How do Merchant Processors Charge?
In our last post, we explained what Interchange means. That's the basis of all the ways that Merchant Processors charge. So let's do a quick review and explain the other types of programs as well.
Interchange (aka Cost, Pass Through) is the cost of the card being run through the system. The rate is set by whoever issued the card. The average currently sits around 1.81% (10/11/2022). For more detail, please go to our previous post for a more in depth explanation.
The reason we brought up Interchange again is because the different types of merchant processor programs are all based off of it. Here's the four different type of programs that are offered and a brief explanation:
Interchange Plus (IC+) - This is the cost of the card being put through the system PLUS the cost of the program. When you see your end of month bill you will see that each transaction is running a slightly different rates. If the cost of the card is lower than the average....you pay less. More? You pay more. It sounds a little weird but this is typically the least expensive option for you when it comes to merchant processing programs over all.
Flat Rate - The rate is the rate is the rate. Currently one of the largest processors in the CBD space is offering a Flat rate of 3.8% + $0.30. (Just saying...we have less expensive options). That means you pay that rate no matter what the cost of the card. It can be more expensive in the long run. For example, we have a comparable program to that big box solution that is IC+ 1.25% + $0.20. If you take the average Interchange rate, add in the 1.25% you're looking at an average 3.06% + $0.20. You'd be saving....ON AVERAGE .74% plus $0.10 per transaction. Even more if the cost of the card is lower. With a flat rate program, you don't get that luxury...you're paying a straight shot every time. What does that look like realistically? Let's take a $100 transaction.
On the flat rate program you'd be paying $4.10 for the transaction.
If it were the IC+ program, you'd be paying on average $1.45 per transaction.
That's a $2.65 difference. Multiply that times 100 transactions? That's $265.....Ouch!
3. Tiered - With a tiered program, it's a mix. It starts off as an IC+ program BUT there's a threshold.
If you cross that threshold you get bumped up to the next tier of pricing. For example, a merchant
processor tells you "I'm going to give you a rate of 1.61%." That sounds great right? What is that average interchange rate again? Currently 1.81%....wait...so if the card comes in higher what happens? You know the merchant processor isn't going to lose money....you get bumped to a higher tier of pricing. They could have that tier set at 4.25%....5%...I've even seen a contract where it was bumped to 8%. The merchant processor doesn't tell you that. In fact, they hope you never figure it out, a lot of merchants don't. They're relying on the fact that you don't know to ask. (Yes...we explain these things....we aren't very popular with those less scrupulous payment processors and we are totally alright with that).
4. Surcharge - Last but not least is surcharging. What is surcharging? It's a flat rate program where your customer pays the fee. The merchant pays the fees in the first three scenarios. (We're including it here so we have all the different types of programs on the list. Currently however, we do not (though I've been looking) have this available for high risk credit card processing FYI.) With this one however, your customers pay the fee. Auto repair, tradesmen....they love these programs. Why? The merchant saves a ton of money. For example. let's look at your typical auto repair bill. I had to have some work done recently. The bill was $2k...yeah...it was not a happy day for me. If the auto repair shop had to eat the merchant processing fee, and let's say it was at IC+ 1.25%...you're looking at about a $42 charge the auto shop has to eat. If it were a tradesman...(we just replaced our furnace to the tune of $8k) that could have run them around $165. This is becoming more and more popular out in the market. Merchants are tired of having their bottom line gouged because of processing rates. Most customers will pay it for the ease of paying with their credit card.
Why are we sharing this information? It's important for you to know what type of program you're signing up for. It effects your bottom line after all. Most merchants don't know what to ask because you simply don't know. This is what we specialize in...we do know. I'm sure if I were to speak to you, you're an expert in your field after all, I would be just as lost (really...don't even get our CEO started on tech stuff...it's scary...we literally just cheered for her because she rebooted her phone without assistance.) A lot of merchant processors won't explain these terms either. They gloss over them or count on a merchant not knowing or asking so they can make even more money.
If you don't know what type of program you're on or if you just simply want a free review of your program please let us know. It usually only takes us three months statements from you and about 15 minutes. That's it. Even if you don't take us up on it, at least now you're armed with the knowledge to help your business in the future. Knowledge is power after all...and if we can help you save money too? We consider it a good day.
Blessings to your day!