Payments 101
As a business manager, you know full well that credit cards can help ensure you’re paid quickly and easily by your customers. You’ve also seen how the costs for accepting card payments can spiral out of control. Understanding the basics of how credit card processing fees work, knowing what rates you should be paying, and what to ask for are all important factors to help your bottom line.
What are the Costs to Run a Card?
Whenever a business accepts a card payment, there are direct fees that every credit card processing provider shares. They act as a price floor, meaning what is charged on top of the direct fees are where credit card processors compete.
Every transaction taken with a card has the following costs:
Every transaction taken with a card has the following costs:
- Merchant Service Provider Fees
These are the rates and per transaction fees where your processor makes their profit, plus any additional account fees. These fees can vary greatly, and depending on your pricing structure, may even include the actual Interchange and Assessment fees on your billing statement.
- Interchange
Paid to the bank that issued the credit card and varies by the type of card and perks/rewards on the card. These costs are the same for all merchant service providers and should be the largest part of the transaction cost.
- Assessments
Dues & Assessments and other card brand fees paid to the card networks like Visa, Mastercard, Discover, and American Express for any transactions that use their network. These are the same for all merchant service providers.
Regardless of how these fees appear on your statement, they are the hard costs that all credit card processors build into their pricing.
To help you better understand what you’re paying for merchant services, let’s dive into each of them.
Understanding Interchange
Interchange is the industry term for the fees on every transaction paid to the issuing bank behind a credit card – think Chase, Capital One, etc – and is the largest contributing factor to what it costs to run credit card payments.
Interchange isn’t a single rate, but a catch-all term for the fees applied to the more than 1,000 different card types in the U.S.
Interchange isn’t a single rate, but a catch-all term for the fees applied to the more than 1,000 different card types in the U.S.
The exact cost for a specific transaction is dependent on 3 things:
- The type of card
All card payment systems know exactly what type of card is being accepted as soon as the card is used.
- How the payment is accepted
Card present transactions are almost always cheaper than card not present transactions for the same card due to the lower risk of fraud.
- The type of business
Based on your federal industry classification code, there can be slight differences between different Interchange rates.
Since all credit card processors pay the same Interchange, this isn’t an area where they compete but rather part of the base costs they all share. No payment provider, regardless of what promises they make, can get you a lower or special Interchange rate.
If you have competitive pricing, Interchange should be by far the largest fee you pay on your monthly statement, but it’s not uncommon for the Interchange costs to be obscured by the pricing structure.
If you have competitive pricing, Interchange should be by far the largest fee you pay on your monthly statement, but it’s not uncommon for the Interchange costs to be obscured by the pricing structure.
Phil Nieto
President of Best Card
02 May
Phil Nieto
President of Best Card
02 May
Phil Nieto
President of Best Card
02 May
What are Card Brand Assessments?
While Interchange is paid to the bank that issues the credit card, Assessments are paid to the card brands – Visa, Mastercard, Discover, or American Express.
Generally, assessments are a percentage fee between 0.13% – 0.165% and a series of very small fees based on certain transaction particulars. Assessments are one of the reasons that credit card processing gets a reputation for having tons of additional, hard to understand fees.
Just like Interchange, all merchant service providers pay the same Assessments on every transaction. While some claim not to charge these fees, in reality they are just accounting for that cost in another part of their pricing structure. Some processors even surcharge Assessments above the actual cost, hoping that their clients don’t notice the extra profit margins they have added.
Merchant Service Provider Fees -
Where Companies Compete
As we’ve just learned, all credit card processors have the same base costs – Interchange and Assessments – a shared price floor for how low their rates can be. Anyone charging below these costs would be losing money on an account. And no one becomes a credit card processor to lose money.
Sometimes though, credit card processors can state their fees in confusing ways, or fail to disclose important fees they add to transactions. Interchange and Assessments aren’t exactly simple to begin with and some pricing structures can make it even more difficult to understand what you’re paying and to whom.
Any credit card processor CAN offer great rates. Any type of pricing COULD be competitive. But certain types of pricing and the processors that offer them are more likely to result in more expensive costs to your business. Below are the 7 most common pricing structures we see in our industry.
