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How Does Credit Card processing work?
- Visa and MasterCard set rates called INTERCHANGE RATES on every single credit card on their network based on the risk level associated with that card.
- A few things that affect that risk level are: frequency of charge-backs, credit of the typical cardholder, financial stability of the card issuing bank, etc.
- These rates change twice a year as VISA and MasterCard make their adjustments.
- Rates can be anywhere from .40% to 3.0% each credit card transaction amount depending on the type of card.
- VISA and MasterCard also place all credit cards into one of four interchange categories:
- Qualified Signature-Debit (debit/check cards)
- Qualified Credit (typical credit card)
- Mid-Qualified Credit (non-typical cards and keyed transactions)
- Non-Qualified Credit (rare cards, corporate cards, rewards cards, etc.)
- Processors (like First Data) provide the processing, funds transfers from bank to bank, merchant account structure and develop some of the merchant “products” available such as:
- Credit Card Machines
- Webpage Credit Card Processing Portals
- Check Verifications and Guarantees
- Processor Agents and ISOs (Independent Sales Organizations, like Select Banking Systems) are charged with selling the transaction processing for processors, selling other products for the processor, and being liaisons between the merchants and VISA, MasterCard, Discover and the processor. Agents and ISOs have the following responsibilities:
- Providing the Merchant Processing Statements for the merchant to see transactions and charges.
- Providing support for the merchant in deciphering charge-backs and other scenarios in which merchants don’t typically have experience in handling such situations.
- Initiating Banking changes, account changes and rate changes as required by VISA and MasterCard.
- Delivering any other pertinent processing information directly to the merchant.
- Providing Setup and Support for equipment, communication and software used to facilitate the credit card transaction.
- Ensuring the transaction environment is legal and safe per PCI Compliant Standards.
- In order to provide these services, Processor Agents and ISOs may do some of the following:
- Add to the Per Item base Interchange Rates set by VISA and MasterCard.
- Sell credit card processing equipment or software.
- Charge monthly fees for things like statements, communications, information access, etc.
- Charge yearly fees.
- Setup processing contracts with specific contract time limits.
- Charge early cancellation fees for contracted processing.
What about American Express and Discover?
- American Express prefers that there be a direct relationship between the merchant and American Express. There are a few key points to take away from this:
- There is literally NO competition for American Express business among merchant service companies.
- Some merchant service companies can help the merchant set up an AMEX merchant account; however this is typically a free service by the merchant services company and all business after that between AMEX and the merchant MUST be direct.
- American Express sets their own rates and fees schedules, the merchant service companies has no control over this.
- Your merchant services company cannot call AMEX on your behalf to resolve any issues you have.
- Your merchant services company DOES have your AMEX merchant I.D. and can provide you with it and a phone number to American Express should you need to contact them. (American Express Phone Number : 1-800-528-5200)
- Discover allows your merchant services company to deal with them on your behalf and, in essence, is handled exactly like VISA and MasterCard.
- The merchant services company sets the rates and fees schedules just as they do with VISA and MasterCard.
- Services and account modifications aren’t as stream-lined as they are with VISA and MasterCard so they will typically take a few days to occur.
How do I know if I’m getting a good deal for my credit card processing?
- Basic Rule: If it sounds too good to be true, it is. There are many Processor Agents and ISOs out there who advertise “dirt cheap” rates (rates EXTREMELY close to Interchange Rates set by VISA and MasterCard). Beware! These companies HAVE to make money somehow. There is no doubt that if they offer these rates, you will pay for it some other way (i.e. monthly fees, yearly fees, high equipment costs, service contracts, or other products they are selling you).
- One way to recognize this is if you see an advertisement or are quoted a SINGLE rate which seems to be much lower than everyone else (typically around 1.1%). No Doubt you are not seeing the whole story and that there are many “hidden” fees, charges or rates, or you are expected to buy another product at a PREMIUM price.
- Industry averages of effective rates on ALL Credit Card processing combined fall somewhere around 2.5% - 5%. Your EFFECTIVE RATE is calculated by adding up ALL of your fees, processing rates, and charges, and dividing it by your total credit card sales. If you can get an effective rate somewhere between 2.0 % and 3.25%, you have a good deal.
- Some companies are given “special deals” on their credit card processing based on the sheer volume of transactions (for instance Wal-Mart or Best Buy). Their rates would be significantly lower than average because there is significant competition for these high valued merchant accounts.
- Keep in mind: other factors may come into play when deciding which Merchant Services company to use, including:
- What sort of products does the merchant services company support?
- Wireless Credit Card machines can be advantageous where the location may not have phone lines or internet (for instance outdoor events), but be prepared to pay a wireless communication fee (just like a cell phone plan).
- Website Credit Card Processing has quickly become one of the most requested products tied to your website in the merchant processing world, but like everything else, be prepare to pay a setup and monthly fee for this.
- Virtual Terminals are secure web pages, not tied to your website, which act as a virtual credit card machine, using simply your internet connection and internet browser.
- Loans against Credit Card Processing are now available in many situations to be spent on improvements, updates, or product purchases, but keep in mind, there is an interest rate and the requirements for credit are quite high.
- What kind of support will the merchant services company provide?
- Will my company bring me supplies (receipt paper, ink ribbons) and will I be charged for this?
- If my credit card machine breaks down, will they fix/replace the broken equipment and for how much?
- When I call, do I get a real person or a computer that answers the phone? Do not underestimate the value of having a real person, who is assigned to YOUR account support, answer the phone.
What are the ways in which the Per Item Rates (fee schedules) are assessed?
- Merchant services companies have a few tools at their disposal to add to the Interchange RateS set by VISA and MasterCard.
- Tiered: Charging a flat rate for all transactions in each of the four interchange categories.
- Pass Through Interchange: Charging the same percentage increase (called base points) over Visa and MasterCard Interchange rates on each transaction, regardless of the card type or card category.
- Enhanced Recovery Rate (ERR): Charging the same rate on ALL credit card transactions, regardless of card type or card category.
- Below is a graphical representation of the different Fee Schedules you may encounter with a merchant services company. Keep in mind, one is not necessarily better than the other; your business is unique and you may run the majority of your transactions in a specific Interchange Category. Finding the right fee schedule for your business is crucial to ensuring you aren’t getting taken advantage of.
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