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.

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