If you’ve started doing research online for how to select a credit card processing company, you’ve probably read articles touting one type of payment structure over another. The most common articles typically tout “interchange plus” over “tiered,” or a “zero markup membership” structure over anything else that charges you a percentage over the interchange rate. What you won’t find, however, is an actual breakdown of the costs to the merchant under these three rates… until now.
In this article, we’ve created a case study that breaks down what the merchant actually pays under these three payment structures so that you can see, in black and white, which is best. (Spoiler alert: they’re all basically the same, and the hooting and hollering about one method over another is just sales tactics).
We did the math!
The Setup:
To make this as real as possible, we use actual pricing from three popular credit card processing companies and apply that pricing to a hypothetical typical small-ish business with normal processing volume, transaction size, and transaction breakdown for a small brick and mortar business.
In doing so, you can see how each of these three merchant services companies structure their pricing in radically different ways, each giving the impression that they are cheaper than their competitors if you focus on the part of the pricing that that company touts. What we conclude, however, if you look at the only pricing metric that most merchants actually care about, the total amount they pay out of pocket, the results are rather surprising.
Hypothetical Business: ABC Store
Let’s take a hypothetical small business that is shopping for merchant services, and call them ABC Store. For the purposes of this hypothetical, let’s assume the following:
Our Hypothetical Business Owner of ABC Store
- $10,000 in card transactions per month,
- $50 average transaction size
- 200 transactions a month with 1 chargeback per month
ABC Store’s Transaction Breakdown:
- 25% Debit Card Transactions
- 10% Qualified (e.g. Non-Rewards Credit Cards that are Swiped)
- 40% Mid-Qualified (e.g. Airline Miles Credit Card that is Swiped)
- 25% Non-Qualified (e.g. Airline Miles Card via Online, or AMEX)
ABC Store’s Transaction Form:
- 15% Manually Keyed In or By Phone
- 75% Wired Terminal
- 10% Online
Types of Billing Defined:
1) Traditional Tiered Pricing
Tiered pricing is the most common way that credit card processing companies charge merchants for transactions. Under this method, credit card processing companies bundle the hundreds of different types of transactions (each with slightly different costs) into different tiers (usually 3 or 6 tiers) and charge the merchant a fixed amount for any transaction in that tier, regardless of the credit card processor’s underlying cost.
These tiers are a construction of the merchant account companies, so the number of tiers and their names can differ from company to company. The most typical, however, is a three-tier system, with the tiers called “Qualified”, “Mid-Qualified”, and “Non-Qualified”. Thus, any credit card transaction your company made would be labeled as fitting into one of the three tiers, and for that transaction you’d be charged that tier’s rate.
The sales angle on these types of accounts is that they will select a tier as a loss leader (typically their Qualified Tier) and actually price it below the interchange rate so that they are losing money on these transactions. They then try to focus the merchants attention on how cheap this tier is, (and usually also tout lower fees), without talking about the other tiers or the requirements to get into the Qualified Tier.
2) Interchange Plus Pricing
A good way to think of this pricing structure is Cost Plus. Processors take the interchange rate (aka the rate that Visa, Mastercard or Discover charges them) and add a fixed markup for every transaction. The interchange rate for a particular credit card is set by Visa, Mastercard, Discover, AMEX, etc. and is non-negotiable. The part that is negotiable, is the markup amount (or the “Plus” part in “Interchange Plus”).
The sales pitch for these types of accounts is that you’ll know exactly how much of a markup over the interchange rate you’re paying every time, and they’ll talk about how you won’t get gouged via hidden profits in the interchange markup. They will typically make up for this cheaper rate by charging a higher per transaction fee, or just make it up via fees.
3) Membership Based Pricing
This is the newest form of pricing, and the pitch is that you will pay a flat membership fee each year (usually a few hundred dollars) and then get to pay absolutely no markup over the interchange rate. It appeals to people’s sense that they want fee transparency.
