If you look in your wallet, you probably have a credit card. And chances are, you receive some sort of benefit whenever you make a credit card purchase.
Some cards give you cash back. Some cards provide discounts on gas. Some cards give you double airline miles.
But have you ever stopped to wonder how these rewards cards can affect a small business? Probably not unless you run one yourself.
The truth is that the costs of these “rewards” are often deceptively passed along to merchants and store owners and credit card processing companies often deceive you with low rates.
If you run an online store, you are probably aware that shopping for a credit card processor can be extremely confusing.
In fact, my friend Scott Bradley recently brought to my attention some deceptive practices that credit card processors are applying when advertising their credit card processing rates.
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How Credit Card Processing Companies Play Tricks With Rates
If you are a brand new ecommerce store looking for a traditional merchant account and gateway, chances are you are evaluating different credit card processors based on the monthly rate and the percentage fee.
Sounds straightforward right? Just pick the credit card processor that has the lowest transaction rate and lowest monthly fees and you are good to go.
Wrong!! It can be much more complicated than you think. Here’s why.
If you have low purchasing volumes (which will always be the case if you are new), most merchant accounts will place you on a tiered plan. And they will quote you a really low transaction fee only for the lowest tier which is called the “qualified rate”.
But in reality, there can be 2 or more other tiers of pricing that have substantially higher transaction rates.
What Are The Different Tiers?
So what the heck is this qualified rate? Let’s say a credit card merchant offers you a 2% transaction fee for Visa/Mastercard purchases. Sounds pretty good right?
But what they won’t tell you is that this 2% rate only applies to a certain class of credit cards, most of which are rarely used. Whenever you process a credit card, you are charged 1 of 3 possible rates.
- The Qualified Rate – This is the lowest rate that you can get
- The Mid-Qualified Rate – This middle rate usually kicks in when certain rewards cards are used or when certain other conditions aren’t met (more on this later)
- The Non-Qualified Rate – The highest rate that you may pay. Usually this rate kicks in for business credit cards and other special types of transactions which I’ll describe below
In actual real world usage of your merchant account, you’ll find that the majority of purchases will fall into the mid-qualified rate due to the widespread use of rewards cards. But your experience may vary. Below is an explanation of the tiers in more depth.
The Qualified Rate
The qualified rate is the lowest rate that you can possibly get charged and is usually the rate that gets advertised on a merchant’s website when you are shopping around.
But what is deceptive is that actually getting this rate can be rare. In order for a transaction to qualify for the “qualified rate”, it must obey the following criteria.
- The card that is used can not be a commercial/business credit card. Unfortunately, a lot of rewards cards fall under this bucket
- The authorization request message must include Address Verification Service (AVS), which verifies the street address and the zip code of the card holder.
- The card transaction must include the business’s customer service telephone number, order number, and total authorized amount. If any of this information is missing, then you won’t get the qualified rate
- The transaction or shipping date must occur within 7 days of the authorization. Some shops “authorize” a charge on a credit card and actually “process” the transaction once the order actually ships. If these two periods are longer than 7 days, you won’t get the qualified rate
- The authorization transaction amount must match the processed amount. Sometimes after a credit card authorization, a customer may change their order amount.
Let’s say that all of the criteria above is not all met. If so, then the transaction will fall under either the mid-qualified or non-qualified rate.
The Mid Qualified Rate
The mid qualified rate is usually on the order of .5% – 1% higher than the qualified rate. Most rewards cards will fall under this category so this tier is likely to be more representative of the actual rate you’ll be receiving for your credit card transactions.
However if you are not careful with the way you process the credit cards on your website, a transaction could potentially fall under the “non qualified” rate which is the highest rate of all. Here is some sample criteria for a typical mid qualified rate transaction.
- The credit card must be processed with a matching billing address and correct CCV data
- Certain classes of business credit cards must not be used. For example, the Visa Infinite card would be considered a non qualified card with some credit card processors
For the most part, most of your transactions will fall under the mid qualified rate as long as you are careful. The only exceptions are when purchases are made with business credit cards with premium rewards (Ask your merchant account provider for a list).
The Non Qualified Rate
The non qualified rate is the highest rate of all and is typically on the order of 1% – 1.5% higher than the mid qualified rate. Whenever you get this rate on a transaction, you are going to be paying a much higher premium for your transactions.
However, as long as you are extra careful about getting accurate information from your customers and always asking for the CCV number, you can mitigate the likelihood of hitting this tier.
