Where does the money go?
Every time a merchant swipes or keys in a credit or debit card number, he pays a processing fee on that transaction.
It is important to find out exactly how much a merchant pays to process each of his transactions in order to avoid costly and long-lasting mistakes.
The cost of each transaction processed can be divided into three distinct parts, and they are as follows:
Interchange Fees – The classical definition of interchange is known as, “the fee paid by the acquiring bank to the issuing bank to compensate for transaction-related costs.” In other words, the interchange fee is the non-negotiable cost paid by the merchant for each transaction processed on his behalf. That cost covers the fee charged by the issuing bank of a particular card. There are now over 400 different categories of cards, and each one has its interchange fee.
“A Vista CPS Retail Rewards 1” would be an example of an interchange fee paid to the issuing bank or financial institution. The rate in April of 2016 was 1.65% + $0.10 per swiped transaction.
On a $50 transaction paid by a consumer with a Visa Consumer Rewards Card a merchant would pay an interchange fee of:
|Transaction amount||Swiped or Keyed||Interchange Fee – Percentage||Interchange Fee – Transaction Fee||Fee paid by the Merchant|
|$50.00||Swiped||1.65%||+ 0.10 cents||$.825 c + $0.10 c = $0.925 cents|
Dues and Assessments Fees – Also known as the fee charged by the Card Brands or Networks, dues and assessments are non-negotiable fees paid by the merchant every time a merchant keys or swipes a VISA, MasterCard or Discover card on his Point of Sales system or credit card terminal. These fees are paid directly to the networks and are not associated with the issuing banks. As of April of 2013 the dues and assessments fees for the major card brands are as follows:
Percent of Volume: 0.11%
Transaction Fee: $0.0195
Percent of Volume: 0.11%
Transaction Fee: $0.0185
Percent of Volume: 0.105%
Transaction Fee: $0.0185
|Transaction Amount||Visa Dues and Assessments||Total Paid by the Merchant|
|$50.00||$50 x 0.0011 + 0.0195 cents||$0.055 + 0.1195 = $0.07 cents|
The fees paid above are the non-negotiable part (interchange, dues and assessments) of each transaction processed by a merchant. Regardless of whom you processes your credit and debit card transactions with, the cost will be the same. Those fees are dictated by the card associations and financial institutions. TekkPay or any other processor out there has no influence over them. Those fees are simply transferred over to the issuing bank and card brand involved in a particular transaction. Therefore in a $50 transaction a merchant will pay:
|Transaction Amount||Interchange Fee||Visa Dues and Assessments||Total Paid by the Merchant|
|$50.00||$0.925 cents||$0.07 cents||$0.995 cents|
Processor’s Fee – Also known as Interchange Plus the processor’s fee or markup is the only of the three components in the cost of each transaction that can vary and is often negotiable between a merchant and its processor. Processors often use three different pricing models to attract merchants to process transactions with them. Without a clear explanation of how these pricing models work a merchant can end up paying a lot more than it should accept debit and credit card payments. There are three main pricing models on the market, and they are as follows:
Tiered Pricing – Tiered pricing is where a certain processor chooses to put a merchant on a more complicated pricing model. The interchange fees, dues and assessment and their markup is blended, and nothing is properly disclosed. Interchange rates are bucketed into 3 or 4 different categories called:
- Qualified rates – typical rate 1.94% + $0.25 cents per transaction
- Mid-qualified rates – typical rate 2.95% + $0.25 cents per transaction
- Non-qualified rates – typical rate 3.75% + $0.25 cents per transaction
In this pricing model, merchants will never find out how much they are paying on a “per transaction basis.” Since they have no idea what the three components of their per transaction cost are, merchants are often subject to constant rate increases, let alone all the other monthly costs and potential hidden fees. Processors that use this pricing model have the ability to determine what cards fall into the qualified, mid-qualified and non-qualified tiers. Based on our industry experience we have seen over 70% of a merchant’s monthly transactions fall into the mid-qualified and non-qualified tiers, and that may include debit cards as well.
Flat Fee – Also known as Billback pricing or Enhanced Billback pricing a flat fee system is considered the worst possible. Why? Because you as a merchant will certainly pay more on your overall cost especially if your sales amount or average transaction is paid with a regular debit card swiped as credit (no PIN number entered on the terminal). A common interchange fee paid by the merchant of 1.65% + $.10 cents is much lower compared to some flat rates offered by Square of 2.75% or higher.
On a $50.00 sales, a merchant would pay the following on one of these scenarios.
|Transaction Amount||Transaction cost||Total paid by the Merchant|
|Interchange Fee||$50.00||1.65% + $0.10 cents||$0.825 + $0.10 cents = $0.925 cents|
|Flat Fee Company||$50.00||2.75%||$1.375|
There is a huge difference of $0.45 cents in one single transaction. If a merchant processes 200+ of those, he will end up paying $90.00 more per month than what he should have paid. Flat fee pricing models have other fees that are usually written in the fine print of a contract and are typically not verbally disclosed by companies that offer this pricing model. Furthermore, companies that offer “flat fees” will hold your daily processing amounts longer in order to earn interest using your money as the source.
Interchange Plus Pricing – is the most transparent and convenient way to process credit and debit card transaction. Interchange plus pricing must be the only way merchant accounts are set up. With interchange plus pricing, you will always know what the interchange, dues and assessments and processor’s markup are. There are no hidden costs and no room for merchants to be overcharged or purposely misled about the fees that they are paying to process transactions. See the example bellow:
|Transaction amount||Interchange fee||Dues and Assessments||Processor Interchange Plus||Total paid by the Merchant|
|$50.00||1.65% +$0.10cents||0.11% + $0.0195 c||0.10% + $0.10 c||1.86% + $0.21c *|
|TOTAL >>>||$0.925 cents||$0.07 cents||$0.15 cents||$1.145|
*Every percentage and transaction fee charged has to be calculated off of the transaction amount of $50.00. Please keep in mind that the interchange plus pricing offered here does not represent what every merchant would be getting.
At TekkPay, we have chosen only to work with Interchange Plus Pricing as the best credit card processing pricing available on the market. To us, more transparency translates into happier customers. We strive on a daily basis to provide our merchants with the best our industry has to offer, and Interchange Plus Pricing adequately represents our intent of being transparent with our merchants from day one.