Thursday, August 13, 2009

Two things your credit card processing firms don't want you to know....

If you are a business that accepts credit cards for payments, you probably never have gotten a good explanation about how the interchange rate impacts the cost of accepting them.

After losing some money to customers who didn't pay my fees, I turned to credit card payments as a more effective way to get paid for my work. As one of my friends from church had a credit card processing fee firm, I asked him to set me up with an account.

My friend promised me a good rate despite the lack of monthly volume. For each transaction, I would pay slightly more than 2.2 percent for each transaction. Yet, after I got my first month's statement I noticed that the cost was more like 3-percent after deducting my monthly fee.

It wasn't until I met David Jemeyson, the chief information officer for MerchantZdirect that I truly understood how credit cards rate could charge more for their services. Take that credit card with the Vikings that advertises on every televised major sporting events. When a business takes the "What's In Your Wallet" card, Jemeyson said the rate is higher than a regular card without rewards.

I would surmise that most businesses are never told about the interchange rate when a new business adds a credit card or decide to change it to another provider. Yet, that's the first point of truly understanding the costs of accepting them.

Another important point for any business to understand is the basis points paid to a merchant processing service. When a business understands how interchange rates and the basis points impact the cost of doing business, they can probably negotiate a better rate.

For example, let's suppose that Jane Smith runs an automotive repair business. She accepts a credit card payment of $400 for four tires. If the interchange rate for the card presented to her is 2-percent, a major credit card company like Master Card or VISA will get $8 for their transaction fee.

If Smith's merchant service charges 100 basis points, she would pay $4 more for this transaction. However, if the rate is at a lower rate like 20-basis points, she would only pay eighty cents.

When I first started accepting credit cards, I wish I had truly understood the interchange rate and the basis points I paid for each transaction. Had I known this when I signed my initial contract, I would have probably negotiated a better deal than the one I currently have with my friend from my church.

It's my hope that businesses who want to cut their costs take the time to talk to their merchant processing service rep about the basis points and the interchange rate. If you find a credit card rep that can explain this to you and gives you something at 20-basis points, I would take that over someone who doesn't help you understand these key terms.

5 comments:

Matt Genovese said...

Very interesting. I had no idea. I use Paypal, which has a generally well-understood fee structure:

https://www.paypal.com/cgi-bin/webscr?cmd=_display-receiving-fees-outside

Roxanne said...

Excerpts from one of the nation's largest credit card processor's Second Quarter 2009 earnings call:

2009 2nd Quarter REVENUES
"Transaction processing volume continues to reflect economic weakness. Same store sales were negative for the fifth consecutive quarter this quarter down a record 9.7%."

2009 2nd Quarter MARGINS
"Although revenue growth slowed in the quarter, margins rose sequentially to 14.7%."

If you are relying on your credit card processing company to analyze your statements and recommend the best possible pricing plan for your business, you may be making a costly mistake. Call Financial Mitigation Services today at 800-797-5642 and have our team of expert analysts review your credit card processing fees. Financial Mitigation Services IS NOT a credit card processor. Our team of analysts review your account to uncover and recover excess fees and overpayments that many businesses unwittingly pay every month.

Matt said...

Just a little correction: MasterCard and Visa do not receive the interchange fee. They determine the interchange rates, but it is the issuing bank (the customer’s bank, the one that issued the card used in the transaction) that ends up receiving the interchange fee. Visa and MasterCard receive much smaller, separate fees called the assessments.

This is from MasterCard's website:
"Does MasterCard make money on Interchange? - Interchange fees represent a sharing of payment system costs among acquirers and issuers. Although MasterCard establishes default interchange fees the company does not earn revenues in connection with interchange fees."
http://www.mastercard.com/us/company/en/docs/MasterCard%20FAQ.pdf

Matt said...

And just to let you know, in my new blog I am starting to try and correct misunderstandings on the web, about credit card processing. I made a post here, http://paymentssolved.blogspot.com/2009/08/correcting-misunderstandings-of-credit.html, that explains your small error that I pointed out above. I'm not trying to be mean, I'm just trying to see what I can do to correct misinformation. Your mistake was small and understandable.

I tried to find an email address, to let you know personally, but couldn't find one.

Matt Scherer said...

Matt,

You're not being mean.... The point of a blog is to get info on things. I value your input.

Trust me, if you want to see some "snarky" comments, go to my other blog at www.mysa.com.

Here's a link -- http://Ez.com/j3y5