There seems to be a great misconception regarding who is making all the money off of merchants that accept credit cards for payment. The last numbers I recall seeing were from 2006 (2007 numbers aren't quite available yet). During 2006, there were over 7 million merchants in the U.S. alone accepting credit cards. Collectively, they paid over $30 billion in fees for this "privilege".Well, here's how it works, in a nutshell. First, it's important to understand that it's not the credit card processors that are making the lions share. The card issuing banks (in other words, the bank that you received your credit card from, i.e. Chase, B of A etc) earn 80% or more of the fees that merchants are being charged.Banks co-issue debit and credit cards with Visa or MasterCard brands on them. This is what makes the cards acceptable anyplace you see a Visa or MasterCard logo. Visa and MasterCard are essentially membership associations owned by the issuing banks, and collectively own about 70% of the market (the balance woud be Discover and Amex as an example). Every time a customeer makes a purchase in your business using a Visa or MasterCard, you get charged a "Discount Rate" and many times a "per item" fee. For example, let’s assume that a business is paying an net effective rate (you need to know what yours is) of 3.0% to accept credit cards. Roughly 80% of that 3.0% is going to the issuing bank. The rest of the 20% is divided among Visa or MasterCard, the credit card processor, and if there is one, the Independent Sales Organization (ISO). As you can see, the "processor" is making very small amounts typically but is doing so on millions of transactions annually.You may ask, "aren't the issuing banks making enough off of card users with the ridiculously high interest rates they charge for cards"? Well, in a word, NO, at least not in their minds anyway. If you're like the majority of the population in the US, your credit card usage has likely grown over the years for a number of reasons. Maybe it's because you get 15 to 45 days to pay for your purchases (sorta like a short-term interest free loan and you get instant gratification). Maybe it's because you get some sort of reward or other perks, or the fraud protection that you receive. Or possibly it's just because you get a monthly accounting of all purchases. Or like many I speak with it's simply because plastic is more convenient than cash or check.All of these that you have justified in your mind, cost banks money. They have costs associated with fraud, bad debt, customer support, rewards and other perks, and float (they pay for your purchases before you pay them). So, they justify the charges (referred to as interchange, to help offset their costs and risks.Now let's take a look at some numbers to give you a better handle on this. Let's say you're a retailer and your average ticket is $50. I come in to your business, make my selection of goods and come to the register. I whip out my Visa card (at this point you don't know if it is a plain vanilla type Visa or one with some sort of perk attached to it). Anyway, you swipe the card thru your POS terminal and the transaction is processed. Your "Qualified Rate" is 1.79% + $.25 so your cost on that transaction is $1.15 in fees (interchange, that goes to the issuing bank is 1.54% + $.10 or $.87 and the Visa "assessment" that goes directly to Visa is .0925% or $.046...let's call it five cents). So, as you can see in this example, the processing company only made $.23 (which by the way, this number is very high).What if that card I gave you was actually my Visa branded debit card instead of a credit card? Well, again, in the above example, if your "Qualified Rate" is 1.79% + $.25, you paid $1.15 in fees. Currently, Visa Interchange on a swiped debit card is 1.03% + $.15 + .0925% assessment. So, the actual "cost" is $.71 and now the processor is making $.44 off of you. Has any of this ever been thoroughly explained to you? Not likely!Let's take it another step further now. Let's assume for a minute that the card I gave you is my brand new Visa Rewards card. To you, at the point of sale, you won't likely know the difference and it doesn't matter anyway. Since you have the Visa logo in the window, you have to accept ALL Visa cards. Now when you swipe it, your terminal automatically reads the magstripe on the back and identifies it as a Rewards Card and routes it accordingly. You won't be getting that "Qualified" rate on that transaction though since the interchange rate is higher on those types of cards. It will show up on your statement under "miscellaneous fees" or something vaguely described. You know, that section of your statement that you can never really seem to get a handle on. Don't you just hate trying to decipher it all?The particular rate that is charged on any given transaction depends on a number of variables, including: 1) the type of card being used, i.e. debit, credit, rewards, business, international, etc. 2) the type of establishment where the card is used, i.e. restaurant, retail, gas station, B2B, internet, etc. 3) How the card is used, i.e. swiped thru a terminal or POS system, over the phone or on a website 4) Also, what kind of information did you capture like name, address, tax ID, item description etc.5) Did you settle the transactions within the prescribed time frame from when it was authorized? If not, the transactions will be downgraded (in other