Guide your client to more competitive bankcard processing rates

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By Mark Dunn

Bankcard processing has become very price competitive, yet many small business owners don’t know if their fees are in the competitive range. Here are some guidelines that will help you assist your clients to know where they stand.

First, ask your merchant client what process they followed to get bankcard processing services. Did they just apply at the bank where they have their business checking? How many processing services did they talk to before they made a choice? What were the important elements in their decision – price, point-of-sale system, integration with other systems or other factors?

Bankcard processing services (often called merchant services) are provided by a bank but often sold to merchants by a sales office (like a dealer, but called an ISO – independent sales organization) and delivered by a third-party processor. This bankcard distribution channel has many very complicated methods of pricing its services. Fortunately, it is relatively easy to get competitive bids. Sadly, it is not always easy to make direct comparisons from one bid to another. But regardless of the number or complexity of the bids, it is always better to focus on value delivered as opposed to simply price.

Merchant services pricing

There are four basic cost components that go into pricing to the merchant. These four components are:

  1. Interchange, dues and assessments, levied by Visa and MasterCard to its member bank
  2. Cost of risk, levied by the “acquiring” member bank that takes on the merchant
  3. Costs of processing, assessed by the processor
  4. Sales cost, determined by the ISO or bank that is selling the service

Interchange is the largest component cost, usually making up approximately three-fourths of the total cost. There are more than 200 separate interchange categories and corresponding prices. Each individual credit or debit transaction falls into one of these categories.

The ISO and the acquiring bank determine these costs but overlay a pricing program to simplify the pricing picture. The pricing program takes all of the complexity of interchange, risk, processing costs, and so forth and makes a very neat pattern to the pricing. For example, the classic credit card pricing program is called Three Tier. Three Tier has:

  1. Qualified – a card present, swiped transaction
  2. Mid-qualified – a key-entered or card-not-present transaction
  3. Non-qualified – a catch-all category for any type of transaction the bank does not accept as qualified or mid-qualified

Thus, we see three categories of transactions. There are Four Tier, Five Tier and even Six Tier pricing programs, all based on some variation of this model.

The pricing program that follows a different model is Interchange Plus or cost plus. With Interchange Plus, the ISO or bank assigns a flat number of basis points on top of interchange for each transaction. For example, interchange plus 25 basis points – this means the merchant discount rate (the fee the merchant pays) is interchange plus one-fourth of 1 percent.

Merchant discount, the fee to the merchant, is usually expressed in a percent plus a transaction fee, for example 1.69 percent plus 15 cents per transaction for card-swiped transactions. But be aware there are other fees the merchant pays, such as a monthly statement fee, “downgrade fees,” and chargeback fees.

Getting a good deal

So how do you tell if a merchant has a good deal or not? First you’ll have to get your client to assemble their last three to four months of processing statements. Then you’ll calculate the net effective rate. Net effective rate is the total of all fees divided by total card processing minus any credits. Also, be sure to calculate net effective rate average over three to four months. Some processors back-bill various fees from the previous month.

If the merchant sells mostly retail in a store, the net effective rate should be in the range of 1.95 to 2.15 percent. If the merchant does mostly telephone order or Internet sales, it gets more complicated but, generally, the net effective rate should be 2.5 to 2.8 percent. However, these factors can complicate the picture:

  1. The merchant sells products or services that get charged back often or is a business type that quickly goes out of business leaving heavy losses, i.e., high risk
  2. The merchant doesn’t get many card sales, i.e., low processing volume
  3. The merchant has a lot of business customers, international customers, or other unusual card types presented, i.e., higher interchange rate cards
  4. The merchant does half their card volume in the store, half online, and only has one merchant processing account, i.e., mixed processing.

Understanding the details of a bankcard processing statement requires an entirely separate article, so I will have to sum up:

  1. There are dozens of ways to present card processing fees, so it may be difficult to decipher.
  2. Focus on three sections of the statement
    1. Summary of card fees – this section shows qualified transactions in a tiered pricing program. This section should usually contain most but not all of the fees you pay. Compare these rates carefully with other providers.
    2. Discount qualification or surcharges – surcharges for transactions that were not qualified. This usually is where you can get providers to cut costs.
    3. Processing fees – monthly statement fee, AVS, batch header, chargeback, ACH return, and other fees. These fees also may be reduced in most situations.
  3. Call the provider and ask for an explanation of the statement. Ask if they can come up with suggestions on how to lower the fees.

If you believe the fees are not in the competitive range, get some alternative proposals from other providers in writing. Ask similar merchants what provider they are using. Compare the bids and talk to the providers to see who is helpful versus who is just trying to make a sale. Get references from merchants in your area and call them.

What solutions do the proposals contain? Do they offer good suggestions? Do they propose processing methods that will save time or integrate with the merchant’s current processes or systems? Will they give faster access to the merchant’s processing funds? Consider this: If the merchant likes the current provider, call them and ask to match the competitive bid.

Buyer beware

A note of caution – be careful when you consider these:

  1. “Free” offers – you will pay for that free terminal somewhere, somehow.
  2. Equipment leases – these are not cancelable and you will be personally liable to continue paying even if your business fails. Read carefully.
  3. Merchant agreement terms longer than three years – industry norm is three years.
  4. Early termination fees (ETF) – like a cell phone contract, you may have to pay to exit a merchant services contract. A $250 to $300 flat fee is the maximum.
  5. PCI requirements – if a provider says you need new equipment to become PCI compliant (for card data security requirements), check this with other providers and online at or
  6. Most merchant account advice or blog sites are run by folks trying to sell something.
  7. Most providers have very similar cost structures and your client may not be able to save a lot of money by switching.

About the author:

Mark Dunn is president and founder ofField Guide Enterprises, LLC, an executive consulting, training, and marketing communications company. Dunn provides insight and recommendations for merchant bankcard companies focusing on new product or service launches. In the electronic payments industry for more than 21 years, he has held senior management and sales positions with a processor, a terminal manufacturer, a software company, an independent sales organization, and a bank. This breadth of background gives him a detailed understanding of each piece of the merchant bankcard puzzle.

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