Pricing Models Exposed in Merchant Statement Example
Updated: Nov 30
MERCHANT ACCOUNT SECRETS REVEALED – ONLINE SERIES – PART 6
Let's switch gears and discuss various pricing options you have to choose from. Keep in mind that if your business does not process enough volume, some pricing may not be available to you. For example, if you are a small business with only a few thousand dollars in monthly sales, you may not be eligible for the same rates as a large enterprise with millions of dollars in sales. To help you understand the different pricing options, I recommend reviewing a merchant statement example.
By reviewing some merchant statement examples, you can better understand the different fees you may be paying and how much they cost you. This information can be used to negotiate with your payment processor or to find a new processor that offers lower rates.
TIERED PRICING First, there is the tiered model. We have already discussed this earlier in this book. This is the most common pricing option available and includes a Qualified, Mid-Qualified, and Non-Qualified rate with a flat per-item fee or transaction fee. Tiered merchant account pricing takes the many Visa and MasterCard interchange fees and categorizes them into 3 or 4 categories (or more) called “buckets” or “tiers”. Below is what you might pay for the various cards your business accepts. • Qualified Rate: 1.59% • Mid-Qualified Surcharge: 1.00% (or 2.59% NET) • Non-Qualified Surcharge: 1.50% (or 3.09% NET) • Transaction Fee: $.20 • Statement Fee: $10 per month While this simplified model makes it much easier to calculate how much you are paying for a merchant account, you might be paying too much for transactions that fall in the Mid and Non-Qualified tiers. This is especially true if most of your transactions fall in those categories! Grouping all of the various interchange categories into 3 or 4 categories may have their advantage as to keeping the merchant statement simple and easy to read, but it is not the best option if your business accepts a wide variety of credit cards each month. High traffic C-stores, grocery stores, or restaurants could do much better with Interchange-Plus pricing. There are also variants of the tiered pricing model that can have six, eight or even sixteen different tiers. This allows the processor to customize where card types land. Even if a company offers you this multi-tiered model, it will still be more cost-effective if you go with the Interchange-Plus pricing model below.
INTERCHANGE-PLUS PRICING This is the cheapest model by far! It is also very easy to understand how much you are being charged. This model itemizes all transactions under their appropriate interchange category as described by Visa and MasterCard and then charges an additional percentage surcharge to the transaction. Think of it as “cost-plus pricing”. Of course, if you have never accepted credit cards before, it may be difficult to get this pricing right away as many companies do not want to give away that much of their profit. In the last two years, however, this pricing model has become more common and if you understand how it works you can save a lot of money each month! • Discount fee: Interchange • Processing fee: plus .30% • Transaction Fee: $.10 • Monthly Statement: $10 Consider this example: Suppose you have Interchange-Plus pricing and the plus amount (processing fee) is 30 basis points (.30%) across the board. Suppose that you accept a credit card order over the phone. You would pay 1.80% plus.30% plus .10% or 2.20% for that transaction. That is a deal since you would normally pay 3.40% (Non-Qualified rate) for the same transaction on the tiered pricing model. However, caution should still be exercised! Suppose that your business is a convenience store and you swipe all cards. Most of your transactions fall into your standard qualified rate (On a tiered model you may pay 1.69%). If you switched to an interchange plus .30% model instead; you would now pay 1.54% plus .30% plus.10% or 1.94% for the same transaction. You would not be saving money at all but rather be paying more than ever! I will repeat what I said earlier. You need to know your business well in order to get the best savings on your merchant account! You might be wondering why I added a .10% to the equation. This represents the Visa and MasterCard dues and assessment fees are added to the interchange pricing model (.10% is a rough estimate as Visa and MC fees vary). When you have a tiered merchant account, these fees are already built into the 3 or 4-tiered rates. With the Interchange-Plus model, everything is itemized and broken down to its smallest component. Does this pricing model mean that you can obtain straight or “true” interchange pricing, essentially only paying the actual cost? No. The banks pass through all their fees along with a small percentage and per item fee for profit when sold to the merchant account provider or agent. The provider or agent, in turn, adds additional percentage points and per-item fees so that they too can make money providing service to your business. So the “plus” portion is needed for all parties to make money. If I had to choose a pricing model, I would choose the Interchange–Plus instead of the tiered model as it is much closer to wholesale pricing. With this pricing, you can rest at night knowing that the processor and banks aren’t making a killing off you.
FLAT RATE PRICING There is one model that is close to the true cost if you have a large business that processes many credit cards per month. This is the Flat Rate model. With this model, all fees are passed on to the merchant cost. The processor or bank then adds a simple flat monthly service fee to the pricing to make a profit. This pricing is the most transparent of all and may work well for you. If you are a small business, this model may cause you to pay more, so you need to be careful. Also, make sure that you are not priced as interchange plus additional basis points! This would be quite unfair to you as you would be paying more than ever for a merchant account: especially if the percentage points were very high. There is another Flat Rate model which simply is a bundled discount rate. With this model, the merchant is paying for example a flat 2.45% or higher rate and a low monthly statement fee. There is usually no transaction fee. It is not the cheapest pricing but it is the simplest pricing to calculate for a location with very few transactions per month.
ERR (ENHANCED RECOVERY REDUCED) PRICING This pricing option is probably the most difficult to understand by sales agents and business owners alike. In the past, it was the provider's new secret weapon to keep the competition guessing and their merchants in their portfolio! If other competitors could crack the pricing code and re-price the merchant, they could take the business away. Some argue that this is the least desirable pricing model. Others think it is great. I think it is both. Keep in mind that this pricing model is similar to Interchange-Plus pricing, but it uses a slightly different system to calculate the fees being paid. I have found that ERR pricing is quite competitive and makes it virtually impossible to beat if done correctly. This pricing may also be used to hide the fees the merchant pays and thus cause them to pay even more. Now look at the following example of ERR pricing below: • Discount fee: 1.75% • Downgrade fee: plus .50% • Transaction Fee: $.20 • Monthly Statement: $10 With this model, all transactions will be charged 1.75% and $.20. This is a little higher rate than you would pay with the normal Three-Tiered model. This is because the processor makes much of their profit on the front end or through the discount fee of 1.75%. The real savings to your business are in the downgrade fees. The way that the Downgrade fee is handled is a bit of a mystery to most. Here’s how it works: Suppose I am paying 1.75% for the Qualified fee and accept payment over the phone instead of swiping the card. The interchange category for that transaction is Card-Not-Present and I will have to pay 1.80% for that transaction according to Interchange. Since I am already paying 1.75%, the processor simply adds .05% as a downgrade so that no money I lost on the transaction. They also charge an additional .50% as a downgrade fee. This means that even though the merchant pays 1.75% as a discount rate, he only pays an additional .55% for the downgrade (Non-Qualified) fee. If the same merchant was on Tiered pricing, they would likely pay a much higher Non-Qualified percentage for the same transaction. This same formula is then repeated for every single transaction and is itemized per its own interchange category.
This model can thus be very cost-effective to the merchant and make it nearly impossible for other companies to figure out what the merchant is paying since they don’t know how much the processor is surcharging on the downgraded transactions (this info often remains hidden on the merchant’s processing statements). Some variants to this model allow setting multiple downgrade “tiers” so it is nearly impossible to determine how to save the merchant any more money.
On the other hand, this pricing could cause the merchant to pay more than normal if the processor was trying to build in too much profit or if the merchant swipes most of their transactions. The good news is that if you take orders over the phone or internet and can get this pricing model with little or no additional downgrade fee, you will be paying much less than the other models mentioned.
KNOW YOUR BUSINESS
I want to take a moment to remind you that knowing your business is the key factor in determining what pricing model or rates you need. If you know what types of cards you accept and know the pricing models well, you can qualify for the lowest possible rates and fees for your business type. Shop around, you can get the best deal. If your business accepts mostly business foreign cards; then the qualified rate may not be as important to you as the downgrade fee percentage. Also, consider whether or not the processor is breaking out a separate rate for Visa or MasterCard debit cards (offline debit). The percentage interchange for this card is much lower than a standard credit card while the transaction fee is higher. Depending on your business processing habits, this can mean even more savings! Since many if not most businesses are now accepting these types of cards 60%-70% of the time it is vital to determine if you will benefit from having check cards set as a separate discount rate.
In a future article, I will discuss other pricing models that deserve their own post – Dual Pricing and Surcharging.
TO BE CONTINUED IN PART 7