At Bindo we talk to merchants on a daily basis regarding credit card processing.  We see all kinds of businesses processing credit cards with a range of credit card processors.  Even though these merchants generally have a solid handle on their business operations, many of them do not know the actual rate that they are paying on credit card transactions.  If you ask them, they will respond with a number, but that number is often a huge misrepresentation of their actual rate (aka effective rate).  As a result of this disconnect merchants will often stay loyal to a specific credit card processor, and miss out on a meaningful savings opportunity.

Why do merchants make this mistake?

1. Processors love to advertise the “Qualified Rate”: If you search for credit card processing rates online, you will see a wide range of rates mentioned.  Obviously the lowest rates will capture your attention first, but those super low rates are not representative of the actual rate you will pay.  In many cases that advertised rate is less than Visa and MasterCard’s lowest credit card interchange rate, which is a baseline for the credit card processor’s cost on a transaction.  In other words, the rate that is advertised is less than the processor’s cost.  How can a processor offer a rate that is below their cost? They can do so because that rate will apply on a very small portion of cards that you accept at your business (“Qualified” cards only).  Any credit card which has a rewards or miles program attached to it is not qualified.  Processors will charge much higher rates on cards that are considered “Mid-Qualified” or “Non-Qualified” and easily recoup losses from the extremely low rate that applies on Qualified cards.

Merchants will often be under the impression that their rate on all cards is the very low one that the processor advertised initially.  This is not correct and merchants should look carefully at their processing statements to find the actual rate that they are paying.

2. Snail mail instead of spreadsheets: Your credit card processor probably doesn’t want you to analyze your credit card processing statement.  If you analyze your statement you might realize that you’re paying a much higher rate than you thought, or you might find you’re paying extra fees each month that you were not previously aware of.  Processors create a barrier to analyzing these statements by sending them to you in the mail on multiple sheets of paper with hundreds of lines.  Some may send statements as PDFs, but you will not find processors that make statements available in a spreadsheet format.  On credit card processing statements you’ll see a line for each class of credit card that you took during the month, a corresponding rate, and a fee.  You’ll see multiple sections with different fees listed, and somewhere on there you’ll find the total fees charged, but it probably won’t be listed near to where the total volume processed is listed.

Processors make it difficult to analyze your credit card processing statement because if you don’t analyze your statement you won’t know the rates that you’re actually paying.

3. Extra fees and other fine print: There are often additional fees listed in the fine print of your credit card processing agreement which will appear on your monthly statement.  These fees can make it so that your effective rate is much higher than the rate you think you are paying.  Common fees that appear on statements are “Monthly Statement Fee”, “Monthly Minimum”, “PCI Compliance Fee”, “Chargeback Fee” and more.

An Example:

• Merchant signs up for processing with an advertised rate 1.5%.
• Merchant processes $10,000 in credit cards in one month.
• 10% of these cards are eligible for the Qualified Rate of 1.5%, whereas 60% are processed at a Mid-Qualified Rate of 2.75%, and 30% are processed at a Non-Qualified Rate of 3.25%.
• Merchant is charged $15 (Qualified) + $165 (Mid-Qualified) + $97.5 (Non-Qualified) = $277.50
• Merchant is charged a $10.00 statement fee
• Total charges on the merchant statement are: $287.50
• Actual rate merchant is paying is 2.875%

Until the merchant in this example looks closely at their processing statement, they might be under the impression that the rate they are paying to accept credit cards is 1.5%.

What should you do?

If you’re an existing business owner take a closer look at your credit card processing statement and if you’re not comfortable with crunching the numbers send it to someone who is.

If you’re a new business and you don’t have a statement to work with be careful and do not sign any long term contracts.  Do your best to find a processor that offers a reasonable rate.  It’s ok if you work with a processor whose rates are high as long as you have the ability to change processors.  Take a close look at your first statement and make sure that it lines up with your expectations.