Understanding Pricing Structures for Payment Processing Rates

Uncover the Hidden Costs on your Merchant Statements and Find the Right Credit Card Processing Provider 

Choosing the wrong credit card processing service provider is a costly mistake - but one that can be easily avoided with the right knowledge and guidance. Hidden costs on your merchant statements make the selection process complicated. Small businesses have tight margins and need to cut costs wherever they can so it is obvious that they would benefit from simple and efficient billing processes. In order to arm you with the knowledge you need when evaluating payment processing solutions, this article provides three major tips for understanding how merchant statements work.

The background

Historically, credit card processing was sold and distributed through credit card companies’ networks of large banks. However, banks found that this was not their core business so they began outsourcing the processing to third-party credit card processors or Merchant Service Providers who could provide a better service for the accounts. 

The company who sets the rates for your credit card processing can be called by many names: merchant services provider (MSP), payment solutions provider (PSP),  independent sales organization (ISO), or even just “credit card processor” although that term should be used most often to describe the Core Processor that connects merchants to the card brand networks. We use the term “payment solutions providers” most often because it encompasses the true role of your payments company today. The company you turn to for all of your payment processing needs should provide more than just good rates; they should also provide PCI Compliance assistance, transparent education on the payments industry and expected changes to interchange rates, as well as automated and integrated solutions specific to your business needs. 

Know your pricing structure options.

There are three main types of pricing structures that payment processing solution providers will offer: flat rate, tiered pricing, and interchange plus. These are offered so that you can determine the best option based on your specific business needs. The flat rate will have a flat percentage with a transaction fee, and no additional fees. Tiered pricing will offer fully-qualified, mid-qualified & non-qualified rates, along with hard costs that are billed separately. Interchange Plus is a structure in which the merchant pays the hard-cost associated with each transaction, plus an agreed upon mark-up fee from the credit card and payment processing provider.

Flat rate pricing is simple and easy to understand but may not be the best solution for most businesses. A flat rate is a simple, non-negotiable fee charged either per transaction or per dollar amount, similar to the following example: for a $1,000 transaction, there is a 2.75% charge for a swipe (so, $27.50) or a 3.5% charge for a keyed entry + $0.15 (so $35.15). There is also a monthly cost, typically of about $10-$30. Merchant fees may be deducted daily. With a flat rate, you may end up paying more per transaction than tiered pricing but can sometimes avoid incurring extra fees. This option works best for merchants that process a very low monthly volume.  As your business grows, it’s in your best interest to look at your rates and conduct a full analysis to see how you can cut costs and reduce rates to fit your needs. Merchants with a flat rate pricing structure will not be able to benefit from Level 3 discounts - or possibly more importantly, the incredibly low discounts from the Durbin Amendment.

Tiered rates, also known as “bundled pricing”, work a little differently. The processor is bundling the interchange fees into tiers so it is less clear what the charge is per card type. The credit card processor's profit margin is typically .5% - 1.6% above the interchange. The 3 Tier pricing, typically offered by credit card processors, provide a charge per swipe based on a percentage typically looking like this:

Considering that the merchant services provider can bundle as they wish, generally, qualified are the lowest rates for swiped transactions with consumer cards only. Mid-qualified includes manual key entered, card not present, telephone orders or swiped rewards cards. This pricing model is often compared to flat rate pricing as the better of the two but it depends on the specifics of your business and processing needs. Tiered pricing can be expensive if the contract is full of hidden fees and surcharges. These fees are set by the processing company and can vary by provider.  

If your reporting and merchant statements are confusing, you won't know if you have been overpaying for months or even years. It is important to find an industry expert that you trust to do a full merchant statement analysis with you to look for any hidden fees. 

A blend between tiered pricing and interchange pricing is what we call “base plus differential” pricing: where the merchant has a base rate on all cards and pays the difference on cards that have a higher interchange rate than the base. Although at first glance this can look like a fair pricing structure, the payment processor is still using the same structure as tiered without benefiting from interchange at all. In fact, in this scenario, the processor is profiting on all cards that fall below the base while still charging the merchant (and not paying for) any cards that are above the base. These processors are having their cake and eating it, too, which is why you will never see the words “qualified” and “unqualified” on those statements. They don’t want their merchants to have insights into how their pricing structure works. 

The most transparent pricing can be found in Interchange Plus Rates. Under this fee structure, the Merchant pays the true interchange plus assessment fees. The markup from the payments solutions provider is transparent. Interchange rates range from 0.05% - 2.45%. The payment solution providers will charge about 0.10 – 1.00% plus a transaction fee, depending on the risk assessment of the merchant. This fee structure is also known as cost-plus, pass through pricing, or wholesale pricing and it may be the best option to reduce your fees. The advantage to interchange plus over a pricing model such as base plus differential  is that the merchant is just paying whatever the card’s rate is plus a transparent and consistent markup on the total volume. 

It is important to remember that the cards a merchant accepts each month can fluctuate wildly, with hundreds of different interchange rates ranging from a majority US regulated debit .05% to slightly over 3%. If the payment solutions provider or payment processor is charging a flat or tiered pricing structure,  then they must protect themselves from the fluctuations the merchants sales by adding a substantial cushion to rates charged.

If you are a merchant who runs an eCommerce website, it is likely that you can never charge a card-present transaction. If the processor is quoting you rates based on card-present, a qualified rate you will never get, then the pricing has not been fairly communicated. Without an in depth understanding of your current processing, the frequency of various qualified and non-qualified cards, and how they will be bundled or grouped, you may be taken advantage of. Pushing for the most transparent pricing from your payment solutions provider is the best way to empower your business.

Look out for hidden costs on your merchant statements by first understanding the typical fees a payment solutions provider or merchant services provider might be charging you.

• Batch fees - This could be a daily fee for when you settle out the daily transactions. These fees tend to be low, but if they are every day, they will eventually add up. 
• PCI fees - Adhering to PCI standards is a shared responsibility between the merchant and the payment solutions provider. Some PSPs assist in helping the merchant meet their requirements and in return charge a fee. The trick is finding reputable PSP that is actually holding up their part in helping you and your business to meet those requirements. Some payment solution providers offer free PCI Compliance assistance. 
• Annual fees - Payment solution providers sometimes charge these to cover their costs and can be an indication they are trying to ensure their own profit. 
• Terminal fees and gateway fees - Terminal Fees are often charged to brick and mortar stores for using credit card terminals. Gateway fees are applied to businesses online. If a credit card processing company is charging you for both, they are double charging you.

This is only the tip of the iceberg when it comes to all the potential types of fees a credit card processor could charge. It is also important to ensure your solution is PCI compliant and fully integrated with your ERP and/or eCommerce software. By doing so, you can rest easy knowing that there will not be wasted time integrating data or checking duplicate entries. We hope this helps you identify some of the sneaky hidden fees that credit card processors charge.  

Let the experts at REPAY educate you!  

REPAY is an integrated credit card processor and we want to be your payments industry expert. Does your brain spin trying each time you look at your statement fees? The best way to get a full picture of your current fees is to provide us with a copy of your current merchant statements. We will then review your current fees and educate you on your current rates.  

The REPAY difference  

REPAY provides you with merchant statements that are easy to read and transparent. You have access to more detail than most processors provide. REPAY helps you save with Level 3 processing, and Level 3 processing helps your business with added security against fraud and lower rates for B2B transactions.  REPAY acquires and passes all the required Level 2 and Level 3 data by extracting it from our ERP and ecommerce integrated credit card processing solutions. There’s no time-consuming mapping or manual data entry required.