What they won’t talk about, however, is that they typically mark up the per transaction fee more than other companies, and add another layer of fees to transactions in order to make up for the lower percentage charged per transaction.
The Fees:
When shopping for cheap merchant account services, the important number to merchants is how much overall they pay per year to accept a given amount of credit card transactions. That is, if they do $120,000 in credit card transactions per year, the merchant wants to keep as much of that money as possible, and pay the least amount possible in fees. He/she doesn’t really care what you call the fees, the bottom line is, how much money did he/she get to keep of the total amount they accepted in credit card charges.
Unfortunately, merchant account services providers don’t provide you with those figures, so they have to be calculated manually. The way we’ve done that, is to look at the fees by when they accrue. The groups are named in a way that should be self explanatory, Per Transaction Charges, Daily or Per Occurrence charges, Monthly or Annual, and One-Time Charges. We’ve included the stated rate for each Merchant Account Services Provider, and how much that means the actual merchant is paying for that particular fee. Then we’ve totaled the fees up in each sub-section, and finally, altogether so that you can see how much our hypothetical merchant Sample Small Retail Merchant is paying under each payment type.
Per Transaction & Daily Charges
In the two tables below you’ll see a breakdown of the per transaction (aka per swipe) charges under each pricing model, as well as the daily charges under each pricing model.
Per Transaction Charges:
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Daily or Per Occurrence Charges:
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Monthly & One-Time Charges
In these two tables you’ll see a breakdown of the monthly charges under each pricing model, as well as any one-time fees under each pricing model.
Monthly or Annual Charges:
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One-Time Charges
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Conclusion:
As you can see as you look through the data, they all end up about the same for what truly matters, the total amount that the merchant has to pay to accept a fixed volume of credit card transactions (in this case $10,000 per month).
Are there some differences in the total price? Yes. But the overall price differences between the three offers analyzed above have nothing to do with the type of payment structure, and everything to do with the specifics of the deal that a particular offer contains. That is to say, any of these three payment structures can be a great or a terrible overall deal depending on the specific percentages charges, fees applicable, etc.
Implications:
So, what we’ve learned is that you can’t say that any pricing model is universally best, or even that one tends to be better or worse than others on average. That doesn’t mean that there aren’t great or awful offers out there, just that you have to be sophisticated in the way that you shop.
By applying the offers you receive in the way we did above, you can get a more accurate apples to apples comparison.
Notes on the Pricing Used:
- Is this retail pricing, and if so, why didn’t you use the discounted pricing you guys get for your customers?
- Why didn’t we “out” the companies listed here?
Two reasons, the first is that credit card processing companies hate having their pricing published and hire lawyers to send out nasty letters when we do so without their permission. As you can imagine, nobody is going to give you permission to display their pricing and explain why its misleading. The second, is that these practices are so ubiquitous that it doesn’t really matter which processor this is, because almost every processor is doing it. That’s why, again, we don’t think that there’s a single “great company” or a “great pricing structure” that you can simply sign up for. Rather, we believe you have to aggressively negotiate with multiple companies using merchants’ combined leverage in order to improve your pricing.
Yes, these are retail pricing quotes, meaning we didn’t try to negotiate any of them down from the first offer we were provided. Our thinking was that if an individual merchant did try to negotiate these prices, they’d probably get around the same discount from all of them, thus the conclusion that they’re all end up costing the merchant about the same still applies.
While it’s true that we negotiate regularly to obtain better pricing from credit card processors (which is available to customers through our website), we only are able to do so successfully because we can offer them the prospect of hundreds of new customers, which is something individual merchants simply don’t have. While we think that negotiating rates by using the leverage of volume is one of the only ways to actually get better pricing instead of just having a company pretend to give you better pricing by reshuffling the fee structure, for the vast majority of businesses, it’s simply impossible, thus for all those reasons, we didn’t think including non-retail rates was appropriate for this article.
