This is a guest article written by David Goodale 

You want lower processing rates. Every merchant wants to feel that they have wrung every last bit of savings that they possibly could out of their processor. Unfortunately, this challenge is harder to complete than may appear. In fact, because of the complexity of merchant industry pricing it’s the case that even after an apparently successfully negotiation you could still be significantly overpaying on your processing fees.

I should point out before continuing that most processors have a good relationship with their clients. This article is intended to give you the knowledge needed to negotiate your payment processing rates more successfully. Nothing herein should be construed to demonstrate an “us vs. them” way of looking at the payments industry. While there are both good eggs and bad eggs in the payments business, like in any industry, most payment processors highly value their clients and are run by good, honest people. I think this is especially important to point out, seeing as I work in the payments business!

What I hope to provide to you in this discussion is the knowledge needed to help determine if you found a good solution, and how to negotiate a good value for your company. If you approach the discussion the right way you will be able to walk away with a significantly better deal than if you go in without proper preparation.

You are about to get educated on the topic of interchange.

A significant part of what we will look at will be an analysis of how to conduct a effective negotiation when it comes to the rates. However, when you walk into a negotiation you must first be educated on the topic of discussion in order to be an effective negotiator. In order to do this, you must first understand the costs that are incurred by the processor when performing a transaction. If you are able to empathize with your processor and understand their costs, then you will be able to know when and where to push for more, and when to acquiesce and move onto the next point.

Let’s start by setting on-target expectations that will net us the result we are going for.

Beware impossibly low pricing and you will avoid getting taken advantage of.

If you go in like a bull in a china shop with the intention of finding absolute rock-bottom rates you are all too likely to find a fast and loose salesperson at a disreputable company that will gladly “meet” your demands. Unfortunately, if you do this you will end up with a processor that promises much and delivers little. Let’s get this point out of the way: there are many good and honest merchant account providers that provide good service and great value. But there are also less scrupulous processors that employ misleading pricing tactics. Search engines like Google and social media like Facebook makes these processors easier than ever to find. Researching the reputation and searching for complaints of each of your potential processors is always a good starting point when beginning your research. However, reputational research only gets you so far. We are now ready to start digging into the facts that will help you find a good solution and negotiate the lowest rate for your business.

Understanding Interchange

Here is an important fact: all payment processors receive a cost from Visa and MasterCard when processing a transaction. This cost is the exact same for each processor within that region. This cost is called interchange.

Regions are broken down by geographical location: USA, Canada, Europe, etc. We don’t need to concentrate on the territories themselves, but you should simply understand that every payment processor in Canada receives the same interchange cost from Visa & MasterCard Canada. Every payment processor in the USA receives the same interchange cost from Visa and MasterCard USA. Every processors in the UK receives the same interchange cost from Visa and MasterCard Europe, etc.

Interchange is entirely worthy of it’s own discussion. In fact, it’s a topic worthy of a series of articles and you still wouldn’t know everything after reading them. Fortunately, the concepts of interchange at a higher level are quite simple, and you don’t have to be an expert on interchange in order to negotiate effectively.

As we have just discussed above, interchange costs vary by region. Some regions have more complicated pricing tables than others. For example, interchange is the USA is more complicated than interchange in Canada. For this reason I am going to reference Canadian interchange for the purpose of this discussion.

The first thing to be aware of in regards to interchange is that it fluctuates. The interchange cost the payment processor incurs for each transaction varies depending on several criteria:

  • How is this transaction being processed? If a credit card is physically presented the interchange cost is lower than if the card is not physically present. IE: interchange is slightly less expensive for retail (POS) transactions than it is for e-commerce transactions.
  • The type of card used causes the rate to fluctuate. Rewards cards and corporate cards are more expensive to process than basic cards. For example, an airmiles card will cost more to process (have a higher interchange cost) than a basic Visa card.
  • The location of the cardholder can cause the rate to fluctuate. If you are a US based merchant, and sell to a customer located in the USA (more specifically, a customer who uses a MasterCard that was issued by a US based bank) the interchange cost is lower than it is if you were to process a MasterCard issued by a European bank. That is because if you do a cross-border or foreign transaction there is an extra cost. Let’s be clear on this example though: if you were a UK based merchant, and your business was in London then it would not have cost more to process a European issued credit card, because for you it would have counted as domestic. Foreign transaction fees only apply when you process a credit card that was issued by a bank located outside of your country.

