers and I just wanted to make a quick guide for everybody regarding the payment card industry. I own a merchant processing company (link in signature) so I like to think I know what im talking about!
First a quick explanation on what the industry is, the costs associated with it, and what you absolutely need to know regarding processing credit cards (whether you are looking to be set up to take cards or have been taking cards for years.)
In order to be able to accept cards from your customers you need to set up what is called a "Merchant Account". A merchant account is a contract that allows a merchant bank to securely process a credit card transaction on your behalf. Now, the most obvious question is what are the costs involved with accepting credit cards. The actual "COST" of accepting a credit card is called Interchange. Interchange is what is charged from Visa and Mastercard and is the same for every merchant in the country. It does not matter if you processing $5 a month or $5 Billion. The difference is what the merchant bank is willing to charge you above interchange in order to service your business.
Now, as with any sales industry what do you think the goal of the salesman is? To charge you as much above cost as they can get away with charging you as to make as much money as possible for themselves. There are two methods of pricing that I would like to teach you about.
1) Interchange Plus Pricing
This method of pricing is the most transparent to the merchant. The bank charges interchange which is directly passed through to the merchant from Visa and Mastercard and a "Bump" above the cost usually in the form of Basis points. (100 basis points = 1%). Without a doubt Interchange pricing is the best way to be sure that you are getting a good price for the service you are paying for.
2) Tiered Pricing
This method of pricing is the most widely used, the simplest method, and the most expensive to the merchant! If you are already accepting credit cards there is a good chance that you were told that you would pay around 1.59% or 1.69% etc.... Now that may seem like a good deal, accept for the obvious question.....WHAT IS THE COST??? On a tiered pricing schedule you are never told what the cost is!
So lets say you accept a Visa Debit card which has an Interchange rate of .05% and .21 cents per transaction. On an interchange pricing model guess what you are paying. Thats right, pass through of the .05% and .21 cents along with, lets call it, 20 basis points. On a $100 transaction that means you are going to pay ($100 times .05 = .05 cents) Transaction fee of .21 cents and then your basis points ($100 times .002 = .20 cents). Cost of entire transaction .46 cents.
What if you were on tiered pricing of say 1.69% ($100 times 1.69% = $1.69) and the typical transaction fee of .10 cents. Total transaction cost is $1.79 and since you are not told what the cost was you have no idea that the company processing for you just profited $1.33 on your transaction. This may not seem like a whole lot of money but it really adds up after a month of processing!
Here is a complete list of the interchange pricing from Visa as of 2013.
Please note that the example used was the first interchange value associated with a Visa Debit Card.
1) Why are there so many interchange rates? Why not just pick one and stick with it!
That is a pretty good question. You would think they are doing this so that they can confuse the hell out of you. I am afraid not. In fact its pretty simple. You know how you have a card in your wallet right now that gives you $5 cash back for every $1000 you spend? How about that sky miles card? etc etc... you see where I am going with this? The rewards that you get back from using your card to make purchases are paid for by the merchant that you are buying your goods from! The more rewards a card gives to the card holder, the more expensive it is for the merchant to accept the card. (Makes you think a bit more about those cards you use doesnt it!)
2) What about American Express?
American Express actually decided to process credit cards for merchants directly. They did not want to outsource to merchant services providers and as a result they have all of their own in house customer service. However, have you ever walked in to a store that said they did not accept American Express? Why would they do such a thing?!? Well its because they charge more than Visa and Mastercard! Again, how do you think you are getting all of those super awesome rewards every time you whip out that AMEX card to make a purchase?
3) Am I getting good rates?
This is the question that drives the entire industry. The truth of the matter is that I have no idea. And unfortunately there is a good chance that you do not either. Unless you are very well versed in the merchant services industry you have no idea what the cost is with taking a card, what you are really paying for a service, and how much cheaper you can get it for. Rates also greatly depend on the industry type of your business. If your industry historically has high chargeback rates, for example, the risk of your account going into default is higher and therefor typically charged a premium from the merchant bank.
4) What can I do to make sure im getting competitive rates?
Either you can spend a whole lot of time learning the industry or you can go to one of your merchant bank's competitors and ask for a rate analysis. (Like me!). Analysis are usually completely free and they let you know if you are priced competitively. Usually you would just provide a merchant statement to the company and they come back to you saying what you paid, what the cost was, and what you would have paid with them.
If anybody has any questions that they would like answered feel free to PM me and I can add the question to the FAQ.
Merchant Processing Information - http://protecmerchantsolutions.com/