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!