Flat Rate: Explained
Instead of paying the Interchange, Assessments and Processor markup as separate fees, the processor charges one or two flat fees that cover their cost and profit.
- Example 1: Processor A charges a flat rate of 3.3% + $0.20 on all cards
- Example 2: Processor B charges 2 flat rates depending on how the card was taken: 2.6% + $0.20 per transaction for all card present payments, and 3.5% + $0.20 for all card not present payments
Flat Rate: Getting Your Money's Worth?
If you run more than a few thousand dollars a month in credit card charges, you can probably find a better deal with other pricing methods.
Flat Rate: Explained
The processor makes their profit on the difference between the flat rate that they charge and the rates they have to pay in Interchange and Assessments. Because they have to worry about expensive card types, flat rates tend to be relatively expensive to make sure that even on the most expensive cards to take they are still making money. On less expensive cards, they make a larger profit.
Flat Rate: Getting Your Money's Worth?
If you run more than a few thousand dollars a month in credit card charges, you can probably find a better deal with other pricing methods.
Flat Rate: Explained
PROS
- Easy to understand fees
- Know what you’ll pay on every transaction
- If you rarely run payments, the lack of account fees and other monthly fees can be a good value
CONS
- Expensive pricing option to run cards
- Instead of passing through direct costs, they’re having to work with the risk that you accept too many expensive cards…so they just end up charging near the most expensive rates on every transaction.
- Some processors that have this pricing still have additional monthly fees
Flat Rate: Getting Your Money's Worth?
If you run more than a few thousand dollars a month in credit card charges, you can probably find a better deal with other pricing methods.
Base Rate and Surcharge: Explained
The processor sets a rate that all cards run at, but unlike flat rate pricing, there are additional fees that can apply to some card types. Often the majority of payments receive one, or multiple, surcharges on top of the base rate that the business expects cards to run at.
- Example 1: Processor markets rates starting at 1.5% + $0.10 per transaction. However, this is only the base rate and most transactions receive an additional surcharge of 2% for a total cost of 3.5% on most cards.
- Example 2: Processor charges rate of 2.5% on transactions, but then adds an additional “Settlement Funding Fee” of 2% as a separate fee on all cards for a total cost of 4.5%.
Base Rate and Surcharge: Getting Your Money's Worth?
A deliberately confusing pricing method that almost never works to the merchant’s advantage.
Base Rate and Surcharge: Explained
The processor makes their profit on the difference between the total amount charged in base rate and surcharge vs the Interchange fee paid.
Base Rate and Surcharge: Getting Your Money's Worth?
A deliberately confusing pricing method that almost never works to the merchant’s advantage.
Base Rate and Surcharge: Explained
PROS
- Virtually none for the merchant
CONS
- Difference in expected cost versus actual cost.
- Difficult to know what percentage of transactions will receive surcharge.
- Don’t get benefits of taking lower priced cards.
- Rate increases can be common and hard to spot; they can increase the surcharge but leave the base rate the same.
- There can be multiple surcharges on the same transaction
Base Rate and Surcharge: Getting Your Money's Worth?
A deliberately confusing pricing method that almost never works to the merchant’s advantage.
Tiered: Explained
Payment processor takes the 1,200 + Interchange items and groups them into “tiers” usually with terms like Qualified, Mid-Qualified and Non-Qualified cards. Similar to Base Rate + Surcharge pricing in that most people don’t understand transactions can downgrade to more expensive rate category.
- Example 1: Processor A charges 2.55% Qualified rate, with 3.15% Mid-Qualified, and 3.8% Non-Qualified Rate
- Example 2: Processor B charges 1.5% Qualified Debit, 2.25% Qualified Credit, 3% Mid-Qualified Debit and credit, 4% Non-Qualified Debit and Credit
Tiered: Getting Your Money's Worth?
Value can vary widely based on how the processor sets up it’s tiers and how often they raise those rates.
Tiered: Explained
The processor makes their profit in the difference between Interchange and the rate charged for the "tier" that the card is in. So if a card has a 1.7% + $0.10 Interchange rate and they choose to place it in their Qualified Tier (2.55%), they make 0.85% profit. That same 1.7% + $0.10 per transaction card at their Non-Qualified rate (3.8%) they would make 2.1% profit. The processor has complete control over which cards are in which tiers which can lead to many cards being placed in the most expensive tiers to generate the most profit.
