This is the third and final post where I reply frequent payment-processing questions. The first installment,”Part 1: Learning the Jargon,” included a comprehensive glossary of business terms in addition to explanations of fixed versus percent fees. I have capitalized those defined terms when used below.
The next installment,”Part 2: Pricing Models,” addressed the specifics of”Flat-rate Pricing,””Tiered Pricing,” and”Interchange Plus.” Each version has pros and cons, which I have included in that report.
In this”Part 3″ post, I will answer questions associated with reducing the processing cost.
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My Chip charges a flat rate fee for ecommerce transactions no matter the card. Is that normal?
If you’re billed a single flat percentage for all your national ecommerce transactions, you’re on a Flat-rate Pricing program. (International transactions normally have a higher fee.) Stripe, PayPal, Square, and several other processors provide this pricing model.
Flat-rate Pricing is acceptable if you would like simplicity. It is simple to calculate processing fees in addition to forecast future expenses for any particular volume. Furthermore, your monthly statements will be much easier to comprehend.
Be aware that Flat-rate Pricing includes Markup Fees on top of Interchange fees and Card Association Fees. Markup Fees represent profit for the Processor. If you do not mind comparatively complex monthly statements, an Interchange Plus pricing model could save you money. Regrettably, not all of Processors offer Interchange Plus. The ones that do often require a monthly minimum transaction volume.
Why do some credit cards have higher processing costs?
If you aren’t on a Flat-rate Pricing program, premium rewards cards, corporate cards, and luxury cards are more costly to accept since the Interchange fee (that your Processor pays) is greater.
Someone must pay for all those points, rewards, gifts, and privileges! The Issuing Bank will charge Cardholders a monthly or yearly fee. The financial institution will also earn interest on outstanding balances. But mainly, the cost of these exclusive cards is compensated by merchants via greater Interchange fees. It is not necessarily bad, however. Holders of exclusive and premium cards will, on average, spend more than holders of a normal credit card. Thus, in exchange for the chance to get larger payments, you’re being charged a higher Interchange rate.
My Chip charges a Discount Rate. However, I receive no reductions. I’m confused.
In the realm of finance, a”Discount Rate” is the interest charged to financial institutions for borrowing funds from other institutions like the U.S. Federal Reserve. A credit card payment is similar to a loan. The Cardholder is borrowing money from the Issuing Bank to pay for products and services. This is the source of this term as applied to credit card processing.
The Discount Rate is the closing, all-in fee a merchant pays for processing a payment. The Discount Rate includes Interchange fee and Card Association Fee (together,”provincial Fee”) and also the Markup Fee. Unfortunately, there’s absolutely no cost reduction, as the title may suggest.
How do I reduce my processing fees?
There’s no simple answer. Payment processing fees are a cost of doing business. But, here are a few ideas that could help:
- Negotiate with your Processor to Attempt to Reduce its Markup Fees. Bear in mind, Interchange fees and Card Association Fees are set by the card manufacturers (Visa, Mastercard, American Express, Discover), who prohibit negotiating. Markup Fees, on the other hand, are set by each Processor. Many Processors will reduce their Markup Fee for an adequate transaction volume, particularly for new customers.
- For merchants on Tiered prices, attempt to reduce Downgrades from the Processor. Downgrades (moving from Qualified Transactions to Mid-Qualified or Non-qualified) raise fees. By way of instance, accepting credit card payments over the phone will make a Downgrade. All card-not-present transactions (i.e., ecommerce) are Non-qualified.
- Use a Respectable fraud-prevention platform. When your company accepts fraudulent payments, your Processor will evaluate chargeback fees. Besides, you will lose both the product that you sold and the money you received.
- Carefully choose a Processor. Ask about Markup Fees, tiers, and hidden charges. Do not fall for the first inexpensive quote you get. Be certain that you understand the way the Processor will benefit from your company. Compare quotes and make a careful, educated choice. If your company demands value-added services — e.g., subscription revenue, split payments, cards on file, fraud verification — be certain you include those fees on your evaluation.
- Consider Interchange Plus pricing. If you do not mind the additional job of reading (and understanding) more, complicated monthly statements, and if your company can meet monthly minimum transaction volumes, Interchange Plus pricing will typically offer the cheapest prices.
I am still confused. Is that normal?
Yes. The payments industry is a gigantic network of financial institutions, Card Brands, and technology suppliers. Each participant provides a service and for that reason wishes to be compensated. The result is a mishmash of confusing terms and penalties. Force yourself to read articles like this one. Develop a working understanding of the system to demand better service and more reasonable prices.
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