The above gives us a simple but good understanding of what criteria cause interchange to fluctuate. However, I’m sure that you actually want to know how much it costs. This is where I must more directly address the point I made above about the complexity of interchange – Interchange is complicated because each region has it’s own costs for processing each different card type. It would be far outside the scope of this article to try to build a global interchange table, and it would also be too complicated for most merchants to digest. Fortunately, we don’t have to because even though it ranges, interchange is generally similar in each of the different territories. I am able to give you a concrete point of reference for the costs. Below you will find a simplified breakdown of interchange costs from Visa and MasterCard in Canada, as of July 2012.

Interchange Pricing Reference Sheet

1.54%

  • Interchange for a swiped Visa card (point of sale transaction)

1.65%

  • interchange for a visa e-commerce transaction (the card is not physically present)

1.59%

  • interchange for a swiped MasterCard (point of sale transaction)

1.72%

  • interchange for a MasterCard e-commerce transaction (the card is not physically present)

0.20%

  • additional cost for premium/airmiles/rewards Visa cards

0.35%

  • additional cost for corporate Visa cards

This table is incomplete. It is intended to give a breakdown at an overview level of interchange costs. As you can see that would be beyond the scope of this article. A more in-depth explanation of interchange can be found here.

Keep in mind that the goal of understanding interchange is to keep it in mind so you can spot when a less-scrupulous sales person may be leading you on. I can now get to the core of this point that I have been framing.

Important point: It’s unfortunately true that some processors have misleading pricing. It’s easy to spot misleading pricing if you understand interchange costs. Follow this logic: you understand that cost to the processor for e-commerce transactions ranges from about 1.65% to 2.13%. You understand that every processor receives the same cost from Visa and MasterCard. Every processor is in business to generate positive revenue and must certainly (at least) cover costs. The point? If someone offers pricing that looks to good to be true, that’s because it is entirely too good to be true. You won’t get what you are being promised. It might be hard to spot this if you didn’t understand interchange costs, but with a solid grasp of interchange you can spot if someone is leading you on. The next time someone quotes you a rate of 1.49% with “no hidden fees” you can ask about the additional card types, foreign transactions, and if they are adding additional surcharges if premium cards are used. Even better still, if you get a quote like this the best route is to thank the person for their time, get off the phone, and promptly chuck their proposal into the bin and move onto the next processor.

Great, I now have some understanding costs to the processor, but how do I know what is fair for me to pay? I mean, how do I make a realistic request when asking for a rate?

You have a solid understanding of costs to the processor. You know they are in business to make money, but at the same time you don’t want to make an unreasonable demand. How do you spin the negotiation in your favor?

This is where the discussion gets more complicated. First, understand that many processors don’t like to disclose margins to their clients. Because of this there are several ways to provide a quotation to a merchant. We’ll look at the most common pricing models.

Pricing method

1: Qualified, mid-qualified and non-qualified.

This is the type of pricing you want to avoid. I made the point above that some processors may quote misleading pricing. You might have been wondering in the back of your mind – “How can someone quote a rate of 1.49% and then not deliver upon this promose?“ You are about to find out how this happens...

Say a processor quotes you a rate of 1.49%. (pretend for a minute you don’t know about interchange and didn’t realize this was obviously below cost for an e-commerce transaction). What happens is this:

In the T&C of the merchant agreement (which you must absolutely, positively, always read) it will specify, albeit possibly in a confusing and unclear way, different transaction scenarios. So, an unscrupulous processor could legitimately give you a rate of 1.49% every time you swiped a credit card. How often do e-commerce merchants swipe credit cards? Never! So you would never actually be able to pay this fee. On the pricing schedule this is usually written in an obscure way called “qualified, mid-qualified and non-qualified” rates. So you might pay 1.49% for qualified transactions (swiped – which would never happen), 2.49% for mid-qualified (e-commerce basic Visa and MasterCard) and 3.49% for non-qualified (e-commerce transactions where a rewards card was used). That appealing 1.49% just turned into 3.49%!

