Selecting a merchant service provider is one of the most important relationships you will establish for your business. Without doing your proper due diligence, before settling on a merchant service provider, you could end up paying thousands more in transaction fees – and not even know it! With a host of merchant processing providers to choose from, it is important to understand three key terms and how they will likely influence how much you will pay in processing fees.
Understanding Interchange Fees
What are they? What should I know?
Interchange fees are the underlying cost of processing a credit card sale. This is one of the single most important factors that will influence your transaction fees. When you swipe a customer’s credit card there are a host of entities that are involved with executing the transaction, including the merchant service provider, the card-issuing bank, the credit card association (Visa, MasterCard, Discover, or American Express). It is the credit card association or network that sets the interchange rates and fees. For every credit or debit card transaction, there is a pre-set rate that the merchant service provider is required to pay. The rate can fluctuate with some cards having a higher rate while others have a lower rate. One general rule of thumb is that the interchange fee is often directly related to the cost that each bank has for the respective card. For example, cards with lots of consumer perks or bonuses often have a higher cost to the card-issuing bank to recoup, therefore the interchange fees for these cards are usually higher.
Approximately 90% of your fees will be due to the interchange fees charged by credit card networks. Since these fees are solely determined by the credit card networks, what you pay in interchange fees does not go to your merchant service provider, nor do they have the ability to change these fees. And, in some instance, the interchange rates will vary depending on if the card is physically swiped versus used for an online transaction.
When it comes to interchange fees, there are hundreds of different rates. Here is an example of an interchange rate table. Keep in mind that no matter how large (or small) your transactions, every merchant service provider is subject to paying these rates and fees – with no exceptions.
|Basic Credit||1.51% + $0.10||1.80% + $0.10|
|1.35% + $0.10||1.95% + $0.10|
|“Preferred” Rewards Credit||2.10% + $0.10||2.10% + $0.10 /
2.40% + $0.10
|Small Bank Debit||0.80% + $0.15||1.65% + $0.15|
|Big Bank Debit||0.05% + $0.21||0.05% + $0.21|
Understanding Tiered Pricing
What is it? What should I know?
Tiered merchant account pricing is a common fee that most merchant providers charge. However, this is where a lot of the hidden fees occur since how tiered pricing is determined or what rates are charges can change from one provider to the next. Unlike interchange fees that are set by the credit card networks, tiered pricing is determined solely by the merchant provider and can be influenced by a variety of arbitrary factors.
With tiered pricing, credit card processing companies bundle the hundreds of different types of transactions into three different tiers: “Qualified”, “Mid-Qualified”, and “Non-Qualified”. Depending on what tier a transaction is assigned to will determine what fixed amount you are charged for that transaction, regardless of the credit card processor’s underlying cost.
The common issue with tiered pricing is that the fees you are charged, are often inflated and deciphering exactly how these rates are set are almost impossible to determine. Being aware of promotional tier rates is important as well, as merchant service providers often use these teaser rates to lock businesses into a contract, only to balloon the tiered rates later.
How are transactions grouped into tiers?
In general, the tiers are determined by how you receive credit card payments. For example, if credit card payments are collected using a physical terminal in a retail store, those transactions are likely to be labeled as “Qualified” transactions. However, if credit card information is done over the phone to process payments, this could be considered a “Mid-Qualified” transaction and would be charged a different rate. If instead, customers make online payments with their credit card, these can be placed in yet another tier, are often labeled as “Non-Qualified” and are charged an even higher transaction fee. This is just one example and how the transactions are actually categorized can change, even with the same merchant processing provider, making it rather difficult to understand exactly how your transaction fees are calculated.
Understanding Contract Terminations Points
What are they? What should I know?
Before you sign a contract with a merchant service provider, it is critical to understand what rates or penalties are associated with canceling the account, at any point. Cancellation fees are not set by an industry standard, instead, every merchant processing provider sets their own cancellation fees and requirements. Keep in mind that cancellation fees can run from $200 to a few thousand dollars, depending on the contract details.
Liquidated damages can also apply if you cancel your contract prematurely. This additional penalty is related to how much the merchant service provider stands to lose by you ending your contract early. For example, if you signed a three-year contract and end two years early, you will likely be charged for two years worth of transaction fees – representing the revenue the provider would have made, had you complete the three-year term. Reading the fine print is key because some merchant providers may charge a flat cancellation fee on top of liquidated damages.
Avoid Hidden Fees with Blue Yonder
The key to really tapping into the benefits that credit card processing can provide all rest with which merchant you choose to handle your credit card processing needs. Not doing the proper due diligence and reading all of the terms and conditions could mean the difference between you keeping your money, or paying large amounts each month in transaction fees. That’s why at Blue Yonder, our proven model ensures that you keep more money in your business, while still providing the credit card payment options your customers have come to expect. With our industry-changing approach, we eliminate the confusion and ballooning processing fees and only charge you a flat $65 per month, regardless of the number or the size of your credit card transactions. And, with absolutely no hidden fees, at Blue Yonder, you truly pay ZERO when you register with us and have the added flexibility to cancel at any time.