Tiered: Getting Your Money's Worth?
Value can vary widely based on how the processor sets up it’s tiers and how often they raise those rates.
Tiered: Explained
PROS
- Tiered pricing is more flexible and can sometimes have lower costs than flat rate or base rate with surcharge
CONS
- Difficulty to know what cards fall into which tier which can lead to higher costs than expected.
- Many merchant service providers have the majority of cards fall into their most expensive tiers.
- Often don’t have lower rates for debit cards than credit cards which can lead to being overcharged.
- Particularly susceptible to frequent price increases
Tiered: Getting Your Money's Worth?
Value can vary widely based on how the processor sets up it’s tiers and how often they raise those rates.
Interchange Plus Pricing: Explained
Interchange Plus pricing, sometimes called Wholesale or Cost Plus pricing, takes all Interchange rates and passes them through at costs, then the payment processor adds a separate percentage fee (and often a per transaction fee) as the processor profit on the transaction.
- Example 1: Processor A offers Interchange Plus 0.30% + $0 per transaction
- Example 2: Processor B offers Interchange + 1.00% + $0.25 per transaction
Interchange Plus Pricing: Getting Your Money's Worth?
As the most transparent pricing method that also has the lowest risk to the payment processor, this is frequently the best pricing method to ask for to get consistently low rates.
Interchange Plus Pricing: Explained
On Interchange Plus pricing, the "Plus" is directly the rate at which the processor competes with any other pricing offers. For example, on Interchange + 0.30% + $0 per transaction, the processor passes through direct Interchange and then makes a flat 0.30%, or $30 for every $10,000 processed.
Interchange Plus Pricing: Getting Your Money's Worth?
As the most transparent pricing method that also has the lowest risk to the payment processor, this is frequently the best pricing method to ask for to get consistently low rates.
Interchange Plus Pricing: Explained
PROS
- The most transparent pricing method.
- Easiest to get a good deal due to having the least risk to the payment processor.
- Gives businesses the full benefit of using best practices to reduce Interchange.
- Easiest pricing method to get long-term rates from the payment processor (can vary greatly between payment providers) costs.
CONS
- Statements can be very long and filled with industry jargon.
- Some processors add in hard to find surcharges so that you’re not actually getting this type of pricing, but Interchange Plus with Surcharges…
Interchange Plus Pricing: Getting Your Money's Worth?
As the most transparent pricing method that also has the lowest risk to the payment processor, this is frequently the best pricing method to ask for to get consistently low rates.
Interchange Plus Membership Fees: Explained
Interchange Plus Membership pricing takes all Interchange rates and passes them through at costs, then the payment processor usually adds a small per transaction fee and a large monthly membership fee.
- Example 1: Processor Offers Interchange Plus 0% + $0.10 per transaction + $199 Monthly Membership Fee
- Example 2: Processor B Offers Interchange Plus 0% + $0.08 per transaction + $299 Monthly Service Fee
Interchange Plus Membership Fees: Getting Your Money's Worth?
This can be a good deal or really expensive method for processing depending on your monthly membership fee vs dollar processed. Unfortunately, processors rarely include all fees on one statement to be able to see the full value.
Interchange Plus Membership Fees: Explained
While the per transaction fee probably offsets the processor's cost to run the payment, the real profit is in charging the large monthly membership fee. Instead of earning their profit as a percentage, the membership costs are where they earn their profit, usually with higher membership fees the larger the processing volume.
Interchange Plus Membership Fees: Getting Your Money's Worth?
This can be a good deal or really expensive method for processing depending on your monthly membership fee vs dollar processed. Unfortunately, processors rarely include all fees on one statement to be able to see the full value.
Interchange Plus Membership Fees: Explained
PROS
- Passes through Interchange/Assessments at cost.
- Gives businesses the benefit of following best practices to update Interchange.
CONS
- Can be hard to know the actual rate you pay because the total costs don’t break down the same every month if you have a different monthly volumes.
