If you’ve decided to accept credit card payments for your business, you will realize there are many merchant providers out there and they all charge differently.
Unlike other overhead expenses, such as rent or business supplies, credit card processing fees are more complicated to predict and understand as pricing models vary across merchant service providers and often include hidden costs.
In this post we’ll explain the various pricing models merchant providers use to apply credit card processing fees, the pros and cons of each, and help you determine which is best for you.
Before we compare types of merchant fees, we need to talk for a moment about determining the “effective rate” of your credit card processing as this will help you determine the competitiveness of the rates you receive from your provider. In short, the effective rate is calculated by dividing your total processing fees by your total credit card sales volume. The best way to do this is to calculate it based on your yearly numbers as there can be large variations if you calculate it on a month-to-month basis. For example, if you sell items at Farmer’s Markets every weekend and have a gross credit card revenue of $100,000 and are charged $7,000 for credit card processing throughout the year your effective rate would be $7,000/$100,000 or 7%.
Now that we understand effective rate, let’s look at the different pricing options to see which option is ideal for your business.
Flat Rate Pricing
A flat rate pricing model is when the merchant is charged a flat rate for every transaction. For example, you could be charged 2.75-2.9% per credit card you swipe. You may also be charged an additional 20-30 cents per transaction.
The pro of this type of plan is that it is easy to decipher your effective rate, and if you are only processing a handful of small credit card transactions a month this option may be best for you. However, the con is that if you are processing more than $5,000 to $8,000 per month you might be paying more than if you had a tiered rate plan with a dedicated merchant account. For example, if your average transaction was $5 and you had $100,000 in credit card revenue, your flat rate fee could be $8,900 per year making your effective rate 8.9%.
Next, tiered pricing models are the most common form of pricing and they break down rates based on three levels: Qualified, Mid-Qualified, and Non-Qualified.
In a tiered merchant account plan, the Qualified Rate has the lowest rate because it is deemed as the “safest”. You will generally get this rate when the card is in-hand and swiped (as opposed to the number being typed in), or when the credit card is not a rewards credit card (as those are more expensive for all parties involved).
The Mid-Qualified Rate are more expensive than the Qualified Rate, but less expensive than the Non-Qualified Rate. For example, a web payment where the credit card number was typed in is a good example of a Qualified Rate.
The Non-Qualified Rate it the most expensive in the tiered merchant account rate plan because they include “risky” and expensive transactions such as transactions that are not accepted in person or from credit cards that offer rewards for the consumers.
The benefit of this type of plan is that if you are processing more than $5,000 to $8,000 per month you will save money compared to a flat rate plan. Also, if you’re on a fixed budget and need predictable expenses, tiered pricing is a good fit for you. When you have a lot of repeat customers and are familiar with the types of credit cards they prefer to use, you can easily predict the amount owed on your merchant statement each month.
An interchange pricing model is a model that consists of two components, the interchange fee (determined by card networks like Visa) and a network that the credit card processor charges you.
The benefit of this type of plan is that it is a fair model because you get charged for what you’re actually processing. However, it comes with a lot of variation based on the types of credit cards customers use thus creating a complicated statement that makes it difficult to forecast your merchant statement each month.
Picking What’s Best For You
So, when it comes to credit card merchant fees, which model is right for your business? If you’re just getting started, and have a low number of credit card transactions, a flat rate fee may be ideal for you. With this model, you won’t have to worry about a monthly payment, but know that you are generally paying more per transaction so as you start to receive more credit cards you may want to reconsider this option.
If you’re processing more than $5,000 to $8,000 per month in credit cards you probably won’t want to use the flat rate pricing anymore. If you value a predictable merchant statement each month tiered pricing will probably work best for you and easily allow you to forecast future expenses. On the other hand, if you’re willing to deal with a more complicated statement that may be more difficult to forecast, the Interchange model may be able to save you some money.
How much credit card companies charge merchants varies based on the target type of merchant they are trying to serve. Knowing how your credit card sales volume and what’s most important to you (price or predictability) will help you choose the credit card processing company that’s right for you.
To learn more about merchant accounts, click here for a complete a to z guide.