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Archive for December, 2006
Marking Up The “Downgrades”
This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started TransFS.
One way that processors make extra money is by using a strategy that we call “Marking Up Downgrades”. Most merchants are charged for processing services according to a Three Tier Rate Structure. Each transaction is put into one of three categories: “Qualified”, “Mid Qualified” and “Non Qualified”. Transactions classified as “Qualified” will be charged the base rate. Transactions classified as “Non-Qualified” or “Mid-Qualified” will be charged extra.
The category for each transaction is decided based upon how the transaction was processed and what kind of card was used:
- example: If an online store does a transaction without address verification then the rate will often be downgraded from “Qualified” to “Non-Qualified”
- example: If a rewards card is used, the transaction will often be downgraded from “Qualified” to “Mid-Qualified”.
How it works
The reason why processors charge extra for these kinds of transactions is that they get charged more for those transactions by Visa and Mastercard (see What Is Interchange for more detail) so that Visa and Mastercard can pay for the rewards. However, they usually pass through MORE than the extra amount to the merchant.
For example, a transaction using a “Visa Signature” Rewards card typically costs the processor about 0.40% more than a typical consumer credit card, but the amount passed on to the merchant is usually at least 1.00% and often as much as 2.00%.
Rewards cards have become much more popular lately, so these charges can really add up, which is a shame because most merchants pay most of their attention to negotiating the Qualified Rate and ignore the other rates. One friend of ours was told by his processor “don’t worry about that, it’s just for special cases and doesn’t happen very often”, which is a bit deceptive in our mind.
Something to watch out for: the criteria for determining which tier each transaction is classified into is based on a case-by-case basis and is usually not specifically defined in the contract. This can make it hard to price compare between processors because what might be “qualified” to one processor can be “mid-qualified” to another processor (see “Inconsistent Buckets“).
Reasonable markups
A reasonable markup, which covers the increased interchange cost for Mid Qualified transactions is less than 0.20% (20 bps). I based this assumption on the difference between rewards and non-rewards interchange rates.
For non-qualified a reasonable markup is no more than 1.00% (100 bps). I based this on the difference the VISA EIRF (a common rate for cards that were settled without proper identification or not settled in a timely manner) and VISA Retail interchange rates , which is 0.70% (70 bps)
Examples
Our article “Reading a 3-Tier Merchant Statement” shows a good example of this practice. Here the Mid-Qualified Rate is an extra 1.00% and an extra 0.10. That is on top of the overall rate of 2.520%. So the Merchant Account Provider in that case is making an approximately an extra 0.80% + 0.10 on each of those Mid-Qual transactions, adding up to almost $500 extra that month for the merchant. The Non-Qualified rate is similarly marked up, to 1.50%.
Our article “Reading a Hybrid Merchant Statement” shows a trickier example of this practice where 1.99% is added to a variety of interchange categories , adding over $800 to a merchant’s bill.
Debit Markup
This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started TransFS.
Debit Markup is one of the ways that Merchant Account Providers make extra money from merchants. The reason why Merchant Account Providers make so much money off of debit transactions is that Mastercard and Visa charge the processor less for debit card transactions than credit card transactions.
Explanation
Typically, a debit card transaction costs between 0.50% and 1.00% less than credit card transactions (see What Is Interchange for more details), the cost of which is usually NOT passed on to the merchant. Even when the processor does pass on a lower cost for debit cards to the customer, often they pass on less than the full savings, creating extra profit for themselves (this practice is related to marking up downgrades).
The exact mix of credit and debit are dependent on what kind of customer your business serves, but in 2004 Visa Announced that the value of Debit Card transactions had surpassed the value of Credit Card transactions, so you can bet that a big portion of your transactions are actually debit.
If your processor charges you based on Interchange Plus pricing, then you are having the debit card discount passed on to you.
However, most merchants are charged using 3-tier pricing, in which case your debit card transactions are being grouped into your standard credit card rates and you are being charged too much.
What you can Do about it
You should call your Merchant Account Provider and demand that debit card transactions be split out on your bill and the price reduced, just ask them “but debit cards are cheaper, right?” and then ask why you are being charged the same for them as for the credit transactions. Usually the Merchant Account Provider will get the idea and change your billing. If they don’t, then go shopping for a new Merchant Account Provider.
Or you can ask to be given Interchange Plus pricing, which is the best solution.
Equipment and Terminals
This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started TransFS.
If you are processing credit cards in a physical environment then you will require a credit card terminal. Four big pieces of advice:
1. Avoid terminal leases – they are almost always a bad deal. When credit cards were in their infancy credit card terminals were very expensive and needed to be leased. These days, the simple kinds of credit card terminals that most merchants need only cost a few hundred dollars, which is the kind of thing for which most small businesses can just write a check. When you lease you usually end up paying about 4x the actual price (see “Rip Off Leases “).
2. If you decide to switch Merchant Account Providers , you can easily have them reprogram the terminal (it can usually be done over the phone) for free. Therefore, if you buy your terminal outright, even if you buy it from your Merchant Account Provider, you can always switch providers. Don’t feel locked-in.
3. Invest in a PIN-pad and encourage your customers to use it as much as possible. Most credit card terminals have easy and cheap ($100) add-ons that allow you to accept customer PIN numbers. When the customer types in the PIN it becomes an “Online Debit” transaction and travels over a different (cheaper) network such as NYCE or STAR, rather than the VISA or Mastercard network. By getting the customer to type in their PIN you will reduce your transaction cost by about 50%, which will quickly pay for the cost of the PIN-pad (see “Signature Debit vs. PIN Debit“).
4. Be very skeptical of Merchant Account Providers that are advertising free terminals. Nothing in life is truly free and these deals always come with a catch. Such contracts will have a higher cancellation fee, higher startup fee, higher discount rate, or something (see “Explaining The Fees ” for a more complete list of the fees that could be included).
