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Credit Card Processing: Am I on the Correct Rate Plan?

Credit Card Processing: Am I on the Correct Rate Plan?
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Anyone who has researched credit card processing rates will probably tell you different iterations of the same story, all of which can be summed up to this: it is a frustrating chasm of mystery that will lead you to far more questions than answers.

Interchange-plus, Tiered, Flat, MOTO, Billback, retail, membership-based, effective rate, swiped, keyed, chipped, dipped, EMV-enabled, NFC-enabled ... the list goes on. The vernacular is confusing, sometimes deliberately, and is always changing. Despite this, it’s likely you’ve taken action (possibly a few times) to understand it all. But where do you start?

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The Pitfalls of Comparing Credit Card Processing Rates

It’s common practice to start by researching the best rate plan available for your business type. But then you may start to wonder, “Is this truly the best plan for me, or is it just the best plan for the company providing me the services? Is this plan going to scale as my business grows?”

Starting this way will lead you down a rabbit hole of hundreds of different articles, all with the same subject matter, outlining the differences between Interchange-plus, Tiered, and Flat pricing. Eventually, you will only be concerned with the holy grail of credit card processing fees: your effective rate.

The beauty of an effective rate is that it gives you an apples-to-apples comparison in a world with endless varieties of fruit. But an effective rate is not without its own pitfalls. If you’re on any sort of Tiered or Flat pricing plan and you are shown a proposal for Interchange-plus pricing, the Interchange and pass-through fees are just estimates, so now you’re comparing honeycrisp apples to pink ladies.

Receiving only estimates may not seem like a big deal, but as any company that has dealt with merchant services will tell you, it is not the most savory of industries. Unethical practices that are borderline fraudulent are an epidemic, and any area left open for interpretation is often thoroughly abused.

To give you an idea of what a simple “miscalculation” could cost you, let’s walk through an example. If a Merchant Service Provider projected Interchange at just 0.003 less than what it actually is, an auto dealership could be looking at a paying 13% more in fees than what they were proposed for that year! Here’s the math behind that example:

  • (Estimated Interchange 1.5%) + (Rate 0.75%) = 2.25% estimated effective rate
  • (True Interchange 1.8%) + (Rate 0.75%) = 2.55% true effective rate
  • (.0255 - .0225) / (.0225) = 13.33% total difference

So, how do you determine whether an Interchange-plus pricing plan is better than Flat or Tiered for your business?

How to Properly Compare Credit Card Processing Rates

This process will vary depending on the current rate plan you have with your provider, but the following is a good starting point for any scenario:

  1. Gather a few recent months of your merchant statements
  2. Review your processing volumes
  3. Calculate your effective rate
  4. Try to determine your debit volume
  5. Determine what percentage of your cards are keyed in

Here are a few examples to stress the importance of this practice:

Example 1: If you’re on a Flat rate plan with processing volumes greater than $10,000 a month and you are taking more than 20% in debit cards, you should definitely look into switching to an Interchange-plus pricing plan that will scale with your business. Your card breakdown would lead to considerable immediate savings and the continued growth of those savings.

Example 2: If you are currently keying in more than 50% of your volume and your effective rate is greater than 3%, you should look into an Interchange-plus pricing plan and particularly one attached to a system with Interchange-optimization features. This will lower your effective rate by getting rid of high-tiers and downgrades.

If you find yourself in a position where you believe it’s time to make a change, it can’t hurt to do thorough research to educate yourself further. If you find an article that you think is useful or that provides unique insight, do a quick Google search on the company that wrote it and see what their customers are saying. This method is a good way to not only validate that the information is legitimate but also that the source is a trustworthy provider you might consider working with.

When you find a reputable company, it’s smart to have them do a comprehensive review of your statements to ensure you’re getting all the details to properly compare your rates. Once they are done, ask them these questions:

  1. Why is this rate plan better for my company than my current rate plan?
  2. If my company grows by 10%, will your plan be more or less expensive than my current plan?
  3. If this is an Interchange-plus pricing plan, how did you estimate the cost of Interchange?
  4. If I switch to your company, will you walk me through my first three months of merchant statements so I can get a grasp on how to understand them?
  5. If your estimation of my effective rate is off, will you remedy that with a correction?

Still need to make sense of your credit card processing rates?


If you have attempted your own credit card processing rate comparison, tell us how it went in the comment section below.

About Author
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Casey Russell

Casey Russell is a risk analyst for PayJunction. He analyzes merchant statements to detect unethical billing and savings.

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