What Determines your Merchant Rate?

What Determines your Merchant Rate?

Opposing views of Interchange can be argued but it remains that small and mid-sized businesses must insist on an Interchange pricing method just as the largest merchants do in order to get the best bottom line processing costs.

There are three primary cost factors to consider:

  1. All merchant processing companies operate from the exact same Interchange, Dues, Assessment and Access fee cost. These fees are set by the card companies and consist of a percentage rate plus a per-item transaction fee.

    Interchange fees are paid by the merchant acquiring bank to the cardholder's issuing bank for processing a transaction through the system. Interchange pricing consists of a percentage rate plus a per-item transaction fee and comprises the single largest component of your rate. Interchange pricing depends on your industry category, the method by which you accept the card and the card product you accept. Interchange levels today cover specific industry accepted methods and risk. For example, card present merchants pay less than "card not present" merchants. Corporate cards carry higher Interchange than consumer cards due in part to corporate demands for more detailed reporting levels. Transactions not settled for processing electronically or not in a timely manner carry higher Interchange to cover manual processing or increased chargeback liability. Foreign cards have Interchange fees to cover currency conversion. There are special Interchange categories for emerging markets like quick service restaurants (fast food), utility billing (gas, electric, water, cable), purchasing cards, and more.

  2. Front-end processing networks charge communication fees for delivering an authorization message as well as transmission of batch settlement. These companies primarily use special dial-up 800 toll free lines, of high speed connections to perform this service, and this communication cost adds expense to each transaction. Regardless of the network or who owns it, there are fees to operate and keep this technology up 24x7x365 processing payments.

  3. Back-end processing expenses include statement reporting and mailing cost, ACH (automated clearing house) funding to the merchant's business checking account, merchant account maintenance and customer service.

It is important to remember that the difference between rate and actual merchant cost can be significant especially with a pricing structure weighted toward fees. Unlike other industries, where sales volume drives price, in the credit card industry the average transaction size drives the merchant pricing. The reason is there are more resources and therefore fees associated with processing transactions than there are for simply maintaining a merchant account.

"We are the biggest" seems to be many companies number one claim when selling merchant services. The implied benefit is that they have better cost to pass along. But now that you understand what factors drive price, you can see through this marketing hype.

"I am the bank" or "I am the processor" is another often used claim. Again, same price structures listed above, but often these organizations have higher fixed costs in overhead, salaries and fancy literature and greater pressure from their stockholders and board to increase stock price performance by increasing rates.

Work with Vantage and let us help you manage your Interchange qualifications and set your price structure to make the most of cost factors everyone must pass along to you if they are going to remain a viable company with quality service and support.