Standalone Terminals
The simplest kind of terminals and the ones used by most small merchants. Standalone terminals are ideal for service businesses and lower-volume retail businesses.
Standalone terminals connect using either a phone line (they have a modem built in) or an ethernet connection (so you can use your existing broadband for faster authorization). Usually these terminals cost between $200-$400.
Wireless Terminals
Wireless terminals use either a local WiFi (802.11a-e) connection or a cellular connection to process the connection. They are good for businesses where the point of sale moves around. They typically cost $700-$1,000.
POS Systems
A POS system consists of several components:
A computer running POS software, there are lots of POS software packages, some of which are for specific industries.
For example, Intuit has a POS package and here is a list of POS software at DMOZ.
A bar-code scanner like those manufactured by Symbol.
A magnetic swipe reader, like those from MagTek.
A cash drawer like those from APG.
In this case you will need to enter your merchant ID (which you get from your Merchant Account Provider) into the configuration of your POS software and you will be able to process credit card transactions through the POS software by swiping a card through the magnetic swipe reader. The receipts can be printed on a variety of printer types (basically any printer that your POS software can format the receipts to fit).
Terminal Manufacturers
The major terminal manufacturers are:
Lipman (Nurit brand) / Verifone – recently merged
Linkpoint – owned by First Data
Ingenico – more focused on Europe
Where To Buy Terminals
You can buy them from your Merchant Account Provider, from Staples , on EBay or from a variety of specialist sellers of such products. Just be careful, terminals are often used as a loss-leader for the service, so the price quoted is the price tht includes a processing contract (their profit is built into the contract). It’s basically the same as buying a cellphone – “get your phone free with a 2 year contract!”.
This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started TransFS.
One of the ways the the processors make their money is by making the fees as difficult to understand as possible. Therefore, it pays to know how to read a processing bill so you can know how much you are being charged and figure out if you are getting a good deal. Most merchants are pricing according to 3-tier pricing, which this section covers.
1. Depending on how your account is priced, this section will include several categories. This bill, an example of simple tiered pricing , only divides the transactions into two categories: Visa (V) and Mastercard (M).
2. This section shows how much you are being charged for each transaction in each type. Here Mastercard (M) and Visa (V) transactions are being charged the same amount – $0.00 per transaction and then 2.52% of each transaction’s value. You can calculate the total for each category by multiplying the P/I (per-item, here .000) times the # Sales (here 533 for Visa) plus the % (here 2.52) times the $ Sales (here 116,065.03) to get (533 x 0.000 + 2.52% x 116,065.03) = 2,924.87.
3. Discount Due is the single most important item on your bill because it contains the majority of the amount you are being charged by your processor (however, it is not the total charge). The “Discount” is the difference between what you charged your customers and what was deposited in your bank account. Idit is taken by the processor on a daily basis and you never see it. Most of the discount is passed on to Visa and Mastercard and some is kept by the processor to cover their costs and generate their profit.
4. Amount is the amount of fees, which are outlined in more detail on the second page of this bill. This is the second part of what you are charged by your provider (in addition to the Discount) and is usually automatically withdrawn from your bank account on a monthly basis. So this merchant paid a total of $5,468 ($773 in fees + $4,694 in discount) to his payment processor in this month, or 2.94% of his sales (5,468 / 186,301).
5. You won’t see these on every bill. These “adjustments” are either refunds that were issued for transactions that occurred the month prior, or they are chargebacks. Usually it is not a good thing to have a lot of refunds or chargebacks, they can impact the rate that you are charged and the size of your reserve account.
6. This is where you get the detail behind the extra $773 that was charged in fees:
Monthly statement fee: $5 – they charge you to get a statement, this is pretty common. One thing to be careful of is, if you switch payment processors and you don’t cancel with your old one they will continue to charge you the monthly statement fee and you may not notice a $5 ACH from your bank account if you have a lot of transactions. I also don’t think you can opt out of this and go without a statement (not that you would want to).
Visa trans fee @ 0.20 – this is really sneaky. The merchant in this case thought that he had negotiated a 0.00 per transaction fee with his processor, which the first page of the bill would seem to verify. However, the processor really just moved the transaction fee to another part of the bill and he is still getting charged $0.20 for each transaction.
AVS trans fee @ 0.05 – mostly AVS (Address Verification Service) is used by online merchants as a means to reducing fraud. Basically you ask the customer their zipcode and street address which is then matched against those on record with their credit card issuer. This method, also used increasingly in grocery store, convenience stores and gas stations, is highly effective because oftentimes someone in possession of a stolen card or card number won’t know this information. However, the communication with the credit card company to verify the address does have a charge, in this case 0.05 / transaction.
MC trans fee @ 0.20 – same as Visa, explained above.
T&E fees – T&E refers to Travel and Entertainment. In order to pay for the perks that people using points cards or corporate rewards cards get, the issuing bank charges your payment processor extra fees. These are a part of that.
Batch Header Fee – One of the main jobs that your processor does is gather up all your transactions for the day, combine them with other merchant’s transactions, figure out how much each issuing bank (like Capital One or MBNA) owes, ACHs that much from the issuing bank, figures out how much of that amount belongs to each of their merchants and then ACHs your share to you. This Batch Header Fee (in this case $0.25 per transaction) is a charge for that service. It can usually be negotiated down to nothing.
Mid Qualified Trans – Earlier in this document I described that most merchants are charged according to three-tier pricing. That means that each transaction, depending on the circumstances of the transaction, are classified into one of 3 buckets or tiers (Qualifying, Mid-Qualifying and Non-Qualifying). What determines those tiers is complicated, depends on the situation and is covered in the article on tiered pricing. The most important thing to recognize is that you get charged SIGNIFICANTLY extra for Mid and Non qualifying transactions and this practice of Marking Up The Downgrades is one of the ways that your processor makes most of their money.