- The monthly fee is added separately and doesn’t show up on the credit card processing statement, making it harder to track total cost.
- Can have different pricing structures for different volumes, so if your business grows suddenly you can pay much more expensive monthly costs.
- Monthly membership cost may increase substantially over time. Some providers that offered this at $49 per month a few years ago now have $99 per month as their cheapest membership.
- Some providers of this processing still have several large additional monthly fees on accounts.
Interchange Plus Membership Fees: Getting Your Money's Worth?
This can be a good deal or really expensive method for processing depending on your monthly membership fee vs dollar processed. Unfortunately, processors rarely include all fees on one statement to be able to see the full value.
Interchange Plus With Surcharge: Explained
At first glance, you would appear to be getting Interchange Plus pricing, however, the processor is adding in surcharges to some Interchange fees or other card brand fees that are normally passed through at cost. Sometimes, there are multiple fees that they have invented to boost their profit margin.
- Example 1: Processor A offers Interchange Plus 0.10% + $0.25 per transaction but has a Settlement Funding Fee that is an additional 1.00% + $0.25 per transaction on every card
- Example 2: Processor B offers Interchange Plus 0.45% + $0.15 per transaction; however they also have a “Processor Risk Fee” that adds an additional 0.75% on most cards taken
Interchange Plus With Surcharge: Getting Your Money's Worth?
You should avoid this pricing since the it’s regularly one of the most expensive options and those additional fees can be hard to spot.
Interchange Plus With Surcharge: Explained
Not only does the processor make their profits on the "plus" that they charge above Interchange, but also the surcharged fees and creative fees that they create to boost their profit margin.
Interchange Plus With Surcharge: Getting Your Money's Worth?
This can be a good deal or really expensive method for processing depending on your monthly membership fee vs dollar processed. Unfortunately, processors rarely include all fees on one statement to be able to see the full value.
Interchange Plus With Surcharge: Explained
PROS
None
CONS
- Cost can be very hard to spot.
- These surcharges, despite not being tied to actual costs are sometimes impossible to negotiate away from processors that use them heavily.
- Rate increases are almost always added into the hard to identify surcharges.
Interchange Plus With Surcharge: Getting Your Money's Worth?
You should avoid this pricing since the it’s regularly one of the most expensive options and those additional fees can be hard to spot.
Customer Surcharge: Explained
Be Careful: Not all card surcharging programs actually comply with card brand regulations and there can be substantial penalties for surcharging incorrectly.
On credit cards, the system automatically adds a surcharge that the patient pays as an extra fee on the transaction to offset the costs paid on the transaction. On debit cards (which the system automatically detects) the merchant still pays a fee since not allowed to surcharge on debit.
- Example 1: Processor A: Credit cards surcharged at 3%, so customer pays processing costs in additional fee. Debit cards run at rate of 1.5% paid by merchant
- Example 2: Processor B: All credit and debit cards run at a “Cash Discount” rate of 3% more because as a non-cash payment it doesn’t receive the cash discount price.
- Warning: This pricing is not compliant with card brand regulations due to surcharge on debit
Customer Surcharge: Getting Your Money's Worth?
If you were to raise your listed prices 3% instead of adding it as an additional fee, you’d likely have fewer angry customers and you would keep the additional profit instead of your merchant service provider.
Customer Surcharge: Explained
Similar to flat rate pricing, because the processor is charging expensive rates on both credit and debit cards, they generally are making a very lage profit margin per transaction. In addition to this, merchant service providers offering this pricing also tend to have very expensive monthly fees.
Customer Surcharge: Getting Your Money's Worth?
If you were to raise your listed prices 3% instead of adding it as an additional fee, you’d likely have fewer angry customers and you would keep the additional profit instead of your merchant service provider.
Customer Surcharge: Explained
PROS
- Removes a fee that the office pays and passes it on to the customer.
- Relatively simple pricing similar to flat rate, at least in theory…
CONS
- Can significantly damage relationship with your clients and increase client attrition and negative online reviews.
- Complicated Regulatory Structure.
- In industries with larger than average potential bills for services, like dental and medical, this can be a very significant additional cost.
- Certain Types of Payments, like Corporate Cards (for example Insurance Payments) will not accept a surcharge.
