In the world of credit card processing and merchant services, rates are not a one size fits all. I know when dealing with merchants the first thing they want to know is "What is your rate?" I never answer that question without asking questions first, such as "Who and what type of customers do you have? Are they consumers or business to business? How do you process your credit cards? Do you have a credit card terminal or are you running them online? Do you swipe or key your transactions? All of these questions are factors on determining the right rates for your account.
I am going to break this down as basic as I can. First, understand that Visa, Mastercard and Discover have rate categories (aka Interchange) for every type of credit card. These rates are assessed to the merchant. There are approximately 600 interchange rates!
There are two ways to price merchants, Interchange (aka Passthru) and Tiered Pricing. Interchange is the actual costs from Visa, Mastercard and Discover. The other is Tiered Pricing.
Interchange plus basis points offers the merchant true costs from Visa, Mastercard and Discover. The basis points are the above costs that go back to the company you are doing business with. Basis points are set by the agent, which are typically between.15 to.20% (but can be lower or higher). No, this is not what your agent makes off of your account but that is a different article, just in case you were wondering.
To give you an example of Interchange, the cost of a Mastercard debit card (like your personal debit card from your bank) is 1.16%. So an agent using Interchange plus basis points would come back with something like this: 1.16% +.20% (20 basis points). So the total cost for this card, to the merchant, would be 1.36%.
Tiered Pricing is the most common and it can be very deceptive! How many of you have received a phone call stating a low 1.59% or something similar? Well I will be honest with you, there is a good possibility you will NEVER see that rate. Yes I said NEVER.
For Tiered Pricing it is a bit different. All of those interchange rates mentioned have to be distributed between three tiers:
The first tier is a Qualified rate. They are your basic credit cards that are swiped face to face. This is the rate that is typically disclosed. I have seen rates quoted from 1.49% (which is below cost) to 1.80%. For our examples we will use 1.70%.
The second tier is the Mid Qualified rate. A large portion of credit cards fall into this category if your customer is using rewards/sky mile cards (very popular) or if the sale is keyed rather than swiped. This tier is assessed a downgrade fee (aka surcharge). Agents don't typically disclose this rate. You need to ask for it. They will either tell you the full rate or they will only tell you the downgrade fee. If they tell you the downgrade fee is.50% you must add that rate to your Qualified rate (1.70% +.50 =2.20%). A Mid Qualified rate can be anywhere from 1.99% to 2.30%.
The third tier is the Non Qualified rate. Your cost of taking cards in this tier is from business cards, corporate cards, address or zip code provided doesn't match the card holder's on file, certain cards that are keyed into a terminal, international cards, etc. Again, this tier is assessed a downgrade fee that agents typically don't disclose. You will need to ask for it. If they tell you the downgrade fee is 1.50% you must add that to your Qualified rate (1.70 + 1.50 = 3.20%). A Non Qualified rate can be anywhere from 2.94% to over 4%.
This is where deceptive practices come into play. Every agent is willing to tell you that best rate. Notice I didn't say best Qualified rate! They don't disclose everything! Their best rate might be a rate you will never see? Are they telling you what the downgrade fees are? Technically they aren't lying; they just aren't DISCLOSING all the fees to you.
Interchange plus basis points vs. tiered pricing
Let's break down a few different types of credit cards. From the example above, for the Mastercard debit card, we know the cost plus basis points is 1.36%. That card would be considered a Qualified card on a Tiered plan. So if we use the example rate for the Qualified tier above it would be 1.70%.
I'll show you two more (even though there are almost 600!) This time I'll use a Visa Card Not Present (typical consumer bank credit card keyed in). The interchange cost is 1.89% +.20% (plus basis points) =2.09%
Using the Tiered pricing this credit card would be a mid-qualified card so the downgrade fee will apply. Using the example pricing for our qualified rate 1.70% and the example downgrade fee.50% the mid qualified rate would be (1.70%+.50%) =2.20%
Visa CPS/Retail Credit (typical consumer bank credit card, swiped face to face). The Interchange cost is 1.63% +.20% (plus basis points) =1.83%.
Using the Tiered pricing credit card would be a Qualified card so no downgrade fee will apply. Using the example pricing for our qualified rate the rate would be 1.70%. In this case, if you took these types of cards a tiered pricing plan might be better.
These are just three examples. You can see the rate differences between the two pricing plans. It's all how the agent prices your merchant account. These are just the basics that come into play. That is why rates are not "one size fits all".
If you are a hair dresser or coffee shop you might take more debit cards or retail cards. However, if you are keying all your transactions or taking business/corporate cards, because you are a business to business merchant, then your needs are completely different. That is why an agent asks for a statement. To see what kind of cards you're taking and fees you're paying to price you properly or in some cases to take advantage of you!
So how do you know if you're saving money? If you're an Interchange merchant than you can see the difference in the basis points; you know what's lower than what you currently have. If you are on tiered plan make the agent disclose all three tiered rates (don't forget you might have to do the downgrade math). You can tell what rates are lower when you have everything disclosed.
There are other costs involved such as transaction fees, monthly fees, batching fees, annual fees, and other assorted fees that can have an impact on the costs. But if you don't have the right information or understand the basics between Interchange and Tiered pricing then you never stood a chance in the first place to make the right decision!
I am going to break this down as basic as I can. First, understand that Visa, Mastercard and Discover have rate categories (aka Interchange) for every type of credit card. These rates are assessed to the merchant. There are approximately 600 interchange rates!
There are two ways to price merchants, Interchange (aka Passthru) and Tiered Pricing. Interchange is the actual costs from Visa, Mastercard and Discover. The other is Tiered Pricing.
Interchange plus basis points offers the merchant true costs from Visa, Mastercard and Discover. The basis points are the above costs that go back to the company you are doing business with. Basis points are set by the agent, which are typically between.15 to.20% (but can be lower or higher). No, this is not what your agent makes off of your account but that is a different article, just in case you were wondering.
To give you an example of Interchange, the cost of a Mastercard debit card (like your personal debit card from your bank) is 1.16%. So an agent using Interchange plus basis points would come back with something like this: 1.16% +.20% (20 basis points). So the total cost for this card, to the merchant, would be 1.36%.
Tiered Pricing is the most common and it can be very deceptive! How many of you have received a phone call stating a low 1.59% or something similar? Well I will be honest with you, there is a good possibility you will NEVER see that rate. Yes I said NEVER.
For Tiered Pricing it is a bit different. All of those interchange rates mentioned have to be distributed between three tiers:
The first tier is a Qualified rate. They are your basic credit cards that are swiped face to face. This is the rate that is typically disclosed. I have seen rates quoted from 1.49% (which is below cost) to 1.80%. For our examples we will use 1.70%.
The second tier is the Mid Qualified rate. A large portion of credit cards fall into this category if your customer is using rewards/sky mile cards (very popular) or if the sale is keyed rather than swiped. This tier is assessed a downgrade fee (aka surcharge). Agents don't typically disclose this rate. You need to ask for it. They will either tell you the full rate or they will only tell you the downgrade fee. If they tell you the downgrade fee is.50% you must add that rate to your Qualified rate (1.70% +.50 =2.20%). A Mid Qualified rate can be anywhere from 1.99% to 2.30%.
The third tier is the Non Qualified rate. Your cost of taking cards in this tier is from business cards, corporate cards, address or zip code provided doesn't match the card holder's on file, certain cards that are keyed into a terminal, international cards, etc. Again, this tier is assessed a downgrade fee that agents typically don't disclose. You will need to ask for it. If they tell you the downgrade fee is 1.50% you must add that to your Qualified rate (1.70 + 1.50 = 3.20%). A Non Qualified rate can be anywhere from 2.94% to over 4%.
This is where deceptive practices come into play. Every agent is willing to tell you that best rate. Notice I didn't say best Qualified rate! They don't disclose everything! Their best rate might be a rate you will never see? Are they telling you what the downgrade fees are? Technically they aren't lying; they just aren't DISCLOSING all the fees to you.
Interchange plus basis points vs. tiered pricing
Let's break down a few different types of credit cards. From the example above, for the Mastercard debit card, we know the cost plus basis points is 1.36%. That card would be considered a Qualified card on a Tiered plan. So if we use the example rate for the Qualified tier above it would be 1.70%.
I'll show you two more (even though there are almost 600!) This time I'll use a Visa Card Not Present (typical consumer bank credit card keyed in). The interchange cost is 1.89% +.20% (plus basis points) =2.09%
Using the Tiered pricing this credit card would be a mid-qualified card so the downgrade fee will apply. Using the example pricing for our qualified rate 1.70% and the example downgrade fee.50% the mid qualified rate would be (1.70%+.50%) =2.20%
Visa CPS/Retail Credit (typical consumer bank credit card, swiped face to face). The Interchange cost is 1.63% +.20% (plus basis points) =1.83%.
Using the Tiered pricing credit card would be a Qualified card so no downgrade fee will apply. Using the example pricing for our qualified rate the rate would be 1.70%. In this case, if you took these types of cards a tiered pricing plan might be better.
These are just three examples. You can see the rate differences between the two pricing plans. It's all how the agent prices your merchant account. These are just the basics that come into play. That is why rates are not "one size fits all".
If you are a hair dresser or coffee shop you might take more debit cards or retail cards. However, if you are keying all your transactions or taking business/corporate cards, because you are a business to business merchant, then your needs are completely different. That is why an agent asks for a statement. To see what kind of cards you're taking and fees you're paying to price you properly or in some cases to take advantage of you!
So how do you know if you're saving money? If you're an Interchange merchant than you can see the difference in the basis points; you know what's lower than what you currently have. If you are on tiered plan make the agent disclose all three tiered rates (don't forget you might have to do the downgrade math). You can tell what rates are lower when you have everything disclosed.
There are other costs involved such as transaction fees, monthly fees, batching fees, annual fees, and other assorted fees that can have an impact on the costs. But if you don't have the right information or understand the basics between Interchange and Tiered pricing then you never stood a chance in the first place to make the right decision!
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