Non Qualified Trans – Same story as the Mid Qualified, only for even more expensive kinds of cards. Mostly, foreign-issued cards (including Canada) fall into this category.
What is Interchange
This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started TransFS.
Two of the things that confuse merchants the most are:
- Why they are charged different amounts when different kinds of cards are used
- Who gets to keep the 1.5% – 3.0% of their hard-earned sales that are siphoned away as “discounts” and “fees”
A big part of the answer to both of those questions is: “Interchange”.
What is interchange
Interchange is the set of rules that define how much of a cut the issuing bank (the bank that issued the customers’ credit card, big issuing banks include Capital One and MBNA) gets to keep from the credit card transaction.
The part of the transaction that you see:
The back-end of the transaction (where the money flows):
How big is interchange?
Interchage is the largest piece of the transaction. Basically, the card issuing bank captures most of the economics of the transaction.
- Morgan Stanley estimates that interchange is, on average, 1.75%, or 81% of the total fees charged to the merchant on the transaction.
- The Kansas City Fed estimates that interchange is, on average, 1.60%. However, their data was from 2003 and earlier, which may account for the difference in the estimates, since Interchange tends to rise every year.
Why does it matter to me?
When negotiating a deal with your credit card processor it helps to know how much of a cut they are getting for two reasons:
- It lets you know how much they are making off or you and therefore how much room they have to negotiate
- The main rate that a processor will quote is on a standard credit card transaction. With the rise of rewards cards and debit cards, these “standard” cards make up the minority of transactions. If you focus your energy on negotiating a good “standard” rate, with a fair markup for your processor, they probably will sneak in a much larger markup on the rewards and debit cards. An example of that can be found in “Reading a Merchant Processing Statement“
So what are these Interchange rates?
Until recently they were secret, but now you can get a full description of them at the Visa and Mastercard websites: Visa interchange rates , Mastercard interchange rates.
Visa Debit Cards
This is the table of rates for Visa Debit cards as of the end of 2006. The rates will change periodically, but the difference between the rates will always be about the same, i.e. supermarkets will always get a better deal than ecommerce sites.
Note, these are the rates for debit cards when they are processed with a signature. Those where you type in the PIN go through a separate network and are even cheaper, which is why stores generally encourage you to type in your PIN.
| Fee Program | Visa Check Card | Description |
| CPS / Supermarket or Retail Debit – Performance Threshold 1 | 0.62% + 0.13 (0.35 cap for supermarkets) | CPS stands for Custom Payment Service, it doesn’t really mean anything, think of it as the default category for Visa. For merchants on tiered or bucketed rate plans CPS will usually be “Qualified” and non-CPS will usually be “Mid” or “Non”-Qualified |
| CPS / Supermarket or Retail Debit – Performance Threshold II | 0.81% + 0.13 (0.35 cap for supermarkets ) | Supermarkets get a cap on their rate because VISA is trying to encourage them to accept check cards more widely instead of checks. Supermarkets have low margins, making payment costs more important to them. |
| CPS / Supermarket or Retail Debit – Performance Threshold III | 0.92% + 0.15 (0.35 cap for supermarkets) | |
| CPS – Supermarket or Retail Debit – All Other | 1.03% + 0.15 (0.35 cap for supermarkets ) | |
| Check Card II Supermarket | 0.25 | |
| CPS / Automated Fuel Dispenser or Service Station, Debit | 0.70% + 0.17 | Automated Fuel Dispenser refers to Pay at the Pump systems |
| CPS / Small Ticket, Debit | 1.55% + 0.04 | |
| CPS / Retail 2, Debit | 0.80% + 0.25 | |
| Utility Program | 0.75 | |
| CPS / Retail Key Entry or Card Not Present, Debit | 1.60% + 0.15 | |
| CPS / E-Commerce Basic | 1.60% + 0.15 | |
| CPS / E-Commerce Preferred Retail, Debit | 1.55% + 0.15 | |
| CPS / E-Commerce Preferred Hotel and Car Rental, Debit | 1.36% + 0.15 | |
| CPS / E-Commerce PReferred Passenger Transport, Debt | 1.60% + 0.15 | |
| CPS / Hotel and Car Rental, Debit | 1.36% + 0.15 | |
| CPS / Passenger Transport, Debit | 1.60% + 0.15 | |
| CPS Restaurant Debit | 1.19% + 0.10 | |
| CPS / Account Funding, Debit | 1.75% + 0.20 | |
| Check Card II | 0.55% + 0.10 | |
| Electronic Interchange Reimbursement Fee, Debit | 1.75% + 0.20 | |
| Standard Interchange Reimbursement Fee, Debit | 1.90% + 0.25 |
Visa Credit Card
VISA has two kinds of rewards cards: Visa Signature and Visa Traditional Rewards . Visa Signature cards are marked with the Visa Signature brand mark, have no pre-set spending limit and typically have more extensive cardholder rewards and services (like concierge services) than the traditional rewards cards. All other refers to visa cards that do not have rewards. An increasing number of the cards do have rewards, so it is important to be aware of the different prices.
