NMA is a full service broker. This means that we have access to multiple processors and providers so we can better customize the solution for your business. Whereas most agents try to make your business fit into one of a few soultions that they offer, we are able to customize a soloution for your business.
We provide a free rate analysis of your current credit card processing to show you the savings based off the various card types your organization accepts.
We don’t have set rates because our goal is to tailor a solution that will save your organization money no matter your rates. For more information read Credit Card Processing Fees & Rates.
Credit Card Processing Fees & Rates
Rest assured. Credit card processing fees aren't as confusing as you might think. In fact, fees are pretty straight forward once the components of cost are examined individually. In this article we will explain the different aspects that contribute to credit card processing fees to give you a solid understanding of who's charging what and which areas of cost you can control.
After we lay the groundwork, we'll outline exactly how to get the lowest credit card processing rates for your business, keeping in mind that every quote delivered by NMA a complete cost breakdown.
Components of Cost
Regardless of who you use as your credit card processor, you should still understand one very important point, which is:
Not all credit card processing fees are negotiable.
The rate that you pay to process a credit card transaction is a combination of base costs and markups called merchant discount. Think of merchant discount as the retail price of credit card processing, base costs as raw material expenses and the markup as production costs.
Base costs should account for the largest portion of expense (about 75% - 80%) followed by the markup (about 20% - 25%). With that said, we help a lot of organizations here at NMA that are getting abused by their current processor, and their base costs are about equal to the markup they're paying. In cases like this there's a lot of room for savings. Jump down to the Cost Distribution section below to learn more about where your money goes.
Base Credit Card Processing Fees
Base credit card processing fees are made up of interchange and assessments, and they're the same for all processors. No processor can give you a lower rate or a better deal on base costs. For example, First Data (the largest credit card processor) pays the same interchange fees and assessments as a small local broker or bank.
Interchange accounts for the largest portion of credit card processing expense and it's paid to card-issuing banks. Believe it or not, your processor and the card brands (Visa, MasterCard, and Discover) don't see any revenue from interchange.
Here's the short story of interchange…
The stakeholders of Visa, MasterCard and Discover (the banks) get together and decide how much they want to charge when you accept their credit cards.
The banks consider things like processing method (swiped, keyed, e-commerce), card type (rewards, business, consumer), your business type, and a host of other variables to create a long, exhausting list of interchange fees.
Interchange fees are assessed net of refunds and chargebacks, and most are two parts consisting of a percentage and a transaction fee. For example, 1.51% plus $0.10 is the current Visa interchange fee for a swiped consumer credit card.
It's important to note that even though interchange rates don't vary among processors, it is possible to optimize interchange charges to achieve lower costs. Check out these links for more details on interchange rates.
- Visa Interchange Rates & Fees
- MasterCard Interchange Rates & Fees
- Discover Interchange Rates & Fees – Discover does not publish their rates and fees
- American Express Interchange Rates & Fees – Amex does not publish their rates and fees
Visa, MasterCard and Discover make money by charging assessments on every transaction involving one of their credit cards. Like interchange, assessments are exactly the same for all credit card processors and no processor can give you a lower rate or a better deal on assessments.
However, assessments may be charged differently if you have a bundled pricing model. Reason being is that your processor has more control to manipulate pricing on a bundled pricing system.
The assessments for each card brand are listed below along with the details about when they apply. Assessments are changed periodically by the card brands, and this list is updated as changes are announced.
Clarification of Terms: The only true assessment fee from each card brand is the percentage charge applied to volume. The various other fees such as network access, foreign handling, and so forth are charges incurred through processing behavior at the individual transaction level. I refer to card brand charges collectively as assessments because these charges are consistent for all businesses.
- .13% - Debit Assessment - This assessment applies to gross Visa debit transaction volume.
Update: In July 2016, Visa raised its assessment on debit volume from 0.11% to 0.13%.
- .13% - Credit Assessment - This assessment applies to gross Visa credit transaction volume.
Update: In January 2015, Visa raised its assessment on credit volume from 0.11% to 0.13%. The debit volume assessment did not change from 0.11%.
- $0.0195 - Acquirer Processing Fee (APF) - Credit
The Acquirer Processing Fee applies to all U.S.-based credit card authorizations acquired in the U.S. regardless of where the issuer/cardholder is located. If your business is based in the U.S., the acquirer processing fee will apply to all Visa credit card authorizations.
- $0.0155 - Acquirer Processing Fee (APF) - Debit
On April 1, 2012, Visa began charging a separate lower APF of $0.0155 for transactions involving a debit card.
- $0.0195 - Credit Voucher Fee - Credit
In April 2016, Visa began charging a transaction fee for refund transactions involving a credit card. As noted below, a fee also applies to debit refund transactions, but this fee is slightly lower at $0.0155.
- $0.0155 - Credit Voucher Fee - Debit
In April 2016, Visa began charging a transaction fee for refund transactions involving a debit card. As noted above, a fee also applies to credit refund transactions, but this fee is slightly higher at $0.0195.
- $0.0018 - System File Transmission Fee -- Also called a Visa Base II Fee
System File Transmission Fee applies to all Visa transactions and is charged in addition to other transaction-based assessments, such as the Acquirer Processing Fee.
