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.