Some particularly unethical salespeople don’t even mention card types and breakdowns. If the representative at your prospective processor doesn’t mention card types or interchange it’s a major sign that you might want to move onto the next processor. You’d likely be shocked to find out how many people don’t even read the T&C of their merchant agreement (and because of this get nasty surprises when it comes to non-qualified fees). I want to really reinforce again that not all processors do this, but it’s the unethical ones that do, and this tactic I have just described is the worst one (it’s given the industry a black eye over the past several years). I generally recommend avoiding qualified / non-qualifeid type pricing models. Keep in mind that qualified / non-qualified pricing is not bad in and of itself. A lot of honest processors use this model, it’s just that it’s far less clear and harder to understand, and it can be abused by less scrupulous processors in an attempt at bait and switch pricing. The next two pricing models are much clearer and easier to understand.

2: Interchange pricing.

Interchange based pricing is the newest model of pricing, and relatively few processors have adopted it. The reason why is because it completely and transparently discloses the processor’s margins. A typical interchange quote might be ‘Interchange + 0.75%’.

Interchange + 0.75% means that the processor would take straight interchange cost for each transaction, and add on an additional 0.75% (which is the profit to the processor). So if a customer used a basic Visa card it would be 1.65% (interchange) + 0.75% (for processor) = 2.4%. If that same customer had used a rewards Visa card the rate would have been: 1.85% (interchange for rewards cards) + 0.75% = 2.6%.

As you can see this is a very honest and transparent way of pricing. Some processors do not like to disclose their margins and this why it’s offered less often. Interchange plus pricing is typically used for large merchants, although some processors will provide interchange based pricing for smaller merchants.

Keep in mind that the 0.75% figure that I used above was just a point of reference. If it’s a tiny merchant the processor may feel that a larger margin is needed, so the quote could have been interchange + 1%. If it is a massive merchant doing mega-volume a processor might reduce the fee to something very small like interchange + 0.20%.

The only downside to interchange plus pricing is that because the rate fluctuates it can make reconciliation a bit harder (because the rate per transaction is not always the same). On the plus side, it’s very easy to look at your gross trading volume, consider the margin the processor is earning, and determine in a moment exactly how much money your processing is earning for the service you are receiving.

3: Flat pricing.

Every e-commerce merchant in Canada used to be on flat pricing. In fact, interchange in Canada used to be a flat rate for e-commerce sales. Variable pricing was always more common in a POS (retail scenario) and particularly in the USA. Here is the meat of the argument: flat rates are not popular because they are often perceived to be more expensive (even though they are often not). Pretend you had not read this article. Pretend you made two calls and received two quotes. One for 1.49%, and one for 3%. Which one sounds better to you? Of course, you now understand that the one for 1.49% is almost certainly a qualified rate, that you almost certainly would never actually pay. However, many merchants don’t realize this. Flat pricing is simple. Flat pricing is honest. Flat pricing is by a long way the easiest type to read on a statement and reconcile. However, because of pricing tactics in the industry it’s often undervalued and overlooked. For the sake of mentioning it, interchange plus pricing would usually be a little bit less expensive because the processor can pass through the savings when basic cards are used. When quoting flat rates the processor has to estimate conservatively. They can’t quote too low on a flat rate because a merchant may process a large amount of rewards and international cards. If that happened they could take a loss. Flat rates are usually slightly higher than interchange based quotes (depends on the processor), but are without any doubt the most crystal clear and easy to understand.

I understand costs, I understand the pricing models used to price merchants. Now, please help me negotiate the best rate possible!

You now have enough information to walk into the negotiation fully armed and knowledgeable. It’s time to make some demands <ahem> requests when it comes to the rates. How do you arrive at the actual number?

First, more than anything else, a rate is determined by transaction volume. How much money does Amazon.com process per year in credit card sales? I’m not certain of the answer, but it is definitely a high transaction volume. If tons of money is being processed then the processor is usually willing to go thinner on the margin. This is where the appetite for new business and flexibility on rate will range from processor to processor. As a rule of thumb expect startups to pay about 1% over interchange or 3% flat (roughly) per transaction. It’s entirely possible to find a processor that may go lower. However, at this point I will briefly point out that for smaller businesses a bit of savings on a rate amounts to little (because the volumes are small) and assistance with support and getting live counts for a lot. This discussion is focused on how to get the lowest rate possible, but keep in mind that if a processor goes super thin on a margin, especially for a support- intensive startup bussiness, then what type of support can they afford to offer? There are lots of salesmanship answers to this question, but in reality think of it this way: if you earned $30/month from a client, how much time could you dedicate to helping them each month? It is important to focus on rates but to also consider the reputation for support and the relationship you have with your representative at each of your prospecting processing vendors.

