Lowering Your Credit Card Processing Fees: Just the Facts, Ma’am

As a retailer, you know there’s a wholesale cost to goods and a markup. The same is true for credit card processing. The wholesale cost is the portion of fees that go to the banks that issue credit cards and to the card brands themselves. These costs are non-negotiable — everyone has to pay at least wholesale.

What’s negotiable is the markup (i.e., the processor’s charges beyond wholesale). The key to lowering your credit card processing costs is to pay as close to wholesale as possible. In order to do that, you’ll need to be able to see the wholesale and markup separately, which brings us to step one: finding the right pricing model.

Find the Right Pricing Model
Processors can charge for credit card processing in several ways. The worst will bundle wholesale and markup costs together so that you can’t see what you’re paying at cost and what you’re paying as markup. The best will separate wholesale costs and markup costs, allowing you to more easily see if you have a low-cost solution.

The most common pricing models are tiered, interchange plus, and flat rate.

• Tiered pricing is the one mentioned above as the worst option because it’s opaque and expensive. With tiered pricing, your processor will create “tiers” or categories, assign a rate to those categories, and route your transactions to them as it sees fit. With a tiered model, there are usually three categories: qualified, mid-qualified and non-qualified. The qualified rate is what you’ll be quoted, and is usually unsustainably low — often below wholesale. The problem is that the processor will route very few of your transactions to that tier, instead sending them to more expensive mid-qualified and non-qualified tiers. You won’t be able to see the wholesale cost and the markup separately. Even worse, the processor can choose to change which transactions go to which tier at any time, without informing you. That turns your processing cost into a constantly moving target; you keep trying to do everything to get those “qualified” transaction rates, and the processor keeps changing the rules on you. You wouldn’t put up with that from your other vendors, and if you’re looking for lower credit card fees, you shouldn’t put up with it from your processor, either.
• Interchange plus pricing is the most transparent model. With interchange plus, your processor will pass the wholesale costs to you and bill its markup as separate line items, allowing you to see what you’re paying in non-negotiable costs and what you’re paying to the processor as profit. Paying as close to wholesale in any situation is the way to get the lowest cost, and that’s true here as well.
• Flat rate pricing is a form of tiered pricing, but a less volatile one. With flat rate pricing, your processor charges you a flat rate regardless of the fluctuation of costs at wholesale. That means your pricing is predictable, but it’s usually not very competitive. Some people prefer this type of pricing for the simplicity, but be sure that you’re not confusing simplicity with competitiveness. With flat rate pricing, if you process transactions that are low cost at wholesale, you don’t see that savings. You still pay your flat rate. For retailers that take credit cards in person, flat rate may be your least expensive option IF your average transaction is less than approximately $10 or if you process less than approximately $3,000/month in credit cards. For everyone else, a competitive interchange plus processor will usually result in far lower costs.

It’s extremely important to note that while pricing models set the stage for securing a low-cost processing solution, they don’t guarantee it. Compare the markups from multiple processors before assuming you have a good offer. If you don’t want to do that yourself, or are unsure how to start, a quick online search for credit card processing comparison sites will bring up free services that can calculate your costs for you so you can compare apples to apples. These services are much more accurate and valuable than review sites, as they use your company's specific numbers.

Don’t Be Fooled by Clever Marketing
The next thing to focus on is seeing through the marketing spin. New gimmicks come up all the time, but here are a few that consistently get attention: 0 percent processing or “no markup” and “We’ll give you $500 if we can’t beat your rates” promises.

0% or No Markup
Now that savvy businesses have started asking for interchange plus pricing and calculating markups instead of rates, some companies are capitalizing on that by claiming to offer no markup or 0 percent fee processing.

All processors charge a markup — it’s how they make money. What the 0 percent fee processing means is that the company charges a monthly or annual membership and a per-transaction fee instead of a percentage of your processing volume.

There are times when this can be a great deal, and others when it's a not-so-great deal. You’ll need to factor in the monthly or annual fee when comparing a 0 percent deal to other types of pricing. In many cases, the much higher monthly or annual fees result in a higher overall cost, even though there’s no percentage markup. It’s easy to see 0 percent and think it must be the lowest cost, but that’s not necessarily the case. For some businesses, 0 percent processing would actually result in double the cost of other pricing! If you’d like to see examples of how that can happen, this article on flat rate subscription pricing lays out the math for you.

‘We’ll Give You $500 if We Can’t Beat Your Rates’
Spoiler alert: they never give you the $500, because they can always “beat” your rates. This is the premise behind satirical website Fuzzy Credit Card Processing's promise that they’ll give you a free kitten if they can’t beat your rates.

“Rates” in processing isn’t a very helpful term. It can apply to a variety of components of cost, and doesn’t indicate the total amount that you pay for processing. It’s completely possible for a processor to offer you a lower “rate” than another processor, but actually charge you more overall.

The reason processors offer this gimmick is because it looks like a win-win for the retailer. Many businesses think that either they’ll get $500 or cheaper processing, so what’s the harm? The unfortunate fact is that many retailers switch, happy with the idea of lower “rates” only to find that their actual cost of processing has gone up. As a general rule, avoid these kind of gimmicks.

Understanding Debit
There are several common misunderstandings with debit cards. The biggest is that debit cards don’t cost a retailer anything to process. This is completely incorrect. Debit cards incur charges from the debit network if the card is authorized with a PIN or from the card-issuing banks and card brands (Visa, MasterCard, and Discover) if the card is used with a signature.

Other misconceptions are that debit cards used with a PIN are always cheaper than debit cards authorized with a signature, and that debit is always cheaper to process than credit. Neither of these are universally true.

PIN debit is generally cheaper than signature debit for larger transactions. Signature debit is cheaper for smaller transactions. This is because of the way the two are charged. PIN debit cards incur a higher per-transaction fee with a lower percentage, while signature debit is the opposite. With smaller transactions, higher per-transaction fees take a relatively larger portion of the total.

However, for small transactions, credit cards may be cheaper to process than either PIN debit or signature debit, and for the same reason. Per-transaction fees on small transactions are lower for some types of credit cards, resulting in a lower wholesale cost.
Bottom line: If you’re accepting debit and you have small transaction totals, it’s worth determining if you should train your staff to suggest PIN or signature for debit cards. Read more about the differences between signature debit and PIN debit.

There are several steps to securing the lowest credit card processing, and for small businesses, it can seem overwhelming. Remember that it’s not about rates; it’s about the lowest markup over cost. If you need help, search for credit card processing comparison sites to find services that allow you to compare, and keep this article handy as you’re doing your research. By following these tips, you’ll be positioned to get the best pricing possible for your business.

Ellen Cunningham is the marketing manager for CardFellow, a free service that enables retailers to easily compare pricing from any processor they’d like.