| Fee Program | Visa Signature | Traditional Rewards | All Other | Explanation |
| CPS / Supermarket Credit – Performance Threshold I | 1.65% + 0.10 | 1.15% + 0.05 | ||
| CPS / Supermarket Credit – Performance Threshold II | 1.20% + 0.05 | Usually only big chains are able to get Performance Threshold II or III. | ||
| CPS / Supermarket Credit – Performance Threshold III | 1.22% + 0.05 | |||
| CPS / Supermarket Credit – All Other | 1.65% + 0.10 | 1.24% + 0.05 | ||
| CPS / Retail Credit – Performance Threshold I | 1.65% + 0.10 | 1.43% + 0.10 | ||
| CPS / Retail Credit – Performance Threshold II | 1.47% + 0.10 | |||
| CPS / Retail Credit – Performance Threshold III | 1.51% + 0.10 | |||
| CPS / Retail – All Other | 1.65% + 0.10 | 1.54% + 0.10 | ||
| CPS / Automated Fuel Dispenser | 1.50% + 0.05 | Pay at the pump. | ||
| CPS / Service Station | 1.43% + 0.10 | |||
| CPS / Small Ticket | 1.65% + 0.04 | |||
| CPS / Retail 2 | 1.43% + 0.05 | |||
| Utility Program | 0.75 | |||
| CPS / Retail Key Entry or Card Not Present | 1.90% + 0.10 | 1.85% + 0.10 | It saves money to swipe the card if the customer is there with their card. | |
| CPS / E-Commerce Basic | ||||
| CPS / E-Commerce Preferred Retail | 1.80% + 0.10 | |||
| CPS / E-Commerce Preferred Passenger Transport | 2.30% + 0.10 | 1.90% + 0.10 | 1.75% + 0.10 | |
| CPS / Hotel and Car Rental Card Present | 1.58% + 0.10 | |||
| CPS / Hotel and Car Rental Card Not Present | 1.58% + 0.10 | |||
| CPS / Pssenger Transport | 1.75% + 0.10 | |||
| CPS / Restaurant | 1.54% + 0.10 | |||
| CPS / Account Funding | 2.14% + 0.10 | |||
| Electronic Interchange Reimbursement Fee (EIRF) | 2.30% + 0.10 | Card not present transactions done electronically. E-commerce merchants will get this category when they do transactions without a security code (3-digit code on the back of the card). | ||
| Standard Interchange Reimbursement Fee (SIRF) | 2.70% + 0.10 | Card not present transactions done with paper. | ||
Visa Corporate Cards
VISA and Mastercard try to get big companies to issue VISA and Mastercard cards to their employees by offerring the employer the ability to track in a more detailed fashion what their employees are spending money on. Therefore, a merchant that accepts corporate cards is rewarded with a lower rate for sending detailed data about what was purchased (could be as detailed as an item-by-item list). Level III is the highest amount of data, Level II is some extra data and anything below Level II is just the basic amount of data.
| Fee Program | Commercial Cards | Explanation |
| Commercial Level III | 1.70% + 0.10 | Level III has very detailed information aboutwhat kinds of goods were included in the order. Usually you need a POS system to enter this kind of data, rather than a regular credit card terminal. |
| Commercial Level II – Corporate / T&E Cards | 1.90% + 0.10 | Level II has some information about what goods were included in the order |
| Commercial Level II – Business Cards | 2.00% + 0.10 | |
| Commercial Level II – Purchasing Cards | 2.00% + 0.10 | |
| Commercial Electronic Interchange Reimbursement Fee (EIRF) | 2.20% + 0.10 | If you authorize first you get this rate, if not you get the SIRF. |
| Commercial Standard Interchange Reimbursement Fee (SIRF) | 2.70% + 0.10 | |
| GSA Large Ticket | 0.95% + 35.00 (1.35% minimum) | They give a discount for very large business-related items. |
| Visa Purchasing Large Ticket | 0.95% + 35.00 |
Mastercard
Mastercard World is the standard points card (similar to Visa Traditional Rewards) and Mastercard World Elite is the fancier version (similar to VISA Signature).
| Program Name | Debit | Standard Credit | World Credit | World Elite Credit | Explanation |
| Consumer | 1.90% + 0.25 | 2.75% + 0.10 | 2.95% + 0.10 | No signature, authorization or magnetic strip required. (Authorization means that you checked to make sure they had enough capacity on the card before giving over the product). This is the riskiest kind of transaction, which is why it costs the most | |
| Airline | N/A | N/A | N/A | 2.30% + 0.10 | Requires enhanced data, no authorization required |
| Convenience Purchases | N/A | 1.90% + 0.00 | 2.00% + 0.00 | ||
| Merit III Base | 1.05% + 0.15 | 1.64% + 0.10 | 1.74% + 0.10 | To qualify for Merit III the cardholder, card and merchant must be together at the same place and time. Full magnetic strip data must be captured, merchant must get authorized signature and the transaction must be settled within 24 hours of the transaction date.
Most bricks and morter stores can get most of their transactions to qualify for Merit III |
|
| Merit III – Tier I | 0.70% + 0.15 | 1.43% + 0.10 | 1.53% + 0.10 | For merchants that processed over $2B in Mastercard volumes over the past year ($500M for debit) | |
| Merit III – Tier II | 0.83% + 0.15 | 1.48% + 0.10 | 1.58% + 0.10 | For merchants that processed over $1.25B in Mastercard volumes over the past year ($250M for debit) | |
| Merit III – Tier III | 0.95% + 0.15 | 1.58% + 0.10 | 1.68% + 0.10 | For merchants that processed over $750M in Mastercard volumes over the past year ($75M for debit) | |
| Merit I | 1.64% + 0.16 | 1.95% + 0.10 | 2.05% + 0.10 | Electronic authorization required, but customer does not need to be present and magnetic strip data is not required. | |
| Full UCAF | 1.15% + 0.15 | 1.74% + 0.10 | 1.84% + 0.10 | This is an internet transaction. UCAF stands for Universal Cardholder Authentication Field. Full UCAF happens when both the merchant and the customer are using MasterCard SecureCode. The advantage of this to the merchant is that when the transaction qualifies for Full UCAF the risk of fraud transfers to the bank from the merchant. | |
| Merchant UCAF | 1.05% + 0.15 | 1.64% + 0.10 | 1.74% + 0.10 | UCAF is enabled by the merchant but not used by the cardholder. It seems as though most internet transactions go through in this category and the Mastercard is using the lower rate here to encourage internet merchants the use UCAF.