- Transaction Integrity Fee (TIF)
Effective April 13, 2012, Visa will begin charging a Transaction Integrity Fee (TIF) of $0.10 on transactions involving Visa debit and prepaid cards that do not meet CPS requirements.
- Variable - Fixed Acquirer Network Fee (FANF)
Effective April 1, 2012, the FANF is a monthly fee that varies based on processing method, number of locations and volume.
- $0.0047 - Kilobyte (KB) Access Fee
Visa's kilobyte fee is charged on each authorization transaction submitted to Visa's network for settlement.
- $0.09 - Misuse of Authorization Fee
The Misuse of Authorization Fee applies to Visa authorizations that are not followed by a matching clearing transaction (or in the case of a cancelled or timed out authorization, not properly reversed).
On January 1, 2017, Visa raised the Misuse of Authorization fee from $0.045 to $0.09.
- $0.20 - Zero Floor Limit Fee
Visa's Zero Floor Limit applies to cleared transactions that can't be matched to a previously approved or partially-approved authorization. In short, it applies to settlement transactions submitted without a proper authorization.
On January 1, 2017, Visa raised the Zero Floor Limit fee from $0.10 to $0.20.
- $0.025 - Zero Dollar Verification Fee
The Zero Dollar Verification fee applies to Zero Dollar Verification messages (approved and declined). Zero Dollar Verification messages include the verification of the card account number, address verification (through AVS), Card Verification Value 2 (CVV2) and Single Message System (SMS) acquired Account Verification authorizations. The Visa Misuse of Authorization Fee does not apply to these requests. The fee applies when you want to verify a cardholder's information without actually authorizing an amount of their card.
- .80% - International Service Assessment Fee
The International Service Assessment Fee applies to U.S. acquired transactions paid for with a card issued outside of the U.S.
Update: On April 18, 2015, Visa raised the International Service Assessment from 0.40% to 0.80% on transactions settled in U.S. dollars, and to 1.20% on transactions settled in currencies other than U.S. dollars.
- Note: The Cross-Border Assessment Fee (Domestic) and the Acquirer Program Support Fee often both apply to the same transaction bringing the total assessment charge to 1.25%.
- .45% - International Acquirer Fee
The International Acquirer Fee applies under the same circumstances as the International Service Assessment Fee noted above.
- Note: The International Service Assessment Fee and International Acquirer Fee often both apply to the same transaction bringing the total charge to 0.85%.
- $0.001 - Risk Identification fee
Effective April 1, 2012, Visa has eliminated the risk identification fee
- .12% - Assessment (Transactions less than $1,000)
The assessment applies to gross MasterCard transaction volume.
Update: In January 2015, MasterCard increased its assessment by 0.01% on all signature debit and credit transactions with an amount of $1,000 or less from 0.11% t0 0.12%.
- .14% - Acquirer Brand Volume Fee (Transactions greater than $1,000)
This assessment applies to consumer and business credit volume on transactions of $1,000 or greater. This assessment does not apply to signature debt transactions regardless of size.
- .01% - Digital Enablement Fee - Effective January 2015, MasterCard will begin charging a Digital Enablement Fee. This fee will be assessed on MasterCard card-not-present sales volume involving signature debit, consumer credit and commercial credit transactions.
- $0.0195 - Network Access and Brand Usage Fee (NABU)
Update: Effective January 8, 2012 the NABU fee will apply to U.S.-based authorization transactions regardless of whether the transaction is settled. Prior to January 8, 2012 the Network Access and Brand Usage Fee applies to all U.S.-based settled transactions.
Update: Effective June 30, 2013 the NABU fee will be increased to $0.0195, and it will apply to both authorization and refund transactions.
- $15 / $3 - Merchant Location Fee
The Merchant Location Fee is billed annually at a rate of $15 per location. Payment facilitators will incur a Merchant Location Fee of $3 per merchant location. More information about the this fee can be found here: MasterCard Merchant Location Fee.
- $0.0044 - Kilobyte (KB) Access Fee
MasterCard's kilobyte fee is charged on each authorization transaction submitted to MasterCard's network for settlement.
- .0045% - Acquirer License Fee (ALF)
Effective April 2012, MasterCard will begin charging 0.0045% as an Acquirer License Fee assessed on gross MasterCard processing volume. This fee is also referred to by several processors as a License Volume Fee.
- .60% - Cross Border Assessment Fee (Domestic)
The domestic Cross-Border Assessment Fee applies to U.S. acquired transactions paid for with a card issued outside of the U.S. and settled in USD.
Update: On April 18, 2015, MasterCard raised the Cross-Border fee from 0.40% to 0.60%.
- 1.00% - Cross-Border Assessment Fee (Foreign)
The foreign Cross-Border Assessment Fee applies to international transactions settled by U.S.-based merchants in a currency other than USD.
Update: On April 18, 2015, MasterCard raised the Cross-Border fee on non-US currency transactions from 0.80% to 1.00%.
- .85% - Acquirer Program Support Fee (Increased to 0.85% from 0.55% on April 1, 2013)
The Acquirer Program Support Fee applies under the same circumstances as the Cross-Border Assessment Fee (Domestic) noted above.
