Credit card processing is such a confusing yet lucrative business that a whole industry has sprung up around it. If you're a small business owner trying to operate a restaurant or a store, it can be overwhelming to navigate the world of Interchange rates, merchant fees, and processing terms that can be completely different from credit card processor to credit card processor. But, at the end of the day, what we know is that a certain cut of a business's revenue is going outside of the business.
Let's take a look at an example of how this works:
What do each of these organizations do and what fees do they take?
OK that's a lot of fees and hungry mouths to feed, and the complexity doesn't stop there. One of the most challenging parts of the equation - what makes it so difficult for a business owner to understand their true credit card processing rates - is the Interchange rate. Interchange fees are the fees charged by the Issuing Bank, and they vary from card to card as set by the Card Associations. For some perspective on how varied the rates can be from card to card, Mastercard's document outlining the various rates goes on for 12 pages; Visa's goes on for 20.
Another complex piece of the puzzle is that credit card processing rates are often communicated in confusing ways. Many rates include a percentage fee and a per transaction fee (for example, 2.2% + $0.15), and different splits may be better for different businesses depending on the volume and size of transactions. Sometimes there are additional fees (setup fees, compliance fees, monthly fees) on top of that. Sometimes the number quoted to a business is actually an additive fee, as in the case of "Interchange Plus" rates, which represent the fees charged on top of what Interchange will charge based on the card used in a transaction. Some companies are now introducing flat credit card processing rates as a simpler alternative. These companies charge a flat rate (either just a percentage or a percentage plus per transaction fee) regardless of the specific card used. With all of these different options, which rates or deals do you choose for your business?
To more clearly evaluate rates against each other, start by calculating your "true" credit card processing rate. Here's how:
What you'll need:
1. Take the first credit card statement and copy the following numbers:
(a) total transaction volume ($)
(b) total fees charged ($)
(c) total number of transactions
(d) total transaction volume ($) from American Express
(e) total fees charged ($) from American Express
(f) total number of transactions from American Express
2. Calculate your non-American Express transaction volume and fees:
(g) subtract (d) from (a) - this is your Mastercard/Visa/Discover transaction volume
(h) subtract (e) from (b) - this is your Mastercard/Visa/Discover total fees
3. Divide (e) by (d) - this is your American Express effective credit card rate
4. Divide (h) by (g) - this is your Mastercard/Visa/Discover effective credit card rate
Tips & Notes: