So What's It Really Costing You?

Have you ever tried to figure out exactly what you're paying for the "privilege" of accepting credit cards in your business? You're not still stuck on the rate you think you're paying, are you? Most merchants, when asked what their current rate is quote their lowest rate they see on their statements. However, in reality, the real, Net Effective Rate is always much higher.

Obviously, when you get set up for merchant services, the reps typically only quote you the lowest rate you will receive. This will be for a plain ole generic Visa/MC debit or credit card swiped thru your terminal. If they were to quote you up front what your REAL rate was going to be, you'd probably opt out of accepting them all together. It's hard enough making a living these days without having to give up a chunk of your profits for "convenience" sake.

Keep in mind there are a multitude of categories your customers transactions could fall into. They will be categorized into varying "buckets" and subsequently, a variety of rates and fees will apply. So, how do you know what you're really paying? Let me explain a simple way to decipher it all.

For Existing Merchants: Here's what you want to do. Take a look at your most recent statement. Find your total fees paid for the month. This will be towards the end of your statement. You want to be careful here to make sure you're getting the real "total". For some merchants, they are on what is referred to as "daily discounting". This is where you are paying some of your fees out of each daily batch (great for the processor....an accounting nightmare for the merchant). You'll know this is happening if the total deposit you receive is less than the total sales each day. If that's the case, you'll have to account for these daily fees and add them to the month end fees. You'll want to add any and all miscellaneous fees like batch fees, supplies, statements, equipment rental, monthly or annual fees (these may be only charged once or twice a year but still, you need to account for them to get an accurate figure). Now, take that total and divide it by the total Visa and MasterCard volume. This will give you the true Net Effective Rate that you are paying.

I recently took a look at a merchants statement and went thru this exercise with them. They had never considered this nor had they been shown this process in the past. When I asked them what their rate was, I was told it was 1.49% + $.25. Now, this is a restaurant and this is an excellent rate for them. After examining their numbers, we found that they had total fees of $2,164.24 for the month on $78,132.50 in V/MC volume. Doing the math, we come up with an actual real total rate, considering all their downgrades and transactions types of, 2.77% (the Net Effective Rate). I was then able to do a line by line analysis for them on their actual types of transactions, and show them how to effectively lower their overall rate, quite nicely. Not just their "quoted" rate but their "real" rate. As you might imagine, they were quite pleased with the education and the resulting savings. They have a much better handle on how the whole industry works now, as well. Try doing this with your own statement or even send me a copy for help, if you like.

For New Merchants: For new merchants just getting set up, you won't be able to really determine a Net Effective Rate. What you will need to do, however, is to make sure you ask as many pertinent questions as possible. First, you'll want to know the rate you are being quoted or "teased" with. Ask the rep the following questions:

• What types of transactions will this rate apply to (i.e. debit,credit swiped or whatever)


• What if any transaction or per item fees there will be


• What will hand-keyed or card-not-present rates be


• How much will you pay for Rewards Cards


• What will the rates on corporate or World cards come out to


• Are there any batch fees and if so, how much


• Monthly statement or monthly minimum fees


• Any application or programming fees


• How about annual fees (this is one they don't often tell you about)


• Supplies or any other miscellaneous fees....find out upfront before signing any paperwork)

Out of all the fees described above, I'd have to say that the Rewards Cards are probably the biggest thing to find out about. Each processor can place these types of transactions into any category they choose (primarily when you are on a 3 Tier or 4 Tier Pricing Model). No matter what your type of business, these cards are beginning to show up with greater frequency. For the merchant that I described above, last year they were seeing about 19% of their volume was falling into this category. Currently, they are seeing about 30% and it's beginning to hurt.

Okay, there's your education for today. As always, I welcome your comments and look forward to being of any service to you that I might be.

Why are my fees increasing?

I have been receiving calls from merchants recently wondering why their fees have been increasing. In many cases, it's not because their rates have changed so much as it is the types of cards that they are accepting. Let's talk more about that.

First, let's consider what seems to be going on. Take a look in your mailbox each week. Are you getting an increasing number of credit card offers? I know that I am, and, in fact have taken advantage of a couple. Most of these offers are for cards that pay me some sort of reward on all of my transactions. Now, when I go shopping or out to dinner, I have a choice of which card in my wallet I'm going to pay with. If your bill comes to, let's say $50, and you have a choice of which card in your wallet you will use, which will you chose? Will it be the plain old generic one or the one that pays you some sort of perk or reward? Of course, in the majority, if not all of the cases, you'll use the reward card.

Now, from a merchants standpoint, they are paying more to accept these types of cards (because the interchange rates are higher) and, indirectly, are helping to fund the reward back to the cardholder. I know, I know....it seems like a crock doesn't it? You, the merchant, are, in a way, paying customers to patronize your establishment. Now, in most cases, this is why merchants are seeing higher total fees on their statements. It's because of the types of cards that are being used more and more in their establishments.

Let me give you an example of one of my merchants that I just recently did an analysis for regarding their "increasing fees". They are on a 3 Tier Pricing model with what I consider to be excellent rates. Here's what I uncovered for them. I took a look at their most current statement to see what percentage of their total volume was represented in each of their three tiers. I then compared it to their numbers from a year ago. Here's how it broke down:

Current Month
Qualified 47%
Mid-Qualified 22%
Non-Qualified 30%

One Year Ago
Qualified 57%
Mid-Qualified 24%
Non-Qualified 19%

As you can see from these numbers, they are seeing fewer Qualified transactions (translated to be generic type debit and credit cards) from a year ago and quite an increase in Non-Qualified (translated to be some rewards type and corporate cards).

Obviously all processors are in business to make a profit, as all businesses are, so they need to cover themselves from this changing environment. Since both Three Tier and Four Tier pricing lumps many card and transaction types into one of their buckets (and each processor can freely decide which bucket they want the transaction in and change it whenever they want), what's a merchant to do? Keep in mind that when Interchange Rates change (typically in April and October of each year), the processor has to make some decisions. Do they absorb the increase, pass all or some of it along or pass all of it plus some, to their merchants? It's by no means an exact science.

In the scenario described above with my merchant, we made a decision to change the type of pricing model they are utilizing to Cost Plus. It wasn't up until maybe a year or two ago that local type merchants would even qualify for this type pricing. It was primarily reserved for the large national chains. Now, many merchants can meet the requirements and play on the same field as the big boys. Now, my merchant will be paying exactly what the Interchange Rate is for each card type, plus a small per item fee. The bottom line will be, because of this shift in the types of cards they are getting, they will see a more detailed statement and lower overall fees. They are very pleased and as a result of my continued concern and interest in their business, I have received more referrals. It's a win/win situation which is what I'm always interested in.

Are you experiencing some of the same situations that we have discussed here? If you have any specific questions, please post them here or contact me directly. Thanks for coming by!

Accurately Decipher Your Credit Card Processing Statement

INC. MAGAZINE PUBLISHES STEPS MERCHANTS CAN TAKE TO MORE ACCURATELY DECIPHER THEIR MONTHLY PROCESSING STATEMENTS

Inc. Magazine, a publication targeted for entrepreneurs and small business professionals, recently published an article entitled Cracking the Code, which provides merchants with some pointers on how they can more effectively decipher their monthly processing statements. An excerpt of the article follows below.

Credit card processing bills are a jumble. Here's how to read yours. No one likes a bill, especially one filled with cryptic codes and indecipherable jargon. That's a pretty good description of a statement from a credit card processor. Such firms authorize credit and move funds through the banking system so that you get paid. For these services, you pay the processor a fee, known as the discount rate. Many processors tout low discount rates to lure new customers. Problem is, your bill can be so complicated that it's nearly impossible to figure out if you're paying that low rate--or a lot more, thanks to a host of surcharges and fees. You need to take the time to get educated.

While bills differ from processor to processor, here are some common fees you might see on yours.

1. That low rate? It is really low? Many monthly statements show your daily tally of credit card sales and the fees charged to process them. By way of example, this line might show that you paid your processor $6.86 to process $385.42 worth of MasterCard. That's 1.78% which is the discount rate you likely "think"you are paying. The processor uses those funds to pay the interchange rate, a fee that goes directly to the card issuing bank, and keeps the difference for themselves. But not all credit card transactions are created equal; rewards cards and online transactions, for example, often come with higher interchange fees--and higher processing fees. There's a good chance your processor hasn't told you this.