- $0.01 - AVS Fee (Card-Not-Present)
MasterCard charges a fee each time a merchant accesses the address verification service when processing a transaction. MasterCard's AVS fee is a little higher for card-not-present merchants than it is for card-present merchants. MasterCard's AVS for card-present businesses is listed just below.
- $0.005 - AVS Fee (Card-Present)
- $0.0025 - Card Validation Code Fee Effective October 21, 2013, MasterCard will implement a Card Validation Code 2 (CVC2) transaction fee of $0.0025. This fee
will be charged on transactions acquired in the United States with the CVC2 (three-digit code on the back of the customer's card) included in the transaction for authorization and the CVC2 response value equals ’M’ (Match) or ’N’ (Invalid/did not match). The fee will not apply to Account Status Inquiry (ASI) requests.
- $0.025 - Account Status Inquiry Fee
The account status inquiry fee is charged for transactions where a merchant does actually authorize an amount on a cardholder's account, but instead, validates aspects of her account. Account status inquiry transactions may include requests for address verification service (AVS), card validation code (CVC2), or both. MasterCard implemented the account status inquiry service on June 14, 2011 in place of support for AVS-only transactions.
- $0.055 - Processing Integrity Fee (Card-Present, Card-Not-Present, No reversal)
Effective June 14, 2011 MasterCard began charging acquirers a Processing Integrity Fee of $0.045 to encourage merchants to abide by proper transaction authorization standards. MasterCard increased the Processing Integrity Fee by $0.01 to $0.055 on November 1, 2011. The Processing Integrity Fee will apply in the following instances:
- Card-present: Transactions are not settled, cleared, or reversed within 24 hours of the original authorization transaction/request
- Card-not-present: Transactions are not settled, cleared, or reversed within 72 hours of the original authorization transaction/request
- No reversal: An authorization transaction cannot be matched to a corresponding settlement record after a period of 120 days
- Exempt merchants: Travel and entertainment merchants classified as MCC 3351-3441, 3501-3999, 4411, 7011 and 7512 are exempt from the Processing Integrity Fee
- $0.045 Processing Integrity Fee: Pre-Authorization and Undefined Authorization
MasterCard has updated its definition of an authorization from a single type to three separate types that are pre-auth, undefined-auth, and final auth. As of May 28, 2017, a pre-auth or undefined auth that is not properly cleared or reversed will incur a fee of $0.045.
- 0.25%, $0.04 minimum charge Processing Integrity Fee: Final Authorization
Transactions that do not meet final authorization standards will be assessed a penalty of 0.25% of the transaction amount with a minimum charge of $0.04
The final authorization integrity fee applies to authorizations that are not fully reversed or cleared within 7 calendar days of the authorization date, or to authorizations where the authorized amount does not equal the final clearing amount, or to authorizations where the authorized currency code does not match the clearing currency code.
- $500.00 - Yearly Registration Fee (online e-cigarettes/vaping business)
Effective January 15, 2017, Mastercard will impose a $500 yearly registration fee on ecommerce businesses in the e-cigarettes/vaping industry.
A pre-authorization is an authorization that is not fully reversed or cleared within 30 calendar days of the authorization date.
An undefined authorization is one that is not fully reversed or cleared within 7 calendar days of the authorization date.
- 0.13% - Assessment
The assessment applies to gross Discover card transaction volume.
Note: In April 2016, Discover's assessment increased from 0.11% to 0.13%.
Note: In April 2015, Discover's assessment increased from 0.105% to 0.11%.
- $0.0195 - Data Usage Fee
The Data Usage Fee applies to all U.S.-based authorization transactions.
Note: On April 15, 2016, Discover's Data Usage Fee increased from $0.0185 to $0.0195.
- $0.0025 - Network Authorization Fee
Discover will begin charging a Network Authorization Fee effective October 1, 2013. This fee will apply to all Discover network authorizations and will replace the previously assessed Data Transmission Fee, which applied only to settled Discover transactions. The amount of the Network Authorization Fee and the Data Transmission Fee are the same, but the Network Authorization Fee will apply to a greater number of transactions.
- $0.0025 - Data Transmission Fee (No longer charged)
The Data Transmission Fee applied to all settled Discover transactions, and was replaced by the Network Authorization Fee is October 2013.
- .45% - International Processing Fee
The International Service Fee applies to U.S. acquired transactions paid for with a card issued outside of the U.S.
Update: On April 15, 2016, Discover's International Processing Fee will be increased from .45% to .55%.
- .80% - International Service Fee
The International Service Fee applies under the same circumstances as the International Processing Fee noted above.
Note: On April 15, 2016, Discover's International Service Fee increased from .55% to .80%.
- Note: The International Processing Fee and the International Service Fee often both apply to the same transaction bringing the total charge to 0.95%. This total will be 1.35% on and after April 15, 2016.
The advent of American Express's Amex OptBlue introduced in early 2015 allows us to start listing Amex pricing on this page, as well. Like card brand charges for Visa, MasterCard and Discover, the charges listed below are paid to American Express.
- 0.15% - Assessment / Sponsorship Fee
The assessment applies to gross American Express card volume.
- 0.30% - Card-Not-Present (CNP) Surcharge
The American Express card-not-present surcharge applies to gross card-not-present volume, such as keyed and e-commerce transactions. The CNP surcharge is charged in addition to to the sponsorship fee of 0.15%, making Amex's total assessment on card-not-present volume 0.45%.
- 0.40% - International Assessment
The American Express international assessment applies to gross sales volume involving a card issued outside of the United States.
The markup over interchange and assessments is the only area where you have the ability to negotiate credit card processing costs. Keep in mind that many factors contribute to the markup, so not everything will be negotiable, or it will only be negotiable to a point.
Furthermore, the markup isn't all profit. it's split among all of the organizations that facilitate the processing of your business's transactions such as the acquiring bank, processor, ISO(s), gateway or software provider and others. The markup must cover cost as well as profit for all of these entities.
Markups differ significantly from one processor to the next both by amount, pricing model and the types of fees charged. These inconsistencies are why it's difficult to accurately compare credit card processing on the open market.
Types of Fees
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.
Trying to list the various fees that individual credit card processors charge is like herding cats. When comparing processing quotes, it's easier (and more useful) to break fees down into three general categories and then compare each offer based on the estimated effective rate.
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.
- Retrieval Fee
- PCI Compliance Fee
- PCI Non-Compliance Fee
With competitive pricing the majority 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 NMA 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
You are left with:
$50 - $0.87 - $0.07 - $0.20 = $48.86 (2.28% overall effective rate)
Getting the Lowest Rates
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. As we outline in this article, 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 the majority 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.
Of course, you can make your life easier by letting NMA review your statements and give you an interchange plus quote.
Simplicity is Expensive
Simplicity is expensive when it comes to credit card processing. Companies like Square and PayPal Here are making nice profits by offering flat rate pricing to organizations that don't spend the time to learn how processing fees really work.
For most organizations, 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.
Components of Credit Card Processing Cost
To understand pass through pricing you need a general idea of the components of credit card processing cost which are interchange fees, assessments and a processor markup. These three components are part of every credit card transaction.
Interchange fees are paid by your processor's bank to the issuing bank of your customers' credit card. They're set by the members of Visa and MasterCard (the banks), and they're the same for all businesses. Think of interchange fees as wholesale processing rates: they're the lowest attainable rates and fee.
There are a couple hundred interchange fees between Visa and MasterCard, but it's not necessary to familiarize yourself with all of them since many won't apply to your business. However, it doesn't hurt to take a look at the Visa and MasterCard fee schedules posted online to get an idea of what they look like. Here's a snippet from Visa's interchange table.
(Discover and Amex don't publicly post their fee schedules.)
Many people are surprised to learn that Visa, MasterCard, and Discover don't make a dime from interchange fee revenue. Instead, they make money by charging you assessments when you accept a credit or debit card branded with their logo.
Together, interchange and assessments make up the entire "wholesale" cost of credit card processing. As with anything, you want to pay as close to wholesale as possible, meaning you want to pay a small markup. In the case of credit card processing, the card processor is the one that sets the markup.
The processing markup is any rate or fee beyond the base costs of interchange and assessments, and it's the only area of cost that varies from one processor to the next. The discount rate and transaction fee portion of a processor's markup is collectively the largest contributor to overall markup expense. But it's not the rate that's most important, it's the pricing model on which the rate is based.
Here's where interchange pass through pricing comes in. With pass through pricing, a processor's rate and transaction fee are separate from interchange and assessments. This allows them to be consistent regardless of the actual cost of a transaction.
With other types of pricing, such as tiered, the processor's "rate" includes interchange and assessments all bundled together, which has the effect of essentially concealing actual costs and resulting in hidden fees. You may already be familiar with qualified, mid-qualified and non-qualified rates for which tiered pricing is infamous.
Bringing it All Together
Let's examine things a little further now that you know the components of processing cost, and you have some background on the different pricing models and benefits of pass through.
Interchange and assessments are the same for all businesses and all processors, and their sum represents the lowest possible credit card processing fee for any given transaction. Let's take a look at an example to illustrate what I mean.
Let's pretend that you swipe a Visa reward credit card. The interchange fee for this transaction is 1.65% plus a $0.10 transaction fee, and Visa's assessment is 0.11% plus a $0.0225 transaction fee for a total of 1.76% plus $0.1225. Since interchange and assessments are the same for all businesses and all processors, any business that swipes a Visa reward credit card will have to pay the same rate and fee of 1.76% plus $0.1225.
There are different interchange rates for different types of businesses, such as small ticket establishments, but let's keep it simple for the sake of this example.
Now let's pretend that two different businesses swipe a Visa reward credit card, but Business A has a merchant account with pass through pricing of .20% and $0.10, and Business B has tiered pricing of 1.69% qualified, 2.25% mid-qualified and 2.99% non-qualified, each with a $0.25 transaction fee.
We know that the actual cost of the transaction is the sum of interchange and assessments, which equals 1.76% plus a $0.1225 transaction fee.
To figure the final rate for Business A all we need to do is add the processor's pass through markup of .20% plus $0.10 to the actual cost of the transaction for a final rate of 1.96% plus a $0.2225 transaction fee.
Figuring the final rate for Business B requires us to subtract the actual cost of the transaction from the processor's bundled rate, but it's not that easy. Since we're dealing with a reward card the processor probably sent the transaction to the mid-qualified rate tier. So, let's subtract the actual cost of 1.76% plus $0.1225 from the processor's rate of 2.25% plus $0.25. This leaves us with a markup of 0.49% plus $0.1275.
As you can see there's a lot of guess work with tiered pricing in trying to figure out which tier to use when calculating a processor's markup. Perhaps more importantly than the guesswork is the fact that tiered pricing results in a greater markup and overall processing expense.
It's also important to note that with bundled pricing, a processor can change which transactions are charged according to which "rate" at any time. Just because a transaction with one type of card is considered "qualified" once doesn't mean that the processor won't charge the more expensive "non-qualified" rate for the same type of card in the future. With pass-through pricing, you won't have to worry about that. The processor's markup will remain the same no matter what, making it easier to see what you're paying and to find the lowest cost option.
Interchange and assessments are the same for all processors. The method the processor uses to pass these costs to you is what is important. The two most basic types of pricing are interchange plus and bundled. They're also referred to as pass through and tiered, respectively. Each pricing model is outlined below, and there's also a detailed post comparing interchange plus vs. tiered pricing here.
Interchange Plus or Pass Through
With interchange plus pricing the processor's markup isn't dependent on interchange qualification. This separation of costs keeps the processor's markup the same regardless of the type of card you accept, or how your process it. There are no qualified, mid-qualified or non-qualified rates with interchange plus.
The processor earns a fixed percentage regardless of the underlying interchange. For example, 0.25% is an example of an interchange plus rate quote. No fancy tiers, not qualification at the processor level -- just one simple rate that gets added to actual cost (interchange).
Interchange plus allows for interchange credits on refunded transactions. For example, when you issue a customer a refund, you are supposed to receive a partial credit of the interchange fee paid on the original transaction. This refund credit is not issued on bundled pricing models, but processors are capable of issuing interchange refunds on interchange plus pricing. However, just because a processor is capable of issuing interchange credits doesn't mean it will.
Like with bundled pricing, processors are capable of manipulating costs under an interchange plus pricing model, too. For example, interchange plus pricing does not guarantee that a processor will pass assessments at true cost, issue interchange credits, or refrain from applying a discount to refund volume.
This is yet another reason why it's important to have expert guidance, like that offered by National Merchant Advisors, to ensure you secure a truly competitive processing solution for your business.
Another benefit to interchange plus is that it allows for businesses to reap the benefits of decreases in interchange fees. For example, businesses with interchange plus pricing will benefit from lower debit card charges from the Durbin Amendment.
Interchange plus is the least expensive, most transparent form of credit card processing pricing. For these reasons, it's the only form of pricing that we offer at National Merchant Advisors.
Flat Rate pricing?
Flat rate is an increasingly popular pricing model for credit card processing. The most prevalent version of flat rate processing is where a company charges its clients based on a fixed percentage of volume. Common flat rates are currently around 2.75% - 2.9% for swiped transactions. Some flat rate models also include a per-transaction fee, often in the range of 20 - 30 cents per transaction.
Flat Rate Pricing is An Illusion
The fundamentals of credit card processing make it virtually impossible for a processor to charge a competitive flat rate and remain profitable.
Each time a business processes a credit card transaction it is actually paying three separate fees. It pays a fee to the bank that issued the customer's card, called an interchange fee. It pays a fee to the card brand (Visa, MasterCard, or Discover) whose logo is on the customer's card, called an assessment. And it pays a fee to a credit card processor as a markup.
Interchange fees and assessments are fixed costs that remain the same regardless of which credit card processing company a business uses. Assessments remain fairly consistent across different types of transactions, but interchange rates fluctuate over about 280 different categories.
See for yourself here:
The interchange rate assigned to an individual credit card transaction varies from 0.05% to 3.17% depending on several variables such as card type, card brand, processing method, settlement time, and more.
A processor that offers its clients flat rate credit card processing still has to pay interchange and assessments; it just does so behind the scenes without its clients knowing.
For example, Square charges its customers a flat rate of 2.75% for swiped and 3.50% for keyed transactions that only cost it about 1.40% and 1.95% on average. The difference between interchange and its flat rate is Square's markup.
Companies that offer this type of pricing are not actually "real" processors. Instead, they are aggregators that use one merchant account to process transactions for thousands of businesses.
As I'll explain in greater detail below, this type of flat rate pricing is inherently uncompetitive because an aggregator has to ensure its flat rate is high enough to cover all possible base costs associated with interchange and assessments as well as its markup, and base costs vary greatly.
Arguments for Flat Rate Pricing
Flat rate pricing has two redeeming qualities; it's simple and it is sometimes offered without a transaction fee, which can be beneficial for businesses with lots of transactions. With flat rate pricing, you'll also have known costs that don't change, making it easier to calculate what you've paid or can expect to pay based on your volume and ticket size.
It's relatively easy to forecast what charges will be with fixed-rate pricing — simply multiply gross sales by the processor's rate to calculate charges.
Simplicity seems like a small comfort considering flat rate pricing is typically 20% more expensive than other forms of pricing, but nonetheless, some businesses are willing to pay to have a flat rate. Paying more foe convenience may make sense for your business, just remember that in most cases you will be paying more. Don't confuse simplicity with low cost.
Some flat rate credit card processing is offered without a transaction fee, which makes it an ideal pricing model for businesses with very low average tickets.
For example, 2.75% of a $3 sale is only $0.0825, which is lower than what the processor pays in interchange charges. So, aggregators that don't charge a transaction fee actually lose money by processing for businesses with very small average tickets. Square lost $30 million processing for Starbucks because of the low average transaction total.
Don't be fooled by simplicity. Instead, side step fancy marketing ploys like flat rate pricing for truly competitive rates and fees like those offered by National Merchant Advisors. We only offer true pass-through pricing, making it easy for our clients to compare and select an exceptionally competitive processing solution.
Tiered or Bundled
Tiered pricing, also referred to as bundled or bucket pricing, is named for the way a processor categorizes interchange fees into three pricing tiers called qualified, mid-qualified and non-qualified. Although three tiers are most common, this pricing model can have separate sets of tiers for various types of cards. For example, six-tier pricing where credit and debit cards each have their own three tiers is gaining in popularity.
On a bundled pricing model the processor uses something called an interchange qualification matrix to route interchange fees to the qualified, mid-qualified, or non-qualified tiers.
A big problem with tiered pricing is that interchange fees are often not disclosed on your merchant processing statement (although they sometimes are), and the processor doesn't tell you into which tier individual interchange fees are being routed. This leaves you with no way to calculate exactly how much you're paying above the actual processing costs of interchange and assessments.
Tiered pricing has played a big role in building the processing industry's shady reputation.
Inconsistent buckets is 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 the majority 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.
We will show two examples of the difference in cost just based on the pricing model that is chosen. You will be able to clearly see that one model is better than the others.
The customer is making a purchase of $100 using a Visa Rewards 1 card. (Which has an Interchange Rate of 1.65% + $0.10, this would be a mid-qualified transaction for Tiered/Bundled pricing.)
|Interchange (1.65% + $0.10)||$1.75||$1.75||$1.75|
|Dues & Assessments (0.13%)||$0.13||$0.13||$0.13|
|Cost of Transaction||$2.43||$2.70**||$3.00***|
|Unknown Mark Up||0||$0.82||$1.12|
* Pass-Through pricing would be the cost of the transaction plus 0.30% + $0.25.
** Tiered/Bundled pricing of 1.69% + $0.25 for qualified, 2.45% + $0.25 for mid-qualified, and 2.99% + $0.25 for non-qualified.
*** Flat Rate pricing would be 2.75% + $0.25.
The mark up for the Pass-Through pricing is known, 0.30% + $0.25. That means that your processor made $0.55 on the transaction. However, with the other two you never see the actual cost of the transaction you only know the rate that you are charged. This means you never know what they actual made on each transaction. In this example you would never know that the Tiered/Bundled processor made $0.82 and the Flat Rate processor made $1.12 on this transaction.
In the Tiered/Bundled model savings are passed down to the customer only if the card is put into a lower tier, which is completely at the processors discretion. With the Flat Rate model savings are never passed on to the customer when a lower interchange rate is applied. Let’s look at another example.
The customer is making a purchase of $100 using a Regulated Debit Card. (Which has an Interchange Rate of 0.05% + $0.22, this would be a qualified transaction for Tiered/Bundled pricing.)
|Interchange (0.05% + $0.22)||$0.27||$0.27||$0.27|
|Dues & Assessments (0.13%)||$0.13||$0.13||$0.13|
|Cost of Transaction||$0.95||$1.94**||$3.00***|
|Unknown Mark Up||0||$1.54||$2.60|
* Pass-Through pricing would be the cost of the transaction plus 0.30% + $0.25.
** Tiered/Bundled pricing of 1.69% + $0.25 for qualified, 2.45% + $0.25 for mid-qualified, and 2.99% + $0.25 for non-qualified.
*** Flat Rate pricing would be 2.75% + $0.25.
This demonstrates that with the lower cost Interchange the markup of the Pass-Through model remined constant at $0.55. However, with the Tiered/Bundled model you see that even with the lower cost, their mark up went from $0.82 to $1.54. And the Flat Rate model was even worse. It’s mark up went from $1.12 to $2.60.
When the cost of the transaction decreased so did the cost to the customer. The mark up was transparent and calculable. The customer paid $0.55 to the processor regardless of the cost.
When the cost of the transaction decreased the cost to the customer went down as well but only by an amount determined by the processor. The market didn’t dictate the price. The customer paid a lower rate but a higher mark up. Most of the savings with the lower cost is passed on to the processor as profit instead of the customer.
Flat Rate pricing
When the cost of the transaction decreased the cost to the customer remained constant. No savings were passed on to the customer. 100% of the savings were passed on to the processor in greater profits.
Credit Card Processing for Non Profit Organizations
For non-profit organizations, accepting donations and payments by credit card may help you reach your financial goals. Getting set up to take credit cards as a non-profit organization isn’t a difficult process, but there are some things you should know in order to ensure you’re getting the best possible solution.
In order to choose a processor for accepting credit cards as a non-profit organization, you first need to have an understanding of the components of the cost of processing. There are two fixed costs for everyone who accepts credit cards: interchange and assessments.
