What happens when a credit card is processed?

Have you ever considered what actually happens when a credit card is presented for payment of goods or services?  Merchants pay a credit card processor for this service and are charged a Discount Rate.  Here's a look at what the process looks like and costs involved:

• When a credit card is presented for payment of goods or services, the merchant swipes the card thru their credit card terminal.


• The transaction is electronically routed thru to their credit card processor

• The credit card processor electronically routes it thru the network (Visa or MasterCard) and the network earns an Access Fee (Visa @ .0925% and MasterCard @ .110%) on every transaction

• The network then electronically routes it thru the card issuing bank for approval or denial and this issuing bank earns the Interchange Rate (there are well over 200 different rates based on the card or transaction type)

• Then the whole process reverses back from the issuing bank, thru the network, back thru the merchant services provider, and finally, back to the merchant’s terminal with the approval. The processor charges the merchant a Discount Rate for providing the service which shows up on the merchant statement in various formats each month. It is the difference between the Interchange Rates and Assessments and what the merchant is paying that the processor earns for providing the service.

Well, that's how it all works, behind the scenes, and it happens all in a matter of seconds. 

April 2010 Interchange Rate Adjustments

Well, it's that time of year again.  Typically in April and October of each year, Visa and MasterCard make adjustments to Interchange Rates.  What's that you say, you don't know what Interchange Rates are?  Shame on you for not understanding because you're paying it every time you take a credit card.  Well, at least this April, there weren't any significant changes in rates, however, MasterCard came out with a whole bunch of new "categories" that could have an affect on you and your bottom line.

You see, as a merchant that accepts credit cards for the payment of goods or services, you are charged a Discount Rate by your service provider.  This provider, or merchant services processor, pays card issuing banks an Interchange Rate and pays either Visa or MasterCard, an access and assessment fee.  All of these figures represent their cost basis for providing this service to you.  On top of all these fees, the processor adds their markup and presents it to you in the form of the Discount Rate.

For sake of discussion here let me give you a quick example.  Currently, the Interchange Rate for a Visa Debit Card is .95% + $.20 (last time around, October of 2009 it was 1.03% + $.15).  This is one of the few changes for April 2010.  So, a $50 debit card transaction would cost about $.67.  This fee ultimately gets paid directly to the financial institution that issued the debit card.  On top of that is a Visa Assessment fee of .0925% and total Access fees of about $.02.  So, to cut to the bottom line here, the total "costs" is 1.0425% + $.22.  Take a look at your most current statement and see what you're paying for swiped debit cards without capturing a pin number (that's a whole other ball game).  If you're priced on 3 Tier pricing, it will be your Qualified Rate.  If you're on a 4 Tier pricing, it's your 1st Tier.  And, if you're on Cost Plus Pricing it will be a specific line item showing the total breakdown (or at least it should).

The bottom line here is that you need to become more thoroughly educated regarding this ever-increasing cost center in your business.  Listen, your service provider doesn't want to tell you all this stuff.  All they want to do is just provide the service and hope that you don't ask too many questions.  Trust me, I spent a lot of years in this business and built a tremendous, loyal, customer base.  It was accomplished by establishing mutually rewarding long-term relationships.  Look, the economy is pretty lousy now and isn't showing signs of getting much better any time soon.  You owe it to yourself and your business to learn more about this cost center as it is continually having a growing impact on your bottom line.  You can slowly learn more and apply it along the way, by just subscribing to this blog or coming by often.  Or, you can head on over to my website right now by CLICKING HERE and get the crash course to increased profits.  The choice is yours!

You should be aware of this

     Well, it's been a couple months since I posted last. As you can see from the picture, I've been quite busy. My family and I spent two months in Costa Rica so my mind was elsewhere. However, this business that I'm in (merchant services) is in the blood and I have never really strayed too far away from the pulse of what's going on in this industry.

     As one that's always been concerned about long-term relationships with my merchants, I feel compelled to bring up areas of concern that I feel you should be aware of. You're probably aware of the new credit card laws that went into effect in February. Well, along with that, many card issuers have increased interest rates and consequently, many card holders have reduced their spending. So, the card issuers are coming up with some programs to encourage consumer spending, once again.

     There are some that believe that the economy is starting to show some signs of recovering from our most recent sluggish past. Many of the credit card issuers are now ramping up their rewards programs. Some are offering double reward points on purchases in general. Still others are offering more frequent flyer miles for each $1 spent. You may also see that some card companies are offering increased points or "rewards" for purchases at "partner" merchants. No matter what their doing, the bottom line is that these new purchases will affect your bottom line.

     Here's what to look for on your end. First, if you're priced on a three tier pricing structure, thes "rewards" type cards fall into your Mid-Qualified or Non-Qualified category. There are numerous types of rewards cards offered by Visa and MasterCard so, you need to call your provider and ask them point blank, which level these rewards cards clear in. Honestly, the processor can, at their will, determine which category to put each card type in and if you aren't informed thoroughly, you're needlessly giving up profits. I know of a processor, that not long ago, informed their merchants (you know, in that little paragraph or two on the first page of the monthly statement that nobody seems to read) that they were "reclassifying" Visa Rewards 2 cards and moving them from Mid-Qualified to Non-Qualified (at rates that are, at a minimum, 1% higher). If you're on a four tier pricing model, these reward cards will be in either Tier 3 or Tier 4....make sure you ask where your transactions are priced.

     Now, if you're in a Cost-Plus pricing model, you don't need to worry about being priced in a "bucket" where you don't need to be. All of these rewards cards will, by their very nature, simply be routed to the proper category and pricing. The bottom line is that if the credit card issuers ploy to increase rewards to their card holders, encourages them to spend more, then you reap the benefits of increased business. You simply want to make sure you absolutely know what you're paying for these transactions. After all, who is most interested in the profits and viability of your business....you or your merchant account provider?

     Being in business these days is tough enough as it is. Anything you can do to cut your costs and, subsequently, increase your profits is a good thing to do. With that in mind, knowledge is king and the kind of knowledge that I offer to you, is typically not offered up by the majority of credit card processing reps. So, if you want to really stack the cards in your favor, GET EDUCATED. I have prepared a 40 page eBook on the topic and will give you the A-Z's of how the credit card processing industry works and how it affects you. Take a spin on over to my website and check it out for yourself. I'm confident that you won't be disappointed.