What Are Your Rates? Pt. 2

Always beware of sales reps that start with, “I can lower your rates.”  Chances are, they can, but at what cost?  Costs could be a lower level of service, or less dependable product, but in the merchant services industry, there are usually literal costs over and above the rates.  Less scrupulous reps won’t volunteer this information, and will often get you to sign a long term contract with a high exit fee before you realize you’re actually paying more.  

 

The other costs may be very legitimate, especially if they’re within reason, but sometimes they become excessive, or downright unnecessary.  You’re very likely to incur monthly fees, for example, and they usually range from 6 or 7 dollars, up to 20 or 25.  You may see an annual fee of anywhere from a few bucks, to a hundred or so.  There are usually PCI compliance fees which may be billed monthly, quarterly, or annually, and can range from about $80 a year, to $15 a month.  Transaction fees, batch fees, and equipment rental fees are also very commonly seen on processing statements.  Some other fees that are out there, although less common, include setup fees and tax reporting fees. 

These extra costs are not necessarily bad, especially if they’re offset by reduced costs elsewhere, such as lower rates.  For example; a Square account, with no added fees, may be ideal for a business accepting a few hundred dollars worth of payment cards each month, or processing in some months, but not others.  A business regularly processing a couple grand, or more, however, will almost certainly save money by paying a reasonable monthly fee, and a small transaction fee, in exchange for rate savings of a half percent or more. 

It becomes very difficult to compare the cost of one processor to another when they aren’t charging the same sets of fees, so consider your bottom line effective rate.  There’s usually one deduction made each month to cover a merchant’s processing costs.  (Even that can vary as a small number of processors take a fee from every daily batch or transaction, but you can always add up your total for a one month period.)  Divide the monthly cost by the total gross amount of card payments you accepted that month, and you get the effective rate.  For example; $250 in costs, divided by $10,000.00 worth of card payments accepted, equals 0.025, or a 2.5% effective rate.  The effective rate will vary from month to month, depending on how much you process, what types of cards were used, security features that may or may not have been implemented, or fees that aren’t consistent, such as quarterly or annual fees.  Despite such variances, you’ll have a much more accurate picture of what your processing costs are as a percentage of sales.  Keep in mind, your effective rate will be higher than the rate you were quoted, because it does include all other costs, too.

Be sure to compare all costs, and not just rates.  Also consider whether you may be willing to pay a little more for services and features that may be attractive to you, especially if those features may save money elsewhere.  Card processing is not just a commodity, even though many reps present it as such. 

What are Your Rates? Pt. 1

When calling on prospects for my merchant services solutions, the most common question I hear is, “What are your rates?”  Unfortunately, too many processors have trained clients to ask that singular question, while overlooking the other areas that are sure to incur costs.  I’ll point out some of those other cost areas in the next blog, but for now, let’s just take a look at the rates everyone seems to ask about: 

First of all, there’s something called interchange.  That’s the amount charged by the cards, themselves, such as Visa, Mastercard, and Discover.  No processor can manipulate what interchange is.  It’ll be the same regardless of who you work with.  I had one merchant prospect practically call me a liar for suggesting that he was not, indeed, paying less than interchange, but I can assure you, his processor would not have been taking a loss to make that happen.

What can be manipulated is the amount over interchange that your processor charges.  Perhaps they’ve provided you with 3 or 4 rates called, tiers, into which various transactions will fall.  The lowest tier will cover the cost of the interchange on a typical debit card, or a basic credit card run with all the proper security measures, and build in a profit for the processor.  The next tier provides profit while covering the higher interchange costs that could arise from rewards cards, or a missing address verification, or CVV code.  A third or fourth tier would cover even higher interchange rates.  After all, there are probably hundreds of different possible interchange rates.  Tiered pricing simplifies that for merchants by putting similar interchange scenarios into a few easy to understand tiers.  

An analogy I often use equates taking your vehicle for service and asking the price of a tire rotation, an oil change, and a radiator flush.  Imagine if the service rep said, “Those are all preventative maintenance items, and have, therefore, been put into one price tier to make it easier for you.”  The problem is, the facility can’t take a loss when they actually do perform the higher cost radiator flush, so that price tier will be sure to account for that, and you’ll likely overpay when you really do want just a tire rotation.    

Back in the merchant services world, a pricing model that’s gaining ground is “Interchange Plus,” which passes on the actual interchange rates, and adds a flat rate over that, which is usually the fair share for the processor’s, services.  Using the auto repair analogy, it would be like paying the actual cost of the parts, plus a fair share for labor.  Whether the “plus” portion is 10 basis points, 100 basis points, or somewhere in between, will vary by business, by processor, and by other charges.  Unfortunately, the “plus” portion is often referenced with no mention of the interchange.  If the “plus” is 50 basis points, clients may believe they’re paying 0.5%, but after adding 1.6% in interchange, for example, their real rate for that transaction is 2.10%.  

As you can see, rates do get complicated.  Some businesses pay higher rates because they’re higher risk.  Some pay higher rates for a higher level of service.  Some pay lower rates because their other costs are higher.  As mentioned before; that’ll be a subject for the next blog.  Please check back for part 2 in the coming week or so.