In this case the risk of fraud does NOT transfer to the bank. |
|
| Emerging Markets | 0.80% + 0.25 | N/A | N/A | N/A | Electronic authorization required, magnetic stripe data not required. This is a special rate for Goverment, Utilities, Education, Insurance, Toll Roads and Post Offices. |
| Key Entered | 1.64% + 0.16 | 1.95% + 0.10 | 2.05% + 0.10 | For face to face transactions where the magnetic strip could not be read due to an error | |
| Passenger Transport | 1.60% + 0.15 | 1.83% + 0.10 | N/A | N/A | For airlines and trains |
| Restaurant | 1.19% + 0.10 | N/A | 1.64 + 0.10 | ||
| Service Industries | 1.15% + 0.05 | This is for recurring payments transactions, merchant registration with Mastercard. Must not be face to face. | |||
| Public Sector | N/A | 1.55% + 0.10 | Tax payments, fines, cour costs, etc. | ||
| Supermarkets – Base | 1.05%+ 0.15 (0.35 max) | 1.48% + 0.05 | 1.58% + 0.05 | ||
| Supermarkets – Tier I | 0.70% + 0.15 (0.35 max) | 1.27% + 0.00 | 1.37% + 0.00 | Requires at least $2B annual Mastercard volume ($500M for debit) | |
| Supermarkets – Tier II | 0.83% + 0.15 (0.35 max) | 1.27% + 0.00 | 1.42% + 0.00 | Requires at least $1.25B annual Mastercard volume ($250M for debit) | |
| Supermarkets – Tier III | 0.95% + 0.15 (0.35 max) | 1.42% + 0.05 | 1.52% + 0.05 | Requires at least $300M annual Mastercard volume ($75M for debit) | |
| Travel Premiere Service | 1.36% + 0.15 | 1.74% + 0.10 | N/A | N/A | |
| Utilities | 0.75 | ||||
| Warehouse Base | 1.05% + 0.15 (0.35 max) | 1.48% + 0.05 | 1.58% + 0.05 | ||
| Warehouse Tier I | 0.70% + 0.15 (0.35 max) | 1.27% + 0.00 | 1.37% + 0.00 | Requires at least $1B annual Mastercard volume ($500M for debit) | |
| Warehouse Tier 2 | 0.83% + 0.15 (0.35 max) | N/A | N/A | ||
| Petroleum and Service Stations | 0.70% + 0.17 | N/A | N/A | ||
| Small Ticket | 1.55% + 0.04 | N/A | N/A | Transaction amount must be equal to or less than $15 | |
What is Interchange
This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started TransFS.
Two of the things that confuse merchants the most are:
- Why they are charged different amounts when different kinds of cards are used
- Who gets to keep the 1.5% – 3.0% of their hard-earned sales that are siphoned away as “discounts” and “fees”
A big part of the answer to both of those questions is: “Interchange”.
What is interchange
Interchange is the set of rules that define how much of a cut the issuing bank (the bank that issued the customers’ credit card, big issuing banks include Capital One and MBNA) gets to keep from the credit card transaction.
The part of the transaction that you see:
The back-end of the transaction (where the money flows):
How big is interchange?
Interchage is the largest piece of the transaction. Basically, the card issuing bank captures most of the economics of the transaction.
- Morgan Stanley estimates that interchange is, on average, 1.75%, or 81% of the total fees charged to the merchant on the transaction.
- The Kansas City Fed estimates that interchange is, on average, 1.60%. However, their data was from 2003 and earlier, which may account for the difference in the estimates, since Interchange tends to rise every year.
Why does it matter to me?
When negotiating a deal with your credit card processor it helps to know how much of a cut they are getting for two reasons:
- It lets you know how much they are making off or you and therefore how much room they have to negotiate
- The main rate that a processor will quote is on a standard credit card transaction. With the rise of rewards cards and debit cards, these “standard” cards make up the minority of transactions. If you focus your energy on negotiating a good “standard” rate, with a fair markup for your processor, they probably will sneak in a much larger markup on the rewards and debit cards. An example of that can be found in “Reading a Merchant Processing Statement“
So what are these Interchange rates?
Until recently they were secret, but now you can get a full description of them at the Visa and Mastercard websites: Visa interchange rates , Mastercard interchange rates.
Visa Debit Cards
This is the table of rates for Visa Debit cards as of the end of 2006. The rates will change periodically, but the difference between the rates will always be about the same, i.e. supermarkets will always get a better deal than ecommerce sites.
Note, these are the rates for debit cards when they are processed with a signature. Those where you type in the PIN go through a separate network and are even cheaper, which is why stores generally encourage you to type in your PIN.
