Low Merchant Rates Don't Need To Make You Crazy

 March 2007

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Have you received one of these postcards in the mail lately? The ones that advertise cheap, low merchant account rates, down to 1.10%, with no monthly minimum, no batch fees, no authorization fees, no cancellation fees? Sound familiar? It's almost too good to be true.

The confusion really comes when you call to compare merchant account fees with a well known  credit card processing company or even your bank. That's when you find 1.79% + .25 cents, and those low merchant account rates sound really tempting. What are you to believe? Here's the flat out, absolute truth!  If it sounds too good to be true, it usually is.

Now, I could get into a long winded explanation of how the credit card processing industry needs more advertising regulations for consistency. But, since talking about it isn't an immediate solution. Let me give you the facts about advertisements with low merchant account rates.

The fact is, just like your business, the Credit Card Processing Companies buy Visa & Mastercard services at wholesale prices. These costs are wholesale and standard for every processing company. They all must buy it at the same price. This pricing is called the Interchange Rate. At these processing companies, there are financial analysts hired to formulate pricing plans,  based on Interchange Rates, that will keep these companies profitable. The numbers they have to work with are values in the pennies. And, because every business is different, there will never be a standard pricing plan for everyone - No matter what you read. Therefore, processing companies develop Pricing Grids that help to fit business average ticket sales, with different credit card and debit card types, to cover the fees, monthly minimums, authorization fees...etc., charged (wholesale costs) by the Visa & Mastercard bank networks.

What this means to you is this. Because all Merchant Account Services have set wholesale costs, and since they all need to remain profitable, they will find a way to charge you with fees to cover the costs - even if they claim they won't.  These hidden fees need to pay for Monthly Minimums, Authorization & Batch Fees, Discounts, Cancellation Fees. So, even if they lower one fee, they must make it up by increasing other fees in the contract to make a profit. Even if a company claims to not charge you these fees, they must include fees in your merchant account to cover these costs. Otherwise, they would go out of business. So, don't believe everything you read when you're told you won't be charged certain fees.

So What Should You Do?

First, let me stress an important point. Anytime you see low a rate below 1.59%, don't believe you're getting a deal. Any rate below 1.59% will ONLY be for debit Visa & Mastercard swiped sales. Any offer that claims otherwise is false. Also, if you key in your card sales, don't believe your getting a great deal if you're offered a rate below 2.39%.  

So, what rate is real? Again, costs must be paid. Therefore, what you should really be paying in fees should be similar to a seesaw effect. When your discount rate goes up, your authorization/batch fee should go down. Conversely, the opposite should happen when you have a lower discount rate, the authorization/batch fee should go up.  This should occur in your Qualified Rates section. If not, expect fees to increase in the Mid Qualifed and Non Qualfied section. For an explanation of the three sections of the Discount Rate, read the article Credit Card Processing Lies. See the example below to see what I mean.

Working with a sliding scale you and the merchant account representative can price your credit card and debit transactions correctly, without needing to play with the numbers that will eventually cost you more in backend fees (mid-qualified fees and non-qualified fees).  The reasons why one business may get 1.89% and another is offered 1.59% is based on the average ticket, volume and the business type. For example, if a restaurant has an average ticket of $10, they are better off with a high transaction fee and lower authorization/batch fee.  (Example: 1.89% + .15 cents) On the other hand an electrical contractor will likely have a high ticket average. They therefore are better off with a lower discount rate and higher authorization fee, (Example: 1.77% + .30 cents) because they will have a low volume of credit card and debit transactions. Pricing a business this way saves them money up front. This is how to correctly pay for merchant services.

How Much Money Will $0.002 Really Buy You These Days?

The problems most businesses run into comes when they get suckered into unrealistic rates, like the 1.39% instead of 1.59%. In this situation, companies will sneak in other higher fees elsewhere to cover their costs when they modify the Qualified Fees section. 9 times out of 10, low priced advertisements cost you more because they will increase fees elsewhere. Therefore, stick to paying your fees upfront, not on the backend. Don't go with a low price because it looks good in the advertisement. Watch out for what your not being told.  The real differences you are trying to haggle over are values less than a penny. Think about it, would you rather lose your business money, simply because you wanted to save .002 of a penny?  

Here is when you should haggle over 1.39%. That rate is something to ask for when your dealing with swiped debit card rates only. Depending on your business type, you can get that rate, but only for debit. Again, it all depends on other factors, such as what you priced your swiped rate at or your keyed rate. Keep in mind, these advertised rates are hooks. They are meant to capture your attention. It's like selling hamburgers for 1955 $0.10 prices. Once they get you in the door, they up-charge you on the price of fries.  Bottom line, don't believe everything you read. You can't buy anything for $0.002 these days.

If you need help saving more money while accepting credit cards, give my office a call. My name is Ralph Prado.  To learn more about how to buy a credit card machines or open a merchant account correctly contact me at 1 (888) 604-3443. My details are listed below.

Ralph Prado is a Credit Card Processing Expert with over 20 years of business experience. His expertise is in providing merchant accounts and credit card equipment. Visit my website today at http://www.creditmachines.com