5 Things Your Payment Processor Isn’t Telling You

Credit card processing is a confusing subject at the best of times, and it doesn’t help if your processor doesn’t tell you key information. Here are a few of the most important things that your payment processor isn’t telling you.

  1. Prices are Different for You than Other Merchants
  2. You CAN Avoid Non-Qualified Rates
  3. There’s a Floor on Processing Costs
  4. Leasing Equipment is Expensive
  5. “Free” Machines Aren’t Really Free

1. Prices are Different for You than Other Merchants

Credit card processing isn’t like purchasing an item at a store, where the cost is the same for you and for the next customer. It’s customized based on several factors, including your monthly volume, average transaction size, industry, card-acceptance method, and more. In fact, the same processor might quote two different prices depending on which sales rep you talk to.

Among other things, that means that taking recommendations from other merchants can lead you to the wrong fit. Just because Jane’s Bookstore got a great deal with Processor A doesn’t mean that they will be the lowest cost for John’s Restaurant.

What should you do instead? Compare real pricing for your specific business. Get multiple quotes from credit card processors and ask questions about any processing fees on which you’re unclear. Education is the best defense against being overcharged for processing.

2. You Can Avoid Non-Qualified Rates

One way that merchants overpay is through “non-qualified” rates.

Some processors quote a specific type of pricing based around “qualified” and “non-qualified” rates. What they don’t tell you is that only one type of pricing uses those rates. It’s called bundled pricing, and it’s one of several types of pricing available. Moreover, you don’t need to be a high-volume business to avoid non-qualified rates and get great pricing.

Some sales reps might say that rates are out of their control; that the card brands decide which transactions are qualified and non-qualified. The truth is Visa and Mastercard don’t set “qualified” or “non-qualified” rates. In fact, it’s completely up to the processor when to consider your transactions qualified or not. That’s right – “qualified” and “non-qualified” are not inherent parts of processing. Instead, your processor quotes different costs for the different “tiers” (such as qualified and non-qualified) and then decides which of your transactions it will charge according to each tier.

Sometimes, reps will tell you that very few cards will go to the non-qualified tier, saying it’s only the most expensive cards, such as rewards cards. In reality, the processor can change which cards it considers “non-qualified” at any time. Many merchants find that it’s not just rewards cards that end up costing more. In fact, a lot of merchants quickly realize that the processor charges most of their transactions at the higher “non-qualified” rate, resulting in much higher costs than expected.

You can avoid those higher costs completely by working with processors that offer more transparent pricing. Look for competitive interchange plus pricing or membership-style pricing like Payment Depot offers. Avoid “non-qualified” rates even when you’re a new or small business.

3. There’s a Floor on Processing Costs

That said, while certain pricing models are more beneficial than others, there is still a “floor” on processing costs. That floor is the lowest processing could get if your processor broke even on your transactions. Of course, the processor still has to make money, too. But it’s good to know the floor so you can more easily recognize “too good to be true” pricing.

Most of the time, merchants shopping for a processor look for the lowest costs. They call companies and ask, “What are your rates?” or click on ads promising cheap pricing.

However, what processors don’t tell you is that no processor can control the largest portion of processing costs: interchange.

Interchange fees are the bulk of your processing fees, and it goes to the banks that issue credit cards to your customers. Interchange is the same for every processor – no matter what anyone tells you, they can’t get you lower costs than interchange. Essentially, interchange is the floor.

There are hundreds of interchange categories, each with a different rate and fee associated. Signature debit card costs are among the lowest at interchange, while rewards cards and corporate cards are among the highest.

So, what’s the baseline?

Some basic Visa transactions will cost 1.51% +10 cents per transaction. Not every payment you take will be at that rate, but for the purposes of illustrating interchange, imagine that 1.51% is the lowest you could go.

That means you should be looking out for the “catch” if you see pricing below that. If a processor offers 1.29% or 1.36%, that’s lower than the cost of interchange. They would lose money on your transactions. In some extreme cases, the 1.29% is actually just the processor’s fee on top of interchange. Be sure to ask questions and know what you’re getting, especially when the processor tells you a “total cost” below interchange.

4. Leasing Equipment is Expensive

Some processors try to sell you on the idea of an equipment lease, touting the low monthly payment. What they don’t tell you is that the lease comes with its own separate, non-cancellable contract. That contract is often for 4 years. It doesn’t matter if you close your business, the lease persists.

Leasing is responsible for a number of horror stories from small business owners. Merchants that thought they were in the clear by returning equipment or closing their bank account to prevent further fee deductions found themselves on the receiving end of a lawsuit.

Don’t look at monthly payments. Look at the total cost. Sure, $40/month for that countertop credit card machine doesn’t sound like much, but that adds up to $1,920 over the life of a 48-month contract, for a machine that costs a few hundred dollars to purchase outright.

If buying a machine upfront is cost-prohibitive, work with your processor to determine if you can purchase a compatible refurbished machine or pay in installments.

5. “Free” Machines Aren’t Really Free

Speaking of equipment, sometimes you’ll see offers of a “free” credit card machine when you sign up for credit card processing. You know the old saying: there’s no such thing as a free lunch?” That applies here.

Processors offering “free” equipment make up the cost somewhere else. (Most often, in the form of higher rates and fees on your transactions.) While you think you’re saving money by not shelling out a few hundred dollars for a credit card machine, in reality you pay more over the long run, as every single transaction you process costs more. If your goal is lowest costs, “free” machines aren’t in the cards. Processors that offer the most competitive pricing on your rates don’t have the margins to also offer free equipment.

There are a lot if potential pitfalls when it comes to choosing the right credit card processor, but keeping these tips in mind can help you avoid the biggest landmines. Remember, there are plenty of credit card processors out there. Don’t be afraid to comparison shop for processing. When in doubt, ask more questions!

Ellen Cunningham is the Marketing Manager for CardFellow.com, the leading free resource for businesses to easily compare credit card processors. She loves helping business owners and managers, whether they’re new to processing or looking for the lowest costs once and for all. When she’s not writing about merchant services, she loves spending time outside in the crazy New England weather.