| Fee Program | Visa Check Card | Description |
| CPS / Supermarket or Retail Debit – Performance Threshold 1 | 0.62% + 0.13 (0.35 cap for supermarkets) | CPS stands for Custom Payment Service, it doesn’t really mean anything, think of it as the default category for Visa. For merchants on tiered or bucketed rate plans CPS will usually be “Qualified” and non-CPS will usually be “Mid” or “Non”-Qualified |
| CPS / Supermarket or Retail Debit – Performance Threshold II | 0.81% + 0.13 (0.35 cap for supermarkets ) | Supermarkets get a cap on their rate because VISA is trying to encourage them to accept check cards more widely instead of checks. Supermarkets have low margins, making payment costs more important to them. |
| CPS / Supermarket or Retail Debit – Performance Threshold III | 0.92% + 0.15 (0.35 cap for supermarkets) | |
| CPS – Supermarket or Retail Debit – All Other | 1.03% + 0.15 (0.35 cap for supermarkets ) | |
| Check Card II Supermarket | 0.25 | |
| CPS / Automated Fuel Dispenser or Service Station, Debit | 0.70% + 0.17 | Automated Fuel Dispenser refers to Pay at the Pump systems |
| CPS / Small Ticket, Debit | 1.55% + 0.04 | |
| CPS / Retail 2, Debit | 0.80% + 0.25 | |
| Utility Program | 0.75 | |
| CPS / Retail Key Entry or Card Not Present, Debit | 1.60% + 0.15 | |
| CPS / E-Commerce Basic | 1.60% + 0.15 | |
| CPS / E-Commerce Preferred Retail, Debit | 1.55% + 0.15 | |
| CPS / E-Commerce Preferred Hotel and Car Rental, Debit | 1.36% + 0.15 | |
| CPS / E-Commerce PReferred Passenger Transport, Debt | 1.60% + 0.15 | |
| CPS / Hotel and Car Rental, Debit | 1.36% + 0.15 | |
| CPS / Passenger Transport, Debit | 1.60% + 0.15 | |
| CPS Restaurant Debit | 1.19% + 0.10 | |
| CPS / Account Funding, Debit | 1.75% + 0.20 | |
| Check Card II | 0.55% + 0.10 | |
| Electronic Interchange Reimbursement Fee, Debit | 1.75% + 0.20 | |
| Standard Interchange Reimbursement Fee, Debit | 1.90% + 0.25 |
Visa Credit Card
VISA has two kinds of rewards cards: Visa Signature and Visa Traditional Rewards . Visa Signature cards are marked with the Visa Signature brand mark, have no pre-set spending limit and typically have more extensive cardholder rewards and services (like concierge services) than the traditional rewards cards. All other refers to visa cards that do not have rewards. An increasing number of the cards do have rewards, so it is important to be aware of the different prices.
| Fee Program | Visa Signature | Traditional Rewards | All Other | Explanation |
| CPS / Supermarket Credit – Performance Threshold I | 1.65% + 0.10 | 1.15% + 0.05 | ||
| CPS / Supermarket Credit – Performance Threshold II | 1.20% + 0.05 | Usually only big chains are able to get Performance Threshold II or III. | ||
| CPS / Supermarket Credit – Performance Threshold III | 1.22% + 0.05 | |||
| CPS / Supermarket Credit – All Other | 1.65% + 0.10 | 1.24% + 0.05 | ||
| CPS / Retail Credit – Performance Threshold I | 1.65% + 0.10 | 1.43% + 0.10 | ||
| CPS / Retail Credit – Performance Threshold II | 1.47% + 0.10 | |||
| CPS / Retail Credit – Performance Threshold III | 1.51% + 0.10 | |||
| CPS / Retail – All Other | 1.65% + 0.10 | 1.54% + 0.10 | ||
| CPS / Automated Fuel Dispenser | 1.50% + 0.05 | Pay at the pump. | ||
| CPS / Service Station | 1.43% + 0.10 | |||
| CPS / Small Ticket | 1.65% + 0.04 | |||
| CPS / Retail 2 | 1.43% + 0.05 | |||
| Utility Program | 0.75 | |||
| CPS / Retail Key Entry or Card Not Present | 1.90% + 0.10 | 1.85% + 0.10 | It saves money to swipe the card if the customer is there with their card. | |
| CPS / E-Commerce Basic | ||||
| CPS / E-Commerce Preferred Retail | 1.80% + 0.10 | |||
| CPS / E-Commerce Preferred Passenger Transport | 2.30% + 0.10 | 1.90% + 0.10 | 1.75% + 0.10 | |
| CPS / Hotel and Car Rental Card Present | 1.58% + 0.10 | |||
| CPS / Hotel and Car Rental Card Not Present | 1.58% + 0.10 | |||
| CPS / Pssenger Transport | 1.75% + 0.10 | |||
| CPS / Restaurant | 1.54% + 0.10 | |||
| CPS / Account Funding | 2.14% + 0.10 | |||
| Electronic Interchange Reimbursement Fee (EIRF) | 2.30% + 0.10 | Card not present transactions done electronically. E-commerce merchants will get this category when they do transactions without a security code (3-digit code on the back of the card). | ||
| Standard Interchange Reimbursement Fee (SIRF) | 2.70% + 0.10 | Card not present transactions done with paper. | ||
Visa Corporate Cards
VISA and Mastercard try to get big companies to issue VISA and Mastercard cards to their employees by offerring the employer the ability to track in a more detailed fashion what their employees are spending money on. Therefore, a merchant that accepts corporate cards is rewarded with a lower rate for sending detailed data about what was purchased (could be as detailed as an item-by-item list). Level III is the highest amount of data, Level II is some extra data and anything below Level II is just the basic amount of data.
| Fee Program | Commercial Cards | Explanation |
| Commercial Level III | 1.70% + 0.10 | Level III has very detailed information aboutwhat kinds of goods were included in the order. Usually you need a POS system to enter this kind of data, rather than a regular credit card terminal. |
| Commercial Level II – Corporate / T&E Cards | 1.90% + 0.10 | Level II has some information about what goods were included in the order |
| Commercial Level II – Business Cards | 2.00% + 0.10 | |
| Commercial Level II – Purchasing Cards | 2.00% + 0.10 | |
| Commercial Electronic Interchange Reimbursement Fee (EIRF) | 2.20% + 0.10 | If you authorize first you get this rate, if not you get the SIRF. |
| Commercial Standard Interchange Reimbursement Fee (SIRF) | 2.70% + 0.10 | |
| GSA Large Ticket | 0.95% + 35.00 (1.35% minimum) | They give a discount for very large business-related items. |
| Visa Purchasing Large Ticket | 0.95% + 35.00 |
Mastercard
Mastercard World is the standard points card (similar to Visa Traditional Rewards) and Mastercard World Elite is the fancier version (similar to VISA Signature).
| Program Name | Debit | Standard Credit | World Credit | World Elite Credit | Explanation |
| Consumer | 1.90% + 0.25 | 2.75% + 0.10 | 2.95% + 0.10 | No signature, authorization or magnetic strip required. (Authorization means that you checked to make sure they had enough capacity on the card before giving over the product). This is the riskiest kind of transaction, which is why it costs the most | |
| Airline | N/A | N/A | N/A | 2.30% + 0.10 | Requires enhanced data, no authorization required |
| Convenience Purchases | N/A | 1.90% + 0.00 | 2.00% + 0.00 | ||
| Merit III Base | 1.05% + 0.15 | 1.64% + 0.10 | 1.74% + 0.10 | To qualify for Merit III the cardholder, card and merchant must be together at the same place and time. Full magnetic strip data must be captured, merchant must get authorized signature and the transaction must be settled within 24 hours of the transaction date.
