The cost of accepting credit and debit cards has become unavoidable for retailers as our culture continues to shift from paper to plastic – and I’m not talking about grocery bags. The fees imposed on merchants can be confusing, overwhelming, and sometimes a bit shady. Understanding the breakdown of processing fees and pricing models is essential when shopping for the right Credit Card Merchant Processor or simply trying to understand the fees you’re currently being charged.

At a high level, 70-80% of credit card processing costs are considered base costs which are charged by the various credit card issuers (Visa, MasterCard, Discover, etc.). These base costs are NOT negotiable. The credit card processor is the intermediary between the credit card issuing bank and the merchant. The processor’s revenue is a mark-up charged over the base costs. These markups can typically run between 20-30% of the overall processing cost. Mark-up charges ARE negotiable, as these are determined by the processor.

ALL credit card processors have one thing in common; they ALL pay the same interchange fees and assessments (base costs). Again, these are not negotiable. Interchange Fees are charges paid directly to the card-issuing bank. Interchange fees are generally comprised of a percentage plus a per-transaction fee such as, 1.92% + $0.12. For each type of transaction, the type of card (over 100+ types) and how it’s processed (such as swiped versus keyed in) can result in a varying combination of percentage + transaction fee. The detailed list can be found in the latest Interchange Matrix (ask your processor for a copy).

Assessment fees are imposed by the differing card brands (Visa, MasterCard, Discover). The assessment fees are a set list of fees per transaction (such as NABU, Account Status Inquiry Fee and Processing integrity Fee) and percentage fees (such as Assessment, Acquirer Brand Volume Fee and Cross Border Assessment Fee). You should be clear when reviewing a proposal or a statement, charges labeled “Interchange Fees and Assessments” are purely that! Some less reputable processors will label lines as “Interchange, Assessments, and Fees” – which may actually represent additional non-mandatory fees (and mislead the merchant). Comparing your fees and assessments to the Interchange Matrix will clarify that what you are being charged as a mandatory fee is actually mandatory (and not additional profit for the processor).

There are various pricing models processors offer to merchants, which can be confusing. Here’s a summary of a few of the most common pricing models:

• The Interchange Plus or Pass Through model is a flat percentage charged in addition to the (non-negotiable) Interchange and Assessment Fees. Common language in the industry would be “Interchange + 22 basis points” meaning, you will be charged Interchange and Assessment Fees + 22 basis points (or 0.22%) on the transaction amount. The next logical question would be to ask: ‘What is the effective rate?’. The processor can provide you with an effective rate based upon your transaction history, but understand that your actual rate will fluctuate depending upon the combination of card types used. This pricing method is transparent in the respect that the processor is passing on the interchange and assessment fees directly to you and then clearly charging you 0.22% on the sum of all transactions processed. If refunds are common in your business, this option allows for interchange credits on refunded transactions.

• Bucket, Tier or Bundled Pricing is a pricing model where the processor categorizes interchange fees into three or more buckets such as: Non-Qualified, Mid-Qualified, and Qualified. In this model, each interchange transaction type (remember, there are 100+ types) is assigned to each category by the processor. The processor then assigns a flat percentage rate for each bucket. This pricing model is the most complicated to calculate and compare from processor to processor. Each individual processor can assign whatever interchange transaction type to whatever bucket they choose. With less credible processors, explanations of bundled pricing tiers may be clouded in sales lingo and contain less financial analysis. Often with this rate structure, processors will attempt to obfuscate the actual rate with overcomplicated, redundant answers to common, analysis-driven questions. In summary, comparing one processor’s bundled pricing to another is difficult or impossible. Due to the lack of clarity, bundled pricing should often be avoided.

• Flat Percentage is a pricing model that is the most straightforward, but not always the most cost-effective. This pricing model is generally more practical for smaller companies with low volume and/or transactions. For example, a rate may be 2.70% for all credit card transactions. No hassle, no frills, no buckets, no variability. For larger processing volume retailers, the flat percentage may also be used, though transaction volume will most likely yield a lower cost with Interchange Plus pricing.

Transaction fees may also be assessed as additional fees in any pricing model and should be considered markup (profit for your processor). Understand the fine print here! If a transaction fee is defined as $0.04, clarify if an authorization and a settlement are considered two transactions or one. Do not ignore the significance of transaction fees, or authorization fees, or whatever terminology the processor may use. These fees can contribute significantly to your cost of processing.

Multiple additional factors can affect proposed pricing from a merchant: funding lag (how long the merchant may hold your funds), connection methods, leased versus owned processing equipment, volume, contract length, exit clauses, dedicated support, etc. And, keep in mind, pricing is not everything. Learn about a processors business, annual volumes, reputation, and network reliability among numerous other factors. You wouldn’t buy a car because it’s the cheapest, right?

In closing, demystifying credit card processing fees can save you significant needless expenditures and improve your profitability. To reduce the task to a manageable one, follow these steps:
1. First, understand your current credit card processor statement. Identify which charges are interchange and assessment fees and which are processor mark-up charges. Go line by line through the statement understanding EACH line.
2. Then, accept quotes from potential processors and calculate expected rates to understand what you are paying versus what a new contract might provide.

Tyler Barron is an Applications Consultant with a retail business background at ITK Solutions Group. ITK Solutions Group is a retail-focused consulting firm specializing in enterprise resource planning (ERP) solutions.