Cryptic codes, indecipherable messages and puzzling figures. No, I’m not talking about the latest Indiana Jones movie. I’m talking about just a few of the ways you can describe your merchant-services invoice. Credit-card processing companies have become masters of the invoice and understanding your merchant-processing statements is getting more difficult by the minute. Here are the fundamentals that will help you determine what is on your bill.
The Basics
Most monthly statements will have a rate (or rates) and a per-transaction fee. The rate is referred to as the “discount rate,” even though it is a fee—not a discount. (You can already see how this can get confusing.)
The discount rate is a combination of dues, fees, assessments, network charges and mark-ups merchants are required to pay for accepting credit and debit cards. The largest of these charges—the interchange fee—is a fee that a merchant’s bank (the “acquiring bank”) pays a customer’s bank (the “issuing bank”) when merchants accept cards using networks such as Visa and MasterCard.
Interchange fees vary depending on card type, how the card was processed and, in some cases, the value of the transaction. There are literally hundreds of different interchange charges based on these criteria, and the interchange fees can be between 1 and 3 percent of the total purchase.
Different Pricing Structures
One reason credit-card processors created different billing structures was to simplify the concept of interchange. By grouping transactions into pools of set rates, one could argue that it makes the invoice easier to read. Others, however, say that the end result makes it impossible for the merchant to know what the true cost of the transaction really is. Here are a few common pricing models, as well as each model’s pros and cons.
Flat Rate. A flat rate is a single-rate discount that encompasses all card transactions. In this scenario, your credit-card processor is banking on the fact that more of your transactions will clear at a lower interchange rate than the one offered. Although the merchant statement is easy to read, it’s not usually the most favorable price for the merchant.
Tiered. Because interchange rates are perceived as confusing (go figure), some credit-card processing companies cluster transactions into tiers. These tiers are usually grouped by the interchange qualifications, which are: qualified, mid-qualified and non-qualified. In this case, the merchant can have as many as seven rates. And, in each group of transactions, the processor hopes to make slightly more in fees collected than the interchange cost. The merchant statement is more difficult to read but the pricing is usually better than a flat rate.
Interchange Plus. Since interchange is the true cost of processing credit-card transactions, some processors do offer interchange plus as a pricing structure. The “plus” is the fee that the card processor will add to each transaction regardless of the interchange level. Although this pricing model is considered the most difficult to reconcile, it’s typically the most favorable and, in most cases, reserved for the best or largest clients.
Billback. This was created by credit-card companies that wanted to show the merchant a low processing rate but did not want to pay for any of the high interchange charges. Billback starts with a low processing rate(s), but charges the merchant any and all interchange fees for transactions that clear at a higher interchange cost. Because you are blending a flat or tiered rate with interchange, the statement is the most confusing of the bunch and, in most cases, it’s the most costly.
Fees
As if all of this isn’t confusing enough, you also have to interpret the transaction-fees section of the merchant-services statement. A transaction fee is what you would pay for processing a single credit-card transaction. Authorization fees are sometimes used in place of transaction fees; however, it is charged regardless of whether or not the transaction goes through successfully. This is just another piece of the puzzle that you have to review carefully. There are an assortment of other fees that may or may not be charged—from a batch-settlement fee to a monthly service fee to an annual fee to a help desk fee—and each one adds more depth and confusion to the statement.
Solutions
The best way to fight a confusing statement is with simple math and a second opinion. Take the total sales and divide it by the total service fees. If the rate seems too high, ask why. If your processor doesn’t give you an acceptable answer or take the time to explain it so it makes sense, have a competitor perform a statement analysis. Most will be more than happy to explain your statement as well as offer a comparison. It’s worth it to get the peace of mind that you’re already getting a great deal or find out that there’s a better solution available.
Pawel Blaz is the sales manager and director of business development for Gulf Management Systems. He's been in the payment processing industry for nearly 10 years and has experience in many aspects of the business, from merchant services to ACH operations to check fraud. Blaz is an accredited ACH professional and is anxiously waiting to assume a brand new title—dad. Gulf Management Systems, named on Looking Fit’s “Industry's Coolest” list for its creative marketing programs, has been helping salon owners build strong customer relationships for more than 16 years with easy and affordable solutions that include both ACH and credit-card EFT, POS, gift cards, remote deposit and direct deposit. For more information, call 800.947.3156 or visit www.gulfmanagementsystems.com.