Eventually, once your business starts processing a decent volume of orders, you can change your plan to Interchange Plus which offers lower and more consistent pricing.
What is Interchange Plus?
The Interchange is the cost that your merchant account provider gets charged by VISA and MasterCard.
Interchange Plus means that your merchant account provider will pass through whatever they are getting charged by the interchange plus a markup for their services. The mark-up is charged on a per transaction basis as well as a percentage fee.
As a result, the Interchange Plus transaction rate tends to be much more steady and is in general lower than the tiered rates described earlier in the post.
Putting It All Together With An Example
Are you confused yet? To sum everything up that I discussed above, I’m going to give you a real world example using a cheap online credit card processor advertising a low rate of 2.15%.
Now 2.15% is an excellent rate but when you read the fine print, you’ll notice that if you process less than $20,000 per month, you are placed in a tiered pricing structure shown below.
- Qualified Rate – 2.15%
- Mid Qualified Rate – 2.49%
- Non Qualified Rate – 3.49%
If your store ever processes more than $20,000 per month, you are eligible for Interchange Plus. But otherwise, you are placed in a tiered structure where you’ll rarely see 2.15%.
In fact with the majority of rewards cards offered today, you’ll be much more likely to get charged 3.49% than 2.15%. Just be careful when signing up.
Also, different credit card processors may offer Interchange Plus without any minimums but the markup rate will tend to be higher. It’s up to you to do your own due diligence when evaluating the different rates. But at least now you’ll know what questions to ask. Good luck!
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Steve Chou is a highly recognized influencer in the ecommerce space and has taught thousands of students how to effectively sell physical products online over at ProfitableOnlineStore.com.
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Steve carries both a bachelors and a masters degree in electrical engineering from Stanford University. Despite majoring in electrical engineering, he spent a good portion of his graduate education studying entrepreneurship and the mechanics of running small businesses.
5 thoughts on “How Credit Card Processing Companies Deceive You With Low Rates”
Steve – You did an awesome job at explaining and breaking all of this down! Thanks for the link and the mention in this article.
Other things that affect credit card rates include.
1) When You Close Out Your Batch
For example…some processors penalize merchants who don’t close their batch out within a 24 hour period. This usually applies to a typical brick and mortar store. So lets say that the merchant processed over $5000 in transactions, and if they batched out all of those transactions within a 24 hour period, the rates on the cards that were swiped would stay the same. But here is where they get you…if that same merchant waited more than 24 hours to batch out the transactions, most or all of them would fall into a higher tiered buckets (assuming they are on a tiered plan).
2) How The Card is Taken Also Affects What The Merchant Pays
For example…An in person swiped transaction will be cheaper than a transaction done via the internet. The rate is higher because the risk is higher. If you can help it, you always want to make sure that you swipe the card yourself, and if you can’t, as you described above, make sure that you get the most amount of information from the customer before processing the transaction online or over the telephone.
Another tip I would also like to share with the audience is that if you are going to seek a new processor…be sure to black out the rates on your statement along with your fees. All the new sales rep should know is your monthly processing volume and what business you are in…once they know the rates you are paying, they can still take advantage of you by only lowering them a little bit. (Normally it is customary for them to ask for a statement before quoting a new rate, so if you use this little tip it will save you potentially thousands of dollars!)
When it comes to the other fees involved on top of “dues and assessments” (Processors don’t control these costs…these fees are determined by Visa/Mastercard) make sure that you don’t pay more than these amounts below.
-Don’t pay more than .10/transaction for Visa/Mastercard
-Don’t pay more than .10/transaction for AMEX
-Don’t pay more than .20/batch for the batch fee
-Don’t pay more than 7.50/month for a monthly statement fee
-DO NOT PAY ANNUAL FEES or PCI COMPLIANCE FEES
*If you are paying higher than this, you are being taken to the cleaners.
Always buy your equipment, NEVER RENT! (Renting is a total ripoff…you could be paying upwards of $1200/year vs a $300 one time payment on a terminal if you make this mistake.)
It is also important to know that every October and April the interchange rate for all credit card transactions change. You want to make sure as a merchant that you check your statement to make sure the processor accounted for this change, so they don’t keep charging you a higher rate if the interchange rates decreased for particular cards you take.
I look forward to the conversation!
I think collectively, we’ve covered this topic enough. I received several emails from people telling me that they are more confused than ever now:)
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