Use your trading history

Let’s get this discussion back on track. If you have processed credit cards previously (as long as your account was in good standing without rampant chargebacks), it means you should receive preferential pricing.

When talking to a prospective processor let them know that you have a track record of success in your industry. Tell them how much money you are processing and tell them that processing statements are available. If a merchant is processing over $10,000 per month and has an active trading history they should be able to negotiate a lower rate than whatever the standard advertised rate is fairly easily. For a very rough point of reference, I would expect a business processing about $10,000 per month to be quoted in the range of interchange +0.75%. Again, this is totally dependant on the processor. The rule of thumb is that the rate gets lower as volumes get bigger – with a few exceptions.

Product risk also impacts the rate you are able to negotiate.

Low rates only matter if you can get approved to use the service. If you sell a high risk product you might not get approved at all. For example, travel accounts are very high risk in the payments business. If you operate a travel company you might end up paying a really high rate because otherwise no processor will approve you. A short explanation: processors are liable for chargebacks. They have the potential to lose money if a merchant processes transactions and is unable to fulfill the orders and can’t return the funds to the cardholder. That is why some types of accounts are higher risk and often pay higher rates.

Volumes can eventually shoot you in the foot too. Some businesses are so large (think of a big airline that processes hundreds of millions of dollars via credit card) that if something were to go wrong with them it could bring the processor to it’s knees. This is the opposite situation where too much volume can again create chargeback risk, and can impact credit card processing rates. This would only apply to huge merchants, but is still an important concept to understand.

Research your processor.

Did you know that some processors are more lenient than others? That may be obvious, but consider that statement more carefully. Some processors might approve multi-level marketing, travel and long distance telephone services with no problem at all. But they absolutely, positively cannot provide support for web hosting businesses. There might be another processor with a reputation for being a bit more expensive, but they might actually have an appetite for web hosting businesses because they have a big portfolio of web hosting clients that they are very successful with.

The point I am making is that you should research your processor not only for the (very obvious reason) reason finding out if they have a reputation for honesty and integrity, but also because if you have a harder to place type of account you need to find the right processor. You need a processor that is good at supporting your type of business, and if you find the right solution the rate will likely be a good value when you do.

As a last note, if you have a hard to place or higher risk type of account you may want to work with a merchant account provider that works with several different banks. That is because this provider will be able to route you to the bank that is historically most receptive to servicing merchants in your industry.

Other Fees

If you are doing very small transactions (less than $10) the per transaction fee is going to play as important a role as the discount rate, if not more. Some merchants become blinded by the discount rate. The discount rate is typically the most significant cost to consider, but it’s not the only component that matters. Don’t forget about monthly fees, monthly minimums, per transaction fees, settlement fees, and any other fees that you may see on your merchant agreement.

For example, make certain that the per transaction fee only applies once when processing a transaction and not twice. (Some processors charge once for authorization, once for settlement). Make sure that there are no settlement fees or that if there are you are comfortable with them. Make sure there are no statement fees or other fees hiding in the agreement.

It is a classic trick to provide many different breakdowns such as monthly fee, gateway fee, fraud screening fees, statement fees, monthly minimums, etc – all in an attempt to make the costs look low. Add everything together (and be accurate!) – it’s the only way to get to the true bottom line.

Summary

As a business owner you will have to set your own expectation, shop around and see what offers you receive. Leverage your expertise, do your research, and walk into the conversation looking for a business partner. Your payment processor ultimately does become a partner in the success of your business. When speaking to sales people keep the reputation that you have researched in mind, and also strongly trust your gut instinct when speaking with your sales representative. If someone is thorough, talks about interchange, seems transparent and is honest and open with you then you have a recipe for success. At that point it’s down to making your case and negotiating the best rate possible. Shop around, vet each offer carefully, keep in mind what you have learned in this article, and you will end up with a payment processing solution that you can feel good about.

This article was written by Daivd Goodale, CEO at Merchant Accounts.caDavid has over 10 years of expertise in international, multi-currency and cross-border ecommerce payments.

Merchant Accounts.ca is a leading Canadian provider of credit card processing, and specializes in multi-currency transaction processing. They are able to help businesses accept credit cards online in many different currencies such as CAD, USD, GBP, EUR, AUD and JPY. More information can be found on the Merchant Accounts.ca website.