Credit card processing fees are either flat fees, transaction fees, or based on volume. Assessments are listed above, and interchange fees (or at least a portion of them) are published by Visa and MasterCard. The only inconsistent portion of cost is the processor's markup. Unfortunately, the scope of different fees and pricing models utilized in the marketplace makes accurately comparing markups a daunting task.
This is the reason why we dictate the pricing model and fees that processors can quote here at Merchant Nation Association. All quotes are based on interchange plus pricing so that our software can present you with an accurate comparison of costs.
With interchange plus pricing (the best kind) the volume fee will be a single number such as 0.25%. With tiered pricing the volume fees will be in the form of a qualified, mid-qualified and non-qualified rate, and there may be more than one set of tiers.
Volume-based fees are levied against your business's sales volume. The competitiveness, consistency and transparency of the volume-based markup are dependent on the pricing model that your merchant account utilizes.
Credit card transaction fees often contribute more to total cost than volume fees. So, don't ignore transaction fees to focus just on the volume markup (processor's rate over interchange).
Transaction fees are charged each time your machine or gateway contacts the processor to get or give information, and they are a pre-determined fixed dollar amount regardless of the type or size of the transaction.
Flat fees are consistent regardless of sales or transaction volume. Monthly and annual charges are examples of flat fees.
PCI Compliance Fee
PCI Non-Compliance Fee
With competitive pricing, much of credit card processing costs are paid to your customers' issuing banks through interchange. The remaining costs are split among a varying number of players such as the acquiring bank, processor, ISO(s), and equipment or software provider. Exactly how many players there are depends on the provider and your business's processing needs.
Here's an example that illustrates how credit card processing costs are distributed. Let's pretend that you're processing a $50 transaction by swiping a customer's (consumer, non-reward) Visa credit card through your credit card machine. For this example, we'll assume that you used Merchant Nation Association to obtain a competitive interchange plus merchant account with rates of 20 basis points and $0.10 per transaction.
1.54% plus $0.10 = $0.87 goes to the issuing bank.
0.11% plus $0.0195 to Visa when the transaction is authorized and another $0.003 when it's settled = $0.07 goes to Visa.
.20% plus $0.10 to the processor = $0.20 goes to the processor.
$50 - $0.87 - $0.07 - $0.20 = $48.86 (2.28% overall effective rate).
Inconsistent buckets are the processing industry's term for, "there's no way to compare credit card processing quotes that are based on tiered pricing."
Tiered pricing allows a processor to manipulate charges behind the scenes. Essentially, they can raise your cost without having to raise your rates. They do this by routing more interchange fees to the mid and non-qualified pricing tiers. Since there's no consistency regarding interchange qualification, it's impossible to compare tiered pricing among different processors.
Let's look at an example to illustrate inconsistent buckets. Let's pretend that we have the following quotes from two different processors:
Qualified Rate: 1.49%
Mid-Qualified Rate: 2.59%
Non-Qualified Rate: 2.99%
Qualified Rate: 1.69%
Mid-Qualified Rate: 2.25%
Non-Qualified Rate: 2.49%
Look only at the qualified rate, Processor A is offering a much better deal. What you don't know is how many interchange categories are being routed to the qualified tier. Processor A may be routing much of transactions to the mid and non-qualified tiers making Processor B the better option. Of course, there's no way to tell just by looking at the numbers.
Now that you know where processing fees come from, you know that the best credit card processor is the one that offers you the lowest markup over interchange and assessments. You shouldn't be shopping for the lowest rates. Instead, you should be shopping for the lowest overall markup over base cost. Furthermore, you want to look at the whole picture and consider the effective rate. Don't just focus on the interchange markup or another single fee.
Interchange and assessments account for much of processing expense, and they're not negotiable. Separate costs into interchange, assessments and markups when shopping for a merchant account and focus solely on getting the lowest markup.
Simplicity is expensive when it comes to credit card processing. Companies like Square and PayPal are making nice profits by offering flat rate pricing to businesses that don't spend the time to learn how processing fees really work.
For most businesses, credit card processing fees are second only to rental and real estate expense. All business people and entrepreneurs are busy, but the time invested in learning about credit card processing fees will pay off in spades.
Simple and competitive are two very different things, and for most businesses, credit card processing fees are either one or the other.