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4 Rules to Finding and Keeping Low Merchant Account Fees

Steps to a low cost credit card processing solution

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If you’re like most people, shopping for a merchant account doesn’t rank highly on your list of enjoyable things to do. The rates and fees are complex, the sales people are pushy and it’s tough to tell when you’re really getting a good deal.

Nevertheless, having a low cost credit card processing solution is vital in today’s marketplace where credit and debit cards account for a substantial portion of consumer spending. The good news is that by following just a few key rules when shopping for a merchant account, you will be able to compare offers like a pro and find a low-cost processing solution in no time.

Rule #1: Know the best rates before you begin shopping. The lowest credit card processing rates are public knowledge. Bankcard processing charges are based on the interchange fees that are published twice yearly in April and October by Visa and MasterCard. Familiarize yourself with interchange and the categories that will impact your business before you even think about contacting merchant service providers for quotes.

All credit card processors (or, more accurately, member banks) pay interchange fees to the cardholder’s issuing bank. Interchange costs don’t change from one merchant service provider to the next. What you’re really shopping for in the best merchant account is the lowest markup over interchange. Knowing the interchange costs that typically apply to your business will give you a benchmark from which to compare offers.

Rule #2: Compare apples to apples. In order to accurately compare merchant account quotes, all offers must be based on the same, cost-effective type of pricing. Much of the confusion and complexities surrounding credit card processing rates and fees is due to the different pricing models employed by merchant service providers. While it’s true that all price models are based on interchange, they have varying levels of transparency and cost-effectiveness.

The three most widely used types of merchant account pricing are tiered, enhanced recover reduced (ERR) and interchange plus.

  • Tiered pricing operates by generalizing interchange categories into qualified, mid-qualified and non-qualified tiers, with the mid and non-qualified tiers carrying costly surcharges. The catch is that the acquiring organization can influence which interchange categories go into which tiers, and the categories are not disclosed on the merchant statement. This makes the tasks of accurately comparing tiered pricing very difficult.
  • ERR is a bit trickier because it adds a surcharge to non-qualified transactions as well as a hidden charge that is the difference between the target interchange category and the qualified rate. ERR is tougher to compare because, like tiered pricing, the underlying interchange categories on which fees are based are not disclosed.
  • Interchange-plus, which is also referred to as pass-through pricing, functions by adding a fixed markup to actual interchange charges and the underlying interchange categories are disclosed on the merchant statement. Comparing interchange plus quotes is a simple matter of putting one markup against another.

Rule #3: Look at the big picture: the effective rate and value. A common yet costly mistake when shopping for a merchant account is to fixate on the discount rate while ignoring less visible, but still significant, charges. Take the blinders off when comparing merchant accounts and look at the total cost and total value.

Part of a merchant service provider’s markup is a percentage that is added to actual interchange fees. This volume-based markup is expressed as basis points, or tenths of a percent. While important, the basis point markup isn’t always the leading contributor to processing charges. Other common charges like a transaction fee, monthly minimum or start-up expenses can also have a significant impact on cost.

Effective rate is the term used in the credit card processing industry to refer to the total cost of a merchant account expressed as the percentage of fees over gross credit and debit card sales. For example, if your processing charges are $150 for a month where volume is $5,000, the effective rate of your merchant account is 3%.

The effective rate is the best basis for comparing merchant accounts because it considers all rates and fees. Don’t be afraid to ask prospective providers to formulate the effective rate of their offer using a recent statement from your current processor. Ask them to estimate costs if you’re not yet processing.

Value is also an important consideration when shopping for a merchant account. As with anything, cheapest isn’t always best. For example, one merchant account provider may quote you low rates but give you poor service once you begin processing, while another may be more expensive but offer superior service and support. Along these same lines, cancellation fees and monthly minimums detract from the value of an account. An offer with slightly higher rates and no cancellation fee may prove to have more value than an account with lower rates and a $300 cancellation fee.

Rule #4: Keep interchange costs down. Getting cheap merchant account rates and fees only half the battle. Interchange charges account for the majority of expenses associated with accepting credit and debit cards. Low rates and fees from your provider are important, but avoiding downgrades by consistently targeting the lowest possible interchange category is where you will save the most money.

Downgrade is the term used to refer to a credit card transaction that qualifies to an interchange category with a higher fee than the target category. Credit card type (rewards, commercial) and processing method (no AVS, key-entered, etc.) are common reasons for a transaction to downgrade.

For example, on a card-present merchant account a transaction will downgrade to a higher interchange category if it is key-entered instead of swiped. Similarly, a transaction involving a reward credit card will downgrade to a higher interchange category than the same transaction run with a standard consumer signature card.

A representative at your merchant service provider will be able to tell why your transactions are downgrading by examining your statements and asking a few careful questions. Sometimes downgrades are unavoidable, but often their costly occurrence can be lessened through a few changes in equipment or behavior. Your merchant service provider’s job isn’t done when you sign on the dotted line. Contact them periodically and ask them to review your statements for downgrades and other interchange costs that can be avoided. is a merchant-focused resource aimed at educating businesses and individuals about credit card and bankcard acceptance.

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