For any business or organization, interchange makes up the bulk of the cost to process credit cards. Interchange is a set of "categories" used to classify transactions. For example, a swiped credit card is one category, a swiped debit card is another category, a keyed-in credit card is another, etc. Each interchange category has a rate associated. When your organization accepts a card, the transaction is charged according to the rate for the category it falls into. There are hundreds of interchange categories. Interchange rates are not negotiable. All processors are charged the same rate.
Interchange costs are paid to the bank that issued the credit card to your customer, also known as the "issuing bank."
In credit card processing, assessments are the fees charged by the credit card associations. (MasterCard, Visa, and Discover.) The fees are in addition to the interchange rates described above.
Assessments are paid to the card associations. Assessments are not negotiable. All processors are charged the same rate.
In addition to interchange and assessments, the other piece of processing costs is the processor’s markup. I’ve separated it because markup is not a universal rate, unlike interchange and assessments.
The processor’s markup is the amount that the processor makes as their profit from processing your transactions and handling the payment for you. Processor’s markups vary depending on the processor, pricing model, and other factors. The markup is the only component of processing costs where the business or organization has negotiating power.
What's different for non-profit organizations?
Credit card processing for non-profits still has the same components. Non-profit organizations still have to pay interchange, assessments, and markup, but with a processor who is familiar with non-profit processing, it may be possible to secure lower interchange rates and a lower total cost for you.
When I discussed interchange above, I mentioned that there are hundreds of interchange categories. For the most part, businesses and non-profit organizations don’t need to spend the time learning the ins and outs of the categories. Transactions will be automatically routed to the interchange category for which they qualify.
What matters for non-profits is that there are specific non-profit organization and charity interchange categories. A transaction processed through the non-profit interchange category will generally have a lower interchange rate than a transaction processed through a for-profit interchange category.
Transactions will only go to the lower-rate categories if your organization is correctly set up with your processor as a qualifying non-profit organization using the correct Merchant Category Code.
What is a Merchant Category Code (MCC)?
In credit card processing, a Merchant Category Code (MCC) is a 4-digit number assigned to a business or non-profit organization when they begin accepting credit cards. Your MCC has a direct effect on what interchange fees your organization will pay for credit card transactions.
Why are MCC's important for non-profits?
The MCC assigned to your organization is important to you primarily because it influences which interchange categories your transactions qualify for. In order to qualify for non-profit interchange, your organization needs to be set up with a non-profit MCC. If you work with a processor who isn’t familiar with serving non-profit organizations, there may be a higher risk of being set up with an MCC that leads to more expensive interchange.
Processing Costs for Non-Profits
One thing to remember is that a correct MCC doesn’t automatically mean your non-profit organization will reap the rewards of lower interchange costs. In order to see the savings, you’ll also need to ensure you’re working with a processor who charges you the actual interchange rates. This means working with a processor who offers true pass-through pricing.
For non-profit organizations seeking the most competitive credit card processing, the lowest cost solution will NOT be a flat-rate processor, such as Square or PayPal. While those kind of companies offer services that may be suitable for some businesses, flat-rate processing would not provide savings to a non-profit. With flat-rate processing, the goal is to simplify pricing so it appears less confusing. The goal isn’t to provide the lowest cost.
While every business and non-profit has to pay interchange and assessments, some processors charge the actual cost of interchange and assessments, and then add a small percentage markup on your processing volume to make their money. If you’re paying the actual interchange rates, you’ll benefit from paying the lower non-profit interchange rates for your transactions.
Flat-rate processors charge the same rate no matter what. The flat rate is intended to cover the costs of interchange, assessment, and their markup or profit. Even if your transactions qualify for a lower interchange rate, you don’t see savings. Instead, the lower interchange rate just means there’s more profit for the processor.
Let’s look at a simplified hypothetical situation to see how this works. Say you’re accepting a credit card payment for $100. In this example, we’ll use the Visa charity interchange rate of 1.35% + $0.05 per transaction, listed on Visa’s interchange table. Now let’s look at your processing options: you can work with a processor who charges you the actual cost of interchange (pass-through pricing) or a flat-rate processor.
True pass-through pricing is the pricing model in which a processor charges you the actual interchange costs and charges their markup separately. In this example, let’s say your processor charges you 0.4% + $0.20 per transaction as their markup.
That means that for your $100 transaction at the charity interchange rate of 1.35% + $0.05, you’ll pay $2.00 to process that transaction.
(100 x 0.0135) + (100 x 0.004) + .05 + .20 = 2
Flat Rate Pricing
Flat-rate pricing charges you one flat rate no matter what. Let’s say your flat rate fee from the processor is 2.75% + $0.20 per transaction. For your bottom line, it doesn’t matter what the interchange rate is when you’re using flat-rate processing because you don’t get the savings from lower interchange. The interchange rate only affects how profitable the transaction is for the flat-rate processor. In this example, you’ll pay $2.95.
(100 x 0.0275) + .20 = 2.95
When you process multiple transactions or larger transactions, the difference in cost can add up quickly, leaving you with less money. Why pay more than you have to? Taking credit cards through a processor who charges you the actual interchange cost can help your organization keep more of its money.
How do I get a competitive processing solution?
