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?
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:
So, how do you determine whether an Interchange-plus pricing plan is better than Flat or Tiered for your business?
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:
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:
If you have attempted your own credit card processing rate comparison, tell us how it went in the comment section below.