Interchange is a large matrix of rates set by Visa and Mastercard that is associated with each and every credit card type in circulation. These rates are charged as a percentage against the total sale as well as a flat fee per transaction. Additionally, the Interchange rate differs for each specific card type depending upon if it is swiped or keyed in. The image above is an excerpt of the multi-page Interchange chart for Visa as of October 2011 (Interchange updates every April and October). Interchange represents the true cost of a merchant accepting a credit card as payment.
As an example, if a merchant swipes a Visa individual rewards card for $100, there will be an Interchange fee of $100 x 1.65% + $0.10 = $1.75. It costs the merchant $1.75 to accept that transaction before any processor fees are added in. We have secured $0.04 per transaction thus bringing the total charge to $1.79. If a business had Tiered Pricing, an individual rewards card defaults to the “Mid-Qualified” tier, which is often in excess of 2.50% and $0.25 per transaction. At 2.50% and $0.25 that same sale would would cost $2.75, which is $1.00 of credit card processing fees above interchange versus AdvoCharge’s brokered rate.
Everyone in the merchant service industry, from the large credit card processing companies, to small ISOs (Independent Sales Organizations), down to the sales agents themselves must obey Interchange pricing. There is no way around that. So when you are set up on an Interchange price model (also known as a pass-thru pricing model), you as a merchant are paying the same rates that Visa and Mastercard have dictated to be “true cost.” While you may or may not agree that what V/MC charge is fair or appropriate for the service they provide, it is at least a transparent pricing model and you know exactly what you are paying for and what you are being charged. That is why AdvoCharge will only set up our clients on an Interchange model.
Additionally, with the passage and enactment of the Durbin Amendment (check our our separate post on the Durbin Amendment to learn how it will impact your business), only those businesses on an Interchange pricing model will get the benefit of the new rate structure which is outlined in the far right column in the image above.
Tiered Pricing Model
The tiered pricing model takes the whole matrix of Interchange and boils it down to usually three or four categories. Those categories are generally called “qualified,” “mid-qual,” and “non-qual,” and sometimes there is an additional category for debit transactions. If you see those terms on your monthly statement, then you know you are being charged based on a tiered pricing model.
The concept of tiered pricing models are not inherently bad, as it attempts to take a rather complex matrix and simplify it greatly. The problem lies with how credit card processing companies utilize tiered pricing. The main problems are continual rate increases and the processor only shows what you are being charged, without disclosing true cost from processor profit. A tiered model will always set the tiered price so that it is higher than the actual cost of the most expensive card type allowed within that tier. In other words, there are many card types that fall under the “mid-qual” tier with interchange rates that range from 1.65%-1.74%.
Credit card processing companies often set the price of that tier between 2.25% and 3.25%, plus an additional $0.20-$0.35 per transaction.
One sneaky tactic that many sales agents use is to set a qualified rate that is lower than interchange. These agents and their processors might set a qualified rate as low as 1% and then do their best to convince the merchant that this is the rate they will see for all their transactions. In reality, depending on the business and their industry, the merchant may have only a few, if any, of their total transactions fall into that “qualified category”. The remaining transactions fall into the mid- and non-qual categories, which are priced at a significant mark-up over Interchange. When the deception is brought to the merchant’s attention, they often face a hefty cancellation fee to get away from that processor. We see this time and again at AdvoCharge, but thankfully the savings we generate with our approach more than offsets the costs of cancellation.
Enhanced Bill-Back is another deceitful pricing model used in the merchant service industry. The merchant is charged a flat rate and transaction fee on all sales at the time they are accepted as payment, and then billed again at the end of the month for all rewards, business, and corporate cards. Let’s say for the sake of example the flat rate is 2%. The merchant thinks, “Well, 2% sounds pretty good – OK, I’ll take it,” however at the end of the month additional surcharges are levied for all non debit card charges that the merchant accepts. These additional monthly charges are usually listed in separate sections of the statement to appear as if the merchant is being charged the promised 2%. In reality, there may be an additional charge of 2% or more.
One last component of Enhanced Billback is that the 2% flat rate in the above example is often taken out of the merchant’s daily batch total. For example, if you had $1,000 in sales and then batched out at days end, only $980 would be deposited into your account. Then when you are billed at the end of the month for all the surcharges, it will appear as if those were the only fees for the month, as the 2% is often disguised on the monthly statement.
There are other variations of these pricing models that are utilized. They are almost always aimed at confusing or complicating the process to hide the fact that the merchant is paying more than they were initially led to believe. We’ve seen hundreds of examples of different statements from dozens of different credit card processors and we know how to cut through the noise and determine exactly what you are being charged.
We will show you exactly how our rates compare to what you are paying now and show how much you will save when you work with AdvoCharge to properly establish your credit card processing.
Simply send two consecutive processing statements by email or fax at (720) 505-2714 and we’ll give you an honest comparison.
For greater detail on pricing models, watch our video presentation Merchant Services 101 – What every merchant should know about the credit card industry, which will show you even more examples of how you can protect yourself while accepting credit cards for your business.
Honest, Straightforward, and Transparent – The AdvoCharge Philosophy
Unlike many sales agents and credit card processing companies in the merchant service industry, AdvoCharge believes in giving merchants all the information they need to make the decision to work with us. There is no deception, no hidden fees, no bait-and-switch, no taking a look at your credit card processing statement before giving you a quote and guessing how much savings it will take to get you to switch.
Instead we give you everything up front, and then show how much money our rates will save you compared to your current credit card processing companies. Many clients have said they thought our rates were too good to be true, only to be happily surprised when their first statement arrived and all the savings we promised were right there in black and white.
*Associations and Franchises may benefit even more – we will always negotiate to secure the best rate for you and your team.
Start saving on your credit card processing today!