The good news is that with transparent pass-through pricing and the correct MCC, you can take advantage of the lower interchange rates available for qualified non-profit organizations. When deciding on a processor, you’ll want to make sure they have experience offering credit card processing to non-profit organizations, and that they’re charging you for the actual interchange rates you pay.
Credit card processing for non-profits doesn’t have to be a headache. Sign up today to see how pass-through pricing can help your non-profit take credit cards without breaking the bank.To get started with a competitive quote, fill out our contact formation.
The Frustration of Non-Qualified Charges
Frustration with non-qualified charges goes something like this for most business people:
It all starts when you read your credit card processing statement and cringe at all the non-qualified fees. Then you pick up the phone and call your processor's customer service center to inquire about the charges. The person that answers the phone tells you that non-qualified fees are a fact of life, and you are accepting business and reward cards that Visa and MasterCard consider non-qualified.
At this point you start to get frustrated, so you push a little harder for a solution. Alas, it never comes. So, by now you're getting even more frustrated, and the representative agrees to lower your rates to appease you.
Here's where you pause and ponder... it all seemed too easy. How can the processor lower my rates so quickly? Having accomplished what seems like a victory, you hang up the phone with a hollow feeling in the pit of your stomach. You won the battle, but know that the war is far from over. You fully expect to see those non-qualified fees next month, but at least the rate will be lower this go-around, right?
(Repeat process next month)
If this sounds remotely like your situation, this article will save you time, money and a big headache.
Interchange Rates are the Only Reality
There's a little something called interchange that dictates what processing banks pay issuing banks when you process a credit card. Since interchange is the same for all processors, the details of how it works are incidental, so you don't have to worry about the terminology or intricacies of how things work.
Just understand that interchange is the equivalent of a wholesale price list for credit card processing.
Processors Use the Complexity of Pricing to Increase Profits
There are a lot of different interchange rates, about 400 or so, and they're assessed individually on a per transaction basis. This means that every single transactions is assigned an interchange rate based on the type of card the customer uses, how the transaction is processed (swiped, keyed, etc.) and a host of other variables.
Some of this may sound familiar because processors will often use a version of this truth to sell the story about non qualified rates. For example, you may have been told that "all of your transactions will be qualified except for reward and business cards," which is simply not the case.
A Non-Qualified Rate Example
A perfect example of this twisting of the truth comes courtesy of Wells Fargo. If you check out their website, you'll notice that Wells Fargo says,
"A non qualified fee ... is ... generated when a transaction ... does not meet Visa®, MasterCard®, and Discover® Network requirements."
Visa, MasterCard and Discover don't have any requirements that determine whether a transaction is non qualified. They have guidelines that determine into which interchange category a transaction qualifies, but there is no such thing as a non-qualified rate from the card brands' perspective.
Wells Fargo goes on to say,
"... Visa, MasterCard and Discover Network assign the appropriate interchange level. Each account is set up [Read: Wells Fargo sets up each account] with an interchange level according to its processing method and business type. Any transaction that does not qualify at that level [Read: Any transaction that does not qualify at the level Wells Fargo determines] may result in a non qualified fee being charged."
So, which is it? Do Visa, MasterCard and Discover determine which transactions are non qualified, or do they simply "assign the appropriate interchange level?"
The answer is B. Visa, MasterCard and Discover assign the appropriate interchange level, and Wells Fargo determines what it feels is non-qualified.
Since interchange is confusing, processors created a pricing model that simplifies costs by grouping interchange fees into fewer categories called qualified, mid-qualified and non-qualified. The qualified rate is the lowest and the non-qualified rate is the highest.
Processors got one thing right. The simplicity of tiered pricing often makes it easy to understand, but it also makes it easier for processors to separate you from your money. As we will explain in a moment, tiered pricing is opaque, misleading and expensive.
Your Processor is the Puppet Master of Your Rates
The reason why tiered pricing is so evil is because it gives your processor the ability to manipulate costs behind the scenes by allowing them to control which pricing tier gets used the most.
For example, your processor doesn't have to raise your rates to increase its profits (and your costs). All it need to do is route more interchange fees to your mid- and non-qualified tiers. Sure, you will still have a nice low qualified rate, but it will rarely be used.
Remember how your processor was able to lower your rates so easily in the phone call scenario above? Your processor knew that lowering your rates a few percentage points wouldn't hurt its profits because it can simply route a larger portion of your transactions to the mid- and non-qualified tiers. Sure, your rates went down, but your overall cost will remain the same, or may even increase.
Interchange Pass Through: The Light at the End of the Non-Qualified Tunnel
This article began by telling you that non-qualified fees are nothing more than a figment of your processor's imagination. Well, it's true. Tiered pricing isn't the only game in town.
All you need to do to completely rid yourself of non-qualified rates is to get interchange pass through pricing.
That's it! Dump tiered pricing for pass through and you will eliminate your processor's ability to play games with your rates.
Unlike tiered pricing, pass through functions by allowing you to pay the actual interchange fees and a separate markup. Instead of charging several different rates, your processor makes money by charging a single fixed markup. The result is lower cost and a more transparent processing statement. Imagine, you will actually be able to see where your money is going each month.
So, where can you get pass through pricing? If you want to do things the easy way, fill out our contact form to get a competitive quote.