words, you will be charged more).Unfortunately, the credit card processing or merchant services business is plagued with many unscrupulous players. Vaguery and misrepresentations seem to be way to get business. Many merchants are misled into believing they're paying the "low rate" they were originally sold on. Digging deeper into actual statements and transactions most often reveals a much different picture. But hey, most of the guys on the street, know that merchants don't really understand this stuff so it's how they make the most money off of them by not telling them everything.Let's face it, when was the last time you sat down with one of your monthly processing statements and was totally able to decipher it and understand all of your charges? Has your rep or provider been helpful and willing to explain it all to you? They use these unreadable and difficult to understand formats by design. It's what enables them to make the most money off of you constantly eating into your hard earned profits.Over the past several years, Visa and MasterCard have increased "interchange fees" over 117%. And, it doesn't show any signs of slowing down any time soon due to dramatically increasing credit card fraud. So what's a businessperson to do? If you sell any kind of goods or services, you pretty much have to accept plastic or you're losing business.The only thing you can do is to arm yourself with proper knowledge to at least put yourself in a better position. That is precisely what is offered to you at my website. You see, I'm a very well seasoned professional in the merchant services business. I am semi-retired with quite a comfortable ongoing residual income because of my constantly growing client-base. I don't "need" your business (although I wouldn't turn down the opportunity to educate you) so this blog is not about soliciting you. I would highly recommend you go to my website shown here and check out what I can offer you. I promise you, it will be time well spent. Thanks for coming by.
Tuesday, January 15, 2008
Who is making all the money on credit card processing fees?
There seems to be a great misconception regarding who is making all the money off of merchants that accept credit cards for payment. The last numbers I recall seeing were from 2006 (2007 numbers aren't quite available yet). During 2006, there were over 7 million merchants in the U.S. alone accepting credit cards. Collectively, they paid over $30 billion in fees for this "privilege".Well, here's how it works, in a nutshell. First, it's important to understand that it's not the credit card processors that are making the lions share. The card issuing banks (in other words, the bank that you received your credit card from, i.e. Chase, B of A etc) earn 80% or more of the fees that merchants are being charged.Banks co-issue debit and credit cards with Visa or MasterCard brands on them. This is what makes the cards acceptable anyplace you see a Visa or MasterCard logo. Visa and MasterCard are essentially membership associations owned by the issuing banks, and collectively own about 70% of the market (the balance woud be Discover and Amex as an example). Every time a customeer makes a purchase in your business using a Visa or MasterCard, you get charged a "Discount Rate" and many times a "per item" fee. For example, let’s assume that a business is paying an net effective rate (you need to know what yours is) of 3.0% to accept credit cards. Roughly 80% of that 3.0% is going to the issuing bank. The rest of the 20% is divided among Visa or MasterCard, the credit card processor, and if there is one, the Independent Sales Organization (ISO). As you can see, the "processor" is making very small amounts typically but is doing so on millions of transactions annually.You may ask, "aren't the issuing banks making enough off of card users with the ridiculously high interest rates they charge for cards"? Well, in a word, NO, at least not in their minds anyway. If you're like the majority of the population in the US, your credit card usage has likely grown over the years for a number of reasons. Maybe it's because you get 15 to 45 days to pay for your purchases (sorta like a short-term interest free loan and you get instant gratification). Maybe it's because you get some sort of reward or other perks, or the fraud protection that you receive. Or possibly it's just because you get a monthly accounting of all purchases. Or like many I speak with it's simply because plastic is more convenient than cash or check.All of these that you have justified in your mind, cost banks money. They have costs associated with fraud, bad debt, customer support, rewards and other perks, and float (they pay for your purchases before you pay them). So, they justify the charges (referred to as interchange, to help offset their costs and risks.Now let's take a look at some numbers to give you a better handle on this. Let's say you're a retailer and your average ticket is $50. I come in to your business, make my selection of goods and come to the register. I whip out my Visa card (at this point you don't know if it is a plain vanilla type Visa or one with some sort of perk attached to it). Anyway, you swipe the card thru your POS terminal and the transaction is processed. Your "Qualified Rate" is 1.79% + $.25 so your cost on that transaction is $1.15 in fees (interchange, that goes to the issuing bank is 1.54% + $.10 or $.87 and the Visa "assessment" that