Navigating credit card payment processing
For a majority of Americans, the days of carrying wads of cash or writing out a check to pay for purchases are long gone. Even debit cards are taking a back seat to the credit card due to the endless variety of points, bonuses and travel incentives it offers users.
We are far from becoming a cashless society, but if your business doesn’t accept payment via credit cards, you’re missing out on a lucrative opportunity to increase both the volume and sum of your sales. In general, customers are more likely to make a purchase — and spend more on that purchase — when they’re able to pay with a credit card.
You may be wondering, why doesn’t every business accept credit cards? The answer is that by doing so, the business owner must fork over a percentage of each purchase to middlemen, which typically consist of a payment card company that processes the transaction, a credit card association (ex. Visa, MasterCard, etc.) and a credit card issuer (i.e. the bank that issued the card). For some small businesses, especially those that sell a high volume of lower-priced items, these ‘convenience’ fees can add up quickly and cut in to their profit margins.
While processing fees for credit cards are unavoidable, merchants can keep these costs low by choosing the right pricing model for their business and negotiating better rates based on volume of transactions. Below is a breakdown of the four most common pricing models for credit card processing. (Note: While reading, keep in mind that many markup fees are negotiable, while wholesale fees are not.)
- Interchange Plus
Interchange Plus is the most common pricing model — and the most transparent. The “Interchange” portion of this model refers to a wholesale fee charged by the credit card association (Visa, Discover, etc.) for every wholesale purchase. These fees are set up by each credit card association as a fixed rate; generally, the greater the rewards of the credit card, the higher the fixed rate will be. This is because the credit card association has to pay for the rewards earned by card members. It’s also the reason why businesses often refuse to accept a specific credit card — because it’s simply too expensive and not worth the ROI for the business owner.
The “Plus” portion of this pricing model refers to the credit card processor’s markup (either a percentage of per-transaction fee) that is applied to each credit card transaction. The true cost will depend on the markups, but Interchange Plus typically offers substantial savings compared to other pricing models. Additionally, wholesale fees and markups are itemized and listed on your monthly statement, so you know exactly what you’re paying for.
With a subscription-based pricing model, the credit card processing company charges a small fixed cost for each transaction, rather than a percentage of sales volume (as in the Interchange Plus model). In addition, the business owner will pay a flat monthly subscription fee in order to take advantage of the fixed-cost perk.
This model is the only pricing structure where a processor’s markup is not based on a percentage of sales, making it a great option for companies with large ticket items. Because the subscription fee is separate from the per-transaction fee, this structure also offers a good deal of transparency for the business owner. It’s important to note that many of these membership models cap the number of transactions that can be processed at each membership level; if you process more than that amount, the price of your monthly membership may increase.
Tiered or “bundled” pricing plans categorize each credit card transaction into one of three categories — qualified, mid-qualified or non-qualified. Credit card processors will charge a different fee for each transaction based on which category it falls within. Fees are the lowest for qualified purchases and increase for mid-qualified and non-qualified transactions.
What makes a purchase qualified versus mid- or non-qualified is the type of credit card used to make the transaction. Factors such as the brand of the credit card, whether it’s a private or business card and the types of rewards it offers play a role in which tier the transaction falls in to.
This option — while currently the most common pricing model — can be inconsistent, nontransparent and expensive. Processors don’t often disclose which tiers transactions are falling into, concealing the real cost. The amount of money paid in fees by a business owner can vary greatly each month, depending on the type of sales completed during that timeframe. Additionally, business owners don’t get to decide which credit cards their customers use, so they have no choice but to pay a greater fee every time a customer pays with a card that does not fall into the qualified tier.
- Flat Rate
The flat rate pricing model is similar to tiered pricing — but without the tiers. All transactions incur the same blended fee, somewhere around three percent, regardless of the cost of the purchase. Some processors also charge a small per-transaction fee, but most of the cost comes from the blended fee, which is typically more expensive than other models. However, most processors (especially PayPal, Venmo, Stripe, Square, etc.) do not charge a monthly fee. Flat rate pricing may be right for low-volume or low-ticket businesses, or if a majority of your customer base takes advantage of or is willing to use a service like PayPal or Venmo. By working with these processors, you can get approved online and take credit within about 10-15 minutes.
To accept or not to accept…
The credit card industry has changed over time; today there is more transparency, and merchants are getting smarter about their options. We recommend educating yourself on different rates/pricing models and understanding how many transactions your business is recording per month to decide which option is best for you.
Allowing customers to pay with credit cards can increase your sales by up to 23 percent. If you choose to take advantage of this option for your business, our payment processing solutions partner CardConnect can assist in getting you set up with free terminals, low fixed rates and mobile device plug-ins.
About the author
From selling flowers door-to-door at hair salons when he was 16 to starting his own auto detailing business, Brett Shapiro has had an entrepreneurial spirit since he was young. After earning a Bachelor of Arts degree in Global and International Studies from the University of California, Santa Barbara, and years traveling the world planning and executing cause marketing events, Brett decided to test out his entrepreneurial chops with his own medical supply distribution company.
During the formation of this business, Brett made a handful of simple, avoidable mistakes due to lack of experience and guidance. It was then that Brett realized there was a real, consistent need for a company to support businesses as they start, build and grow. He set his sights on creating Easy Doc Filing — an honest, transparent and simple resource center that takes care of the mundane, yet critical, formation documentation. Brett continues to lead Easy Doc Filing in developing services and partnerships that support and encourage entrepreneurship across all industries.