Most bricks and morter stores can get most of their transactions to qualify for Merit III |
|
| Merit III – Tier I | 0.70% + 0.15 | 1.43% + 0.10 | 1.53% + 0.10 | For merchants that processed over $2B in Mastercard volumes over the past year ($500M for debit) | |
| Merit III – Tier II | 0.83% + 0.15 | 1.48% + 0.10 | 1.58% + 0.10 | For merchants that processed over $1.25B in Mastercard volumes over the past year ($250M for debit) | |
| Merit III – Tier III | 0.95% + 0.15 | 1.58% + 0.10 | 1.68% + 0.10 | For merchants that processed over $750M in Mastercard volumes over the past year ($75M for debit) | |
| Merit I | 1.64% + 0.16 | 1.95% + 0.10 | 2.05% + 0.10 | Electronic authorization required, but customer does not need to be present and magnetic strip data is not required. | |
| Full UCAF | 1.15% + 0.15 | 1.74% + 0.10 | 1.84% + 0.10 | This is an internet transaction. UCAF stands for Universal Cardholder Authentication Field. Full UCAF happens when both the merchant and the customer are using MasterCard SecureCode. The advantage of this to the merchant is that when the transaction qualifies for Full UCAF the risk of fraud transfers to the bank from the merchant. | |
| Merchant UCAF | 1.05% + 0.15 | 1.64% + 0.10 | 1.74% + 0.10 | UCAF is enabled by the merchant but not used by the cardholder. It seems as though most internet transactions go through in this category and the Mastercard is using the lower rate here to encourage internet merchants the use UCAF.
In this case the risk of fraud does NOT transfer to the bank. |
|
| Emerging Markets | 0.80% + 0.25 | N/A | N/A | N/A | Electronic authorization required, magnetic stripe data not required. This is a special rate for Goverment, Utilities, Education, Insurance, Toll Roads and Post Offices. |
| Key Entered | 1.64% + 0.16 | 1.95% + 0.10 | 2.05% + 0.10 | For face to face transactions where the magnetic strip could not be read due to an error | |
| Passenger Transport | 1.60% + 0.15 | 1.83% + 0.10 | N/A | N/A | For airlines and trains |
| Restaurant | 1.19% + 0.10 | N/A | 1.64 + 0.10 | ||
| Service Industries | 1.15% + 0.05 | This is for recurring payments transactions, merchant registration with Mastercard. Must not be face to face. | |||
| Public Sector | N/A | 1.55% + 0.10 | Tax payments, fines, cour costs, etc. | ||
| Supermarkets – Base | 1.05%+ 0.15 (0.35 max) | 1.48% + 0.05 | 1.58% + 0.05 | ||
| Supermarkets – Tier I | 0.70% + 0.15 (0.35 max) | 1.27% + 0.00 | 1.37% + 0.00 | Requires at least $2B annual Mastercard volume ($500M for debit) | |
| Supermarkets – Tier II | 0.83% + 0.15 (0.35 max) | 1.27% + 0.00 | 1.42% + 0.00 | Requires at least $1.25B annual Mastercard volume ($250M for debit) | |
| Supermarkets – Tier III | 0.95% + 0.15 (0.35 max) | 1.42% + 0.05 | 1.52% + 0.05 | Requires at least $300M annual Mastercard volume ($75M for debit) | |
| Travel Premiere Service | 1.36% + 0.15 | 1.74% + 0.10 | N/A | N/A | |
| Utilities | 0.75 | ||||
| Warehouse Base | 1.05% + 0.15 (0.35 max) | 1.48% + 0.05 | 1.58% + 0.05 | ||
| Warehouse Tier I | 0.70% + 0.15 (0.35 max) | 1.27% + 0.00 | 1.37% + 0.00 | Requires at least $1B annual Mastercard volume ($500M for debit) | |
| Warehouse Tier 2 | 0.83% + 0.15 (0.35 max) | N/A | N/A | ||
| Petroleum and Service Stations | 0.70% + 0.17 | N/A | N/A | ||
| Small Ticket | 1.55% + 0.04 | N/A | N/A | Transaction amount must be equal to or less than $15 | |
Merchant Account Costs
This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started TransFS.
One of the main ways that you can negotiate a good deal for yourself is to know what others are being charged. Unfortunately, most merchant account providers are not very transparent in their pricing, we have done some research to shed some light into the murkiness.
What is the industry average price?
The analysts at Morgan Stanley who research the stocks of the publicly traded merchant account providers, estimate that the average Visa / Mastercard credit card fee is 2.15% . For most merchants Visa / Mastercard make up the majority of transactions.
However, keep in mind that the industry average is skewed downwards by large retailers like Walmart and Circuit City that are able to negotiate very low rates for themselves. Heartland Payment Systems, a processor that specializes in smaller merchants, reported an average of 2.53% in Heartland’s 2005 annual report.
What factors influence the price that I am charged?
There are two parts of the credit card rate, interchange and the merchant account markup. Interchange is the amount that gets paid to Visa and Mastercard. The processor markup goes to your processor to cover their costs and profit.
Factors that influence Interchange:
- What kinds of transactions you accept – for example, the rate is lower if the card is swiped through a magnetic strip card reader than if the number is keyed in by hand and the rate for internet transactions is somewhere in between.
