Merchant processing statements and pricing plans shouldn’t require a financing degree to decipher. Although that seems like common sense, many processing companies over complicate their pricing structures purposefully.
The reason they do this is because it’s easier for them to overcharge and hide fees when they break processing rates up into 4 or 5 (or more) smaller parts.
In reality, payment processing rates are made up of 2 parts.
There is the portion that Visa and MasterCard charge known as “Interchange Rates” or Cost, and then there is the markup or commission portion that is charged by the processor.
For merchants accepting credit cards, there are 3 common pricing plans:
- Flat Rate Pricing
- Interchange-Plus (Cost-Plus) Pricing
Although at first glance, flat rate pricing seems best as it’s easiest to understand, it is in reality the most expensive pricing structure.
With flat rate pricing, the processor merely adds their markup onto the most expensive card type. They then simply charge you that amount for all your transactions regardless of how much it actually costs them.
This allows them to make far more for the majority of your transactions as the most expensive cards are in most cases the least common.
As an example, say base cost for a regular card is 1.35% and cost on the most ultra-premium rewards card is 2.9%.
Flat rate pricing will have you at 2.9% plus the markup, which you’ll pay even for basic cards. So, you would be paying 3% or more for every transaction under this setup.
As you can see, flat-rate pricing isn’t generally recommended.
Tiered pricing isn’t much better either. With tiered, there are usually 3 rates. There will be a qualified rate for regular transactions, a mid qualified rate for rewards type cards, and a non-qualified rate for cards not-present.
Very much like flat-rate pricing, in tiered pricing, the processing company simply adds their markup to the most expensive card in each category and charges that for all transactions within each card group.
Although tiered is more cost effective than flat rate, it is still more expensive than it really should be and easier for processing companies to hide fees within.
As such, tiered pricing is another pricing plan that we don’t recommend.
The most transparent pricing structure and by far the most cost-effective is Interchange-Plus (Cost-Plus) pricing.
With Interchange-Plus pricing, you pay only the cost of each card you accept along with one simple processing markup.
The benefit to this pricing plan is that you are clear as to what your provider is charging for their services and where there is room for negotiating.
It’s also the most cost effective because you only pay the cost of each card plus the markup. This way you aren’t paying the huge markups on less expensive card types as in Flat-Rate and Tiered Pricing plans.
Interchange rates for Visa and MasterCard are easily found online for both Canadian and American merchants, so there is no room for ambiguity or hidden fees.
Whether you are currently accepting credit cards, or are just starting out, let our rate specialists find the best merchant account for your business!