"The following article was published in several news papers and magazines"

Credit Card Processing – What is my rate?

By: Faiyaz Merchant

Every merchant asks the same question, what is my rate? To day let me explain how a lower rate may actually be a teaser rate and effectively the total processing cost ends up being higher for the merchant. The effective cost is not the rate but the total amount paid for processing verses the amount processed. For example if merchant has been charged $195.00 for transactions totaling $10,000 then effective rate is 1.95%.

Every processor has a basic cost called “Interchange Rates”. This is the cost charged by Visa and MasterCard to process the transactions. The common sense tells us that if Interchange Rate is 1.64% how can a processor charge less than that rate? The processor is making up the loss from the same merchant as some other charges. These “charges” are hidden as 3 Tier Pricing, 4 Tier Pricing, Downgrades, Bill Back, Gross-Gross Billing, Access Fees, Monthly Fees, Statement Fees, Authorization Fees, Minimum Fees, Minimum Discount, Annual Fee, Semi-Annual Fees, Compliance Fee, Security Fees, etc. etc.

Besides all the “charges” mentioned above, the most common place the charges are hidden are in the Interchange Levels. What merchants are not aware of is that there are 100 plus levels in the Interchange Rate tables and the processor is able to basket these 100 plus levels in to 3 categories. These levels are known as “Qualified”, “Mid Qualified” and “Non Qualified”. More levels the processor puts in “Non Qualified” more cost is incurred to the merchant. It is confusing even to me. Let me give an example how this works. The numbers have been kept simple for better understanding.

Processor A has rates of 1%, 2% and 3% respectively. The merchant processes $10,000 per month.

Processor B has rates of 0.75%, 2% and 3% respectively.

Which one will merchant pick? Well if it was apples to apples and all other “charges” were equal every body is going to pick Processor B.

Now comes the tricky part. Processor A has buckets set so 75% of merchant’s volume falls in Qualified, 12.5% in Mid Qualified and 12.5% in Non Qualified. Processor B has the bucket set so 50% volume falls in Qualified, 5% in Mid Qualified and 45% in Non Qualified.

Now let us put numbers in the equation.
Processor A: $7,500 @1%, $1,250 @2% and $1,250@3%. The total processing cost $118.75
Processor B: $5,000@0.75%, $500@2% and $4,500@3%. The total processing cost $195.00

As you can see the question what is my rate becomes redundant. In order to provide a proper analysis it is essential that the Merchant Statement is checked. Many merchants are very reluctant to provide the Merchant Statement. Many merchants don’t have pin pads and they are not aware that pin pads reduce their cost of processing. There are various other ways of savings on processing costs and they need to be discussed so that a proper processing solution is given to the merchant. Just one rate is not enough.