Before you do anything, learn the fee terminology and understand how fees work. (For an explanation of basic fees, read my article “Fees Demystified”). The more you know what you’re talking about when establishing an agreement with a card processor, the less likely you will be gouged by a fee you didn’t anticipate, or a rate you didn’t understand. And, seek out transparency. The more information you can get about fees from your card processor, the better. If they hand you a package of fine print, read through for snags.
For example, a card processor dangles a low discount rate, but isn’t upfront about the fact that they can change that rate at any future date, a fact they have written into your signed agreement. Three months later, your discount rate has jumped as high or higher as the competitors’ rates and you have saved nothing.
Even with the best processor, it is helpful to know a few things to help you keep fees low:
The key point is this: The riskier the transaction is for fraud, the more you will pay to the card processor. This is because interchange rates charged by Visa and MasterCard are higher for riskier transactions. For example, credit card processors will charge a higher rate if card information is keyed instead of swiped. The higher rates are intended to cover the cost of charge backs. Some processors use tiered rate structures which base rates on how risky the transaction is and what kind of card is used. This is an example of a three tiered rate structure:
- The Qualified Rate (discount rate) is the best rate available and the one usually quoted by most merchant account providers.
- The Mid-Qualified Rate is higher than the qualified rate and includes transactions that are keyed in (not swiped), even swiped transactions where the customer uses certain rewards cards, and transactions that are not batched out within 24 hours after a sale has been initiated.
- The Non-Qualified Rate is the most expensive of the three rates and includes transactions that do not fall under the qualified or mid-qualified rate such as International, Government, corporate or particular consumer rewards cards.
The 4-tiered model adds one more tier at the top at the best rate for processing debit cards. All of the other tiers remain essentially the same.
Card processors generally lump rewards cards into the higher rate categories. Why? Issuing banks need a way to fund their rewards programs, and card networks charge higher interchange rates for rewards cards. Refer to the interchange rates published by Visa and MasterCard here:
Visa interchange rate chart
MasterCard interchange rate chart
If you sign on to a tiered pricing structure, don’t focus only on the qualified rate. Make sure you know what rates you will be charged for mid and non-qualified transactions because you’ll likely be running a large percentage of mid or non-qualified transactions
The third common price model is interchange plus. This sets a flat discount rate, which benefits you or doesn’t, depending on your sales volume, average ticket and what type of cards your customers present to you. Interchange plus generally works best for high volume sales with a low average ticket price.
On your end, when you are running transactions, use the PIN system for debit cards as much as possible. It is much less expensive to process a debit card through a PIN system. Generally, if a customer pays with a debit card, it doesn’t benefit them to go through the credit card system, unless they are crafty and use the delay in transferring funds from their account to their advantage (debit cards clear much faster).