goes directly to Visa is .0925% or $.046...let's call it five cents). So, as you can see in this example, the processing company only made $.23 (which by the way, this number is very high).What if that card I gave you was actually my Visa branded debit card instead of a credit card? Well, again, in the above example, if your "Qualified Rate" is 1.79% + $.25, you paid $1.15 in fees. Currently, Visa Interchange on a swiped debit card is 1.03% + $.15 + .0925% assessment. So, the actual "cost" is $.71 and now the processor is making $.44 off of you. Has any of this ever been thoroughly explained to you? Not likely!Let's take it another step further now. Let's assume for a minute that the card I gave you is my brand new Visa Rewards card. To you, at the point of sale, you won't likely know the difference and it doesn't matter anyway. Since you have the Visa logo in the window, you have to accept ALL Visa cards. Now when you swipe it, your terminal automatically reads the magstripe on the back and identifies it as a Rewards Card and routes it accordingly. You won't be getting that "Qualified" rate on that transaction though since the interchange rate is higher on those types of cards. It will show up on your statement under "miscellaneous fees" or something vaguely described. You know, that section of your statement that you can never really seem to get a handle on. Don't you just hate trying to decipher it all?The particular rate that is charged on any given transaction depends on a number of variables, including: 1) the type of card being used, i.e. debit, credit, rewards, business, international, etc. 2) the type of establishment where the card is used, i.e. restaurant, retail, gas station, B2B, internet, etc. 3) How the card is used, i.e. swiped thru a terminal or POS system, over the phone or on a website 4) Also, what kind of information did you capture like name, address, tax ID, item description etc.5) Did you settle the transactions within the prescribed time frame from when it was authorized? If not, the transactions will be downgraded (in other words, you will be charged more).Unfortunately, the credit card processing or merchant services business is plagued with many unscrupulous players. Vaguery and misrepresentations seem to be way to get business. Many merchants are misled into believing they're paying the "low rate" they were originally sold on. Digging deeper into actual statements and transactions most often reveals a much different picture. But hey, most of the guys on the street, know that merchants don't really understand this stuff so it's how they make the most money off of them by not telling them everything.Let's face it, when was the last time you sat down with one of your monthly processing statements and was totally able to decipher it and understand all of your charges? Has your rep or provider been helpful and willing to explain it all to you? They use these unreadable and difficult to understand formats by design. It's what enables them to make the most money off of you constantly eating into your hard earned profits.Over the past several years, Visa and MasterCard have increased "interchange fees" over 117%. And, it doesn't show any signs of slowing down any time soon due to dramatically increasing credit card fraud. So what's a businessperson to do? If you sell any kind of goods or services, you pretty much have to accept plastic or you're losing business.The only thing you can do is to arm yourself with proper knowledge to at least put yourself in a better position. That is precisely what is offered to you at my website. You see, I'm a very well seasoned professional in the merchant services business. I am semi-retired with quite a comfortable ongoing residual income because of my constantly growing client-base. I don't "need" your business (although I wouldn't turn down the opportunity to educate you) so this blog is not about soliciting you. I would highly recommend you go to my website shown here and check out what I can offer you. I promise you, it will be time well spent. Thanks for coming by.
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2 comments:
the banks are the ones making money off your credit card processing fees! there really is no way to avoid this, unfortunately; I have seen businesses charge customers a 2% or 3% fee if they want to pay with a credit card to cover the fee for the merchant, but this process is highly illegal and may actually prevent you from being able to open a merchant account anywhere else.
Shannon, you're partially right, as the blog says. The card issuing banks (the banks that the customer received their credit card from) are the ones making the lions share of the fees in the form of "interchange rates". The processing company that merchants have credit card processing accounts with, that act as the conduit from the merchant thru to the issuing bank, are also making a piece as well. You are right about the merchants that sometimes charge a percentage or a flat fee to customers for the privilege of using their credit cards. That practice is most definitely against Visa and MasterCard regulations. These merchants can, and likely will, eventually have their credit card privileges revoked and then they will be placed on the MATCH list (in effect, it is a blacklist that will prevent them from getting future service from other providers.
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