- Some HSA/FLEX spending cards will not get an approval if a surcharge is added.
- Can drastically increase accounts receivable often people will ask to come back with another payment method to avoid surcharge.
- Very profitable for the credit card processor, which is why this is pushed so aggressively by some companies.
Customer Surcharge: Getting Your Money's Worth?
If you were to raise your listed prices 3% instead of adding it as an additional fee, you’d likely have fewer angry customers and you would keep the additional profit instead of your merchant service provider.
It’s Not About One Rate,
It’s About Your Overall Cost
Best Card always recommends you ask for Interchange Plus pricing. Interchange Plus is the most transparent option, and that transparency allows for consistently lower costs. We’re not the only one – industry professionals and large corporations routinely negotiate exclusively for Interchange Plus rates.
When looking at your monthly billing statement or evaluating credit card processing offers, it’s easy to get overwhelmed by the number of rates and fees. If last month your total bill was $355 and you ran $10,000 in payments, simply divide $355 by $10,000 for an effective rate of 3.55%. This is called your effective rate.
To find your effective rate, simply divide the total amount paid in ALL fees by the total amount that you ran in credit card sales.
For Example: If last month your total bill was $355.00 and you ran $10,000 in payments, then your effective rate would be 3.55%.
As a dental office, your goal should be to pay around 2.00-2.20%.
As a dental office, your goal should be to pay around 2.00-2.20%.
As we mentioned before, some processors are very aggressive about raising rates after you sign up. Checking your effective rate regularly is the best way to make sure you’re not getting taken advantage of.
7 tips to Minimize Your Credit Card Processing Fees
Phil Nieto
President of Best Card
02 May
It’s Not About One Rate,
It’s About Your Overall Cost
Best Card always recommends you ask for Interchange Plus pricing. Interchange Plus is the most transparent option, and that transparency allows for consistently lower costs. We’re not the only one – industry professionals and large corporations routinely negotiate exclusively for Interchange Plus rates.
When looking at your monthly billing statement or evaluating credit card processing offers, it’s easy to get overwhelmed by the number of rates and fees. If last month your total bill was $355 and you ran $10,000 in payments, simply divide $355 by $10,000 for an effective rate of 3.55%. This is called your effective rate.
To find your effective rate, simply divide the total amount paid in ALL fees by the total amount that you ran in credit card sales.
For Example: If last month your total bill was $355.00 and you ran $10,000 in payments, then your effective rate would be 3.55%.
As a dental office, your goal should be to pay around 2.00-2.20%.
As a dental office, your goal should be to pay around 2.00-2.20%.
As we mentioned before, some processors are very aggressive about raising rates after you sign up. Checking your effective rate regularly is the best way to make sure you’re not getting taken advantage of.
Phil Nieto
President of Best Card
02 May
The Skeleton in the Closet :
Rate Increases
Unfortunately, negotiating great rates is only half the battle as many credit card processors regularly increase their rates and fees above what was agreed to on the initial contract. Great rates you were able to negotiate a year ago can be very expensive now.
Interchange and Assessment costs are adjusted by the card brands every April and October. While those price changes are usually insignificant, many merchant service providers use this as an opportunity to increase their rates, sometimes drastically.
For payments providers, raising rates is easy and profitable. As long as they give 30 days’ advanced notice, a processor can increase rates to whatever they choose whenever they choose. In fact, many processors raise their costs multiple times per year simply hoping that their clients don’t notice the confusingly worded fine print increase notices.
It’s easy to get competitive rates for a couple of months, what really matters is what you’re paying long term. Because there are so many sneaky ways for processors to increase costs, working with a merchant services provider you can trust is very, very important.
The Bottom Line
Ask for
Interchange Plus pricing.
Interchange Plus pricing.
Check your Effective Rate regularly for price increases.
Work with a payment processor
you trust.
Best Card was originally created as a member benefit program by the Colorado Dental Association to help their members who were frequently complaining about merchant services being one of the worst offenders for taking advantage of their practice. We take pride in keeping our costs consistently low and helping both our clients and potential clients understand their fees. A phone call to Best Card will always be answered by a friendly, knowledgeable team member who is ready to help.