2. Beware of "billback" fees or "surcharges" noted elsewhere on your statement. Look under the "Financial Detail" or "Financial Advice" headings on your statement or possibly "miscellaneous fees". You may see an item labled as "BB159" for example. To cover higher interchange rates, some credit card processors use billbacks (in other words, the additional fees are "billed back" to you in the form of a surcharge). They'll charge a low discount rate on all of your transactions in a given month--in this case, 1.78 percent--then bill back surcharges on certain transactions. Cards such as Rewards cards cost more to process (and carry a higher interchange fee). The processor is passing on the additional cost of handling those transactions, and in many cases tacks on something additional for themselves. Unfortunately, you can't see the actual rate you're paying because many processors don't provide the total dollar amount of these transactions, thus making it impossible for you to do the math. Do you ever wonder why they do that??? Hmmm!!

3. Be sure to calculate the markup. It's not hard to estimate your actual rate. Take your average sales value (sometimes called "average ticket" on your statement) and multiply it by the number of transactions for a given billback. Divide the surcharge by that amount and you'll find out how much (or at least close to) what you are actually paying on those transactions. As was mentioned earlier, processors can freely add on any "additional fees" they think appropriate over and above the actual interchange rate. Again, one of the reasons so many statements are "encrypted" in this fashion is it gives enhanced ability to "hide" actual fees. There's nothing wrong with making a profit, of course as long as it's reasonable for the risk and services provided. But you have a right to know the rate you're being charged, nonetheless.

Take the time to sit down with your statement and examine it closely. If there are things that simply aren't outright clear and understandable, get some answers. Contact your processor's customer service department and dig into all your charges. You should be able to negotiate a better deal for yourself. Or, you could entertain accepting competitive bids from other providers. But, before doing either of the above, you need to become more thoroughly educated in this area of your business so you know the right questions to ask.

What does it all mean? Because Visa's and MasterCard's interchange fees are so complex, processors sometimes categorize transactions as qualified, mid-qualified, and nonqualified. One rate covers all the transactions that fall into a category. Suppose we're looking at the statement of a restaurant. When a customer pays with a generic Visa card, Visa charges an interchange fee of about 1.63 percent. The processor considers that a qualified transaction and charges a discount rate of 1.74 percent. If someone uses a Visa rewards card, however, the interchange jumps to nearly 2 percent (if it's a Rewards 2 or 1.64% if it's a Rewards 1) . The processor labels it as mid-qualified and charges 2.85 percent. Every processor sets its own tiered pricing, so one type of credit card transaction may be considered mid-qualified by one and qualified by another. It's up to you to find out how your processor defines things.

5. Interchange fees on Visa and MasterCard debit transactions are lower than they are for credit cards. The processors, though, aren't required to pass these savings on to you. The restaurateur in the above example, is paying at least 1.74 percent on each transaction, including debit cards. But Visa and MasterCard charge about 1.30 percent on typical restaurant debit purchases. Make sure your processor gives you a break on debit possibly by using a 4 Tier Pricing system.

6. Watch out for "skimming". Some processors take a percentage of their fees when they reconcile your account at the end of each business day (this is called "daily discounting"). As a result the figure called "total card fees" on your monthly statement is not a total at all (just another way of misleading merchants and disguising true fees). To estimate your true costs, look for a line on your bill that reads "less discount paid." It may be buried near the bottom and not be as obvious. That's how much your processor skimmed off your sales throughout the month. Add it to your "total card fees" to determine how high your fees actually are.

7. Hidden fee No. 1 - AVS AVS stands for address verification service. When you take a credit card order over the phone or online, that transaction qualifies for a better interchange rate if you key in your customer's address. That's because Visa and MasterCard consider AVS a way to combat fraud. Your processor may--or may not--pass these savings on to you. In fact, it might tack on an additional AVS fee to process these transactions. Not all processors do, so be sure to ask.

8. Hidden fee No. 2 - Per-transaction fees. Many processor charge some "per item" fee for every sale, refund and authorization. Per-transaction fees typically range from 10 to 15 cents but can go higher. For companies with only a few, high-value transactions a month, this fee doesn't matter much. But if you have lots of smaller purchases, it can add up.

9. Find your "real net effective rate". The easiest way to determine what you're actually paying your processor is to divide your total fees by your total montly credit card sales.

If you still find that you are having difficulty with all this, please post your comments here or visit our website at: CCPK 101.