- What kinds of credit cards your customers use – for example, a rewards credit card costs you, the merchant, more than a standard credit card and a debit card linked to a bank account costs less. Another example – a debit card transaction where the pin is typed in costs less than a debit card transaction where the pin is not typed in.
- For more detailed information about interchange see the article “What Is Interchange “
Factors that influence the merchant account markup:
- The amount of time you have been in business
- Your credit rating (because of chargeback risk)
- The volume of business that you will do – bigger companies get better rates
- How informed and diligent a negotiator you are
Teaser Rates
It is very common in this industry for merchant account providers to advertise teaser rates. Some issues you should watch for:
- The rate may change
- The advertised rate is the “Qualified” rate or the “Debit” rate and probably won’t include most of your transactions. The real rate that you will pay for many transactions, including all rewards and corporate cards is hidden under the “Mid-Qualified” rate (see “3-Tier Merchant Account Pricing“)
- Frequently merchant account providers will provide a low % rate but then jack up the
- Sometimes they will advertise their rate net of Interchange, if that is the case add about 1.75% to the rate to get a rough estimate of the actual cost
Always carefully read your statement, it takes a few minutes but can save you a lot of money (see Reading a Merchant Processing Statement).
What is a typical merchant account rate?
Since every merchant account has different fees, transaction tiers, etc. the only way to compare them on an apples-to-apples basis is to add up all the fees for a month and divide it into the total volume for a month. Below we have done that comparison in 2 ways. The top graphic shows the amount the merchants are charged above the Interchange Rate and the below graphic shows the total charges.
While Interchange is not customarily discounted, small merchants pay significantly higher markups than large merchants. That is because they have less bargaining power, spend less time shopping for a good rate, and are more expensive to serve. Many of the merchant account companies make a conscious effort to target smaller merchants because they can charge higher rates and are more profitable.
Rip Off Leases
This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started TransFS.
One of the ways the merchants can get ripped off in an extreme way is by leasing credit card processing equipment (note, this is not an issue for online-only merchants). Fifteen years ago credit card terminals were really expensive ($1000s) and were typically leased by the Merchant Account Provider (in those days they were actually banks) to the merchant.
Now, credit card terminals only cost a few hundred bucks but unscrupulous Merchant Account Provider Salespeople will often still try to lease them to merchants at absolutetely usurous terms.
For example, a typical lease (for a machine that costs $200-$400 at Staples) may cost $20 / month and last 48 months (4 years). That amount, $10 / month, doesn’t sound bad, but over the course of 48 months adds up to $960, or more than 4 time what the machine would have cost you outright.
What would a fair price be to lease the machine over 48 months? Well, given that you don’t actually own it at the end of the lease and will need to lease another one (nowdays credit card terminals are pretty durable and last for many years), you shoud be paying no more than the value of the machine and a reasonable interest rate.
- Value of the machine = $400 / 48 = $8 / month
- Reasonable interest rate (8%) —-> Average balance $200 ($400 / 2), monthly interest rate = Annual interest rate / 12 = 8% / 12 = 0.67%, monthly interest = $200 * 0.67% = $1.33
- Total Cost = $9.33 / month
Do yourself a favor and do the math before signing an equipment lease, they usually aren’t a good deal.
Reading a Hybrid Bill
This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started TransFS.
There are lots of different ways that a merchant account statement can be presented. The best way, which is most transparent to the merchant, is interchange plus (see “Interchange Plus” and “Reading an Interchange Plus Merchant Statement“) and the most common way is 3-Tier (see “Tiered Pricing” and “Reading a 3-Tier Merchant Statement“). The bill below is somewhere in-between. It also allows me the opportunity to demonstrate some of the dirtiest tricks played by merchant account providers.
1. V is a regular Visa credit card, VB is Visa Business, VD is Visa Debit.
2. This shows the danger of focusing on 1 rate when negotiating (and the benefits of Interchange-Plus where there is 1 clear rate to negotiate) multi-tier processing agreements like this one. The merchant got a 1.77% rate which sounds great, but there are lots of fees that make this deal pretty expensive for the merchant.
3. This is a demonstration of the trick Debit Markup – 1.77% is a great rate, below cost for regular Visa credit cards. This merchant is an only-online business meaning that their usual interchange category for Visa transactions is the one Visa calls E-Commerce Basic, which costs 1.85% + 0.10 for non-rewards cards and 1.90% + 0.10 for Visa Signature cards which means that this Merchant Account Provider is taking a loss on those transactions (Mastercard e-commerce rates are a little bit lower and they are making a slight profit on those).
However, for Visa Debit this merchant is getting charged the same 1.77% + 0.10 even though the interchange rate falls to 1.60% + 0.15.
4. This is a good example of Marking Up The Downgrades. Look at the line that says Visa EIRF $329.25. First, it is really hard to figure out what that fee is for, what does EIRF mean? What extra rate is being applied to those transactions? There is no way to tell from the bill, but here is my guess:
75 transactions at an extra $0.10 is $7.50
$329.25 – $7.50 = $321.75
$321.75 / $16,168.23 = 1.99%
It looks like the merchant is getting charged an extra $0.10 + 1.99% for all these EIRF transactions on TOP of the 0.10 + 1.77% they are already being charged for those transactions. An EIRF transaction is one where the merchant used their virtual terminal to enter the customers’ credit card information, rather than having the customer proceed through the checkout process on their website (the critical difference being that the 3-digit security code on the back of the card was not used).
This is a pretty sneaky practice particularly because the 1.99% never shows up on the bill anywhere. When you add up all the categories in the red box this practice adds over $800 to the bill.
5. Divide the total charges (1,002.01 in fees + 2,299.73 in discounts) = $3,301.74 into the total sales $120,680.95 and you get 2.74%, almost a full 1.00% higher than the 1.77% that this merchant thought he was paying.
