How to Negotiate : As in any negotiation, the more you know about your subject, the greater success you’ll have negotiating.
The Foundation of Credit Card Costs
Two basic types of fees form the foundation of the charges to process credit cards. They are:
- Transaction fees, and,
- The “discount rate”
Understanding how these two fees are charged to your merchant account gives you a tremendous advantage when negotiating, because the better you understand the fees, the faster you’ll be at recognizing when processors use “sleight of hand” to manipulate how your account is being charged.
Need evidence this is true? That processors manipulate fees?
Think about the last time you changed processors How to Negotiate. weren’t you quoted better rates? (You must have been or you probably wouldn’t have switched.) Yet despite getting a lower rate, the vast majority of merchants I visit with tell me they hardly notice any difference in what they pay after switching.
Has that ever happened to you? Your rates were lowered, yet your bill stayed about the same? Well here’s a good question… why is that?
The answer is that it’s because your new processor came in with a lower rate, but on a limited basis, and only on specific types of transactions. Or, they made up for any drop in the rate by increasing fees elsewhere. Of course they withheld that little fact from you, a problem you can stop dead in it’s tracks once you understand credit card fees better and can prove it in your negotiations.
Fees Part 1: Transaction Fee
The first fee mentioned, a transaction fee, is what a merchant pays each time a card is swiped through a terminal, or its’ number is “keyed into” a terminal, or it is processed online.
Surprisingly, the transaction fee can be the highest category of fees paid to a processor. This can happen when a merchant has a high number of transactions, and a low average ticket amount. An example would be a convenience store, which is likely to have a high volume of purchases, but lower ticket amounts, (e.g. $10-12 ea).
A word of caution when negotiating transaction fees. Make sure you get an itemized breakdown of the fee. Most people outside the industry don’t realize that the transaction fee which is quoted, and the fee which is actually paid, can fluctuate. That’s due to interchange rates which can vary depending on the kind of card being used (we’ll get to interchange in a moment). How much you’re effected depends on how your account is structured, i.e., is it 3-tier, 4-tier, or interchange plus? Also, do dues and assessments “passthrough”, or, is your fee a “fixed rate”?
For example: A transaction fee is made up of; interchange passthrough + network access fees + merchant acquirers (the company you signed a contract with to process credit cards) mark up.
A processor may give you a “flat” fee (i.e. one rate which is high enough to blend all 3 of the above charges into one), or, they may quote only their own part of the fee, call it the “transaction fee”, and list interchange passthrough and network access fees separately – without disclosing to you that they’ve done it. They do this so they can quote you an unusually low rate to make you believe you’re getting an extraordinary deal.
When the above happens a merchant will get their monthly statement, see their low transaction fee – and wonder what “all these other fees” are (i.e. interchange passthrough and network access fees), which were never disclosed. To get around that they’ll say something like, “Oh those are fees charged by Visa and Mastercard that we have no control over, there’s nothing we can do about that”.
Processors will also disguise all or part of transaction fees and list them on the statement as “inquiry fees”, “access fees” (listed separately How to Negotiate, but not disclosed as part of the transaction fee), or “network fees”
NEGOTIATING TIP: When quoted the transaction fee insist having it itemized. Ask them if their quote includes interchange passthrough + network access fees.
Fees Part 2: Interchange
The most well known fee a merchant pays to process credit cards is the “discount rate”, which is where most of the battles between processors competing for a merchants business are fought. We’ll get to discount rates in a moment, but first a word about interchange (which is what discounts rates are based on anyway).
The best way to understand interchange is to think of it as the “wholesale cost” your acquirer (the company that set you up to take cards) pays to the issuer (the bank which issued a credit card to your customer, e.g., Capital One; CitiBank; Bank of America’ etc), for each purchase transaction they authorize. Interchange is always a percentage of the purchase amount being authorized, plus a transaction fee. NOTE: MasterCard and Visa actually publish their interchange rate charts on their websites.
Fees Part 3: The Discount Rate
Now that you know what interchange it’ll be much easier to understand the discount rate. The discount rate is interchange (amount charged to your processor) + your processors “mark-up”. Remember, since the interchange rate is what your processor pays, they have to mark it up in order to make a profit How to Negotiate. Proportionately, the bulk of the discount rate a merchant pays goes to the card issuer. The processor makes the smaller portion of the fee.
Why is it called a “discount rate”?
That’s a good question. The best way to explain it is by giving an example. If your discount rate is 1.79%, and you process a $100 transaction, the amount deposited into your account is “discounted” by $1.79, meaning you receive $98.21, not $100.
How to Negotiate The discount rate a merchant pays depends, to a large extent, on the structure the merchants account was set up on. Is it 3-tier, 4-tier, or, Interchange plus? The reason this matters is because there are over a hundred possible rates, depending on the card being presented by the customer. Again, these rates are all published in chart form at both Visa & MC’s websites.
If a merchant account is set up on a 3 tier structure there are 3 discount rates: qualified, mid-qualified, and non-qualified. A 4 tier structure is the same as a 3 tier, (i.e., qualified; mid, and non qualified) EXCEPT – debit cards are processed at lower rates.
The third structure, “interchange plus” is usually only offered to higher volume accounts, e.g., those processing at least $20,000 per month. Interchange plus consists of the true interchange rate + a flat fee markup, (usually expressed in “basis points”), + a transaction fee.
(NOTE: A basis point is one one-hundredth of a percent; therefore one basis point is 0.01% or 0.0001; 10 basis points would be 0.10% or 0.0010; 25 basis points would be 0.25% or 0.0025; 100 basis points would be 1.0% or 0.0100.)
Putting It Together
If you can master the ideas and terms in this article you will almost certainly be able to negotiate the lowest rates possible. As competitive as the processing industry is, once you can demonstrate a knowledge of the key issues effecting your merchant account, most companies will recognize this and reward you with the best rates possible.