Rate Structures (Part 1 of 6)
It’s no surprise that this industry has a shady side just like any other. And by doing your due diligence you can avoid making many of the costly mistakes that other Merchants have made. But in addition to being able to spot potentially tricky marketing practices, you can also learn a bit more about how to secure the best value for your business. This understanding might even alert you to the possibility that perhaps you are paying too much for your existing services.
This merchant-consumer academy series will highlight some of these practices in addition to understanding how the industry works. For those that complete the series, you’ll have a tremendous advantage as you shop for, or renegotiate your own payment solutions.
Understanding the Industry & Rate Structures
Before you set out to secure the best possible Merchant account and rate structure on the planet, there are a couple of fundamentals that should be at the foundation of your research.
The first is to understand the rate structures used. You can use this site or do your own web search in order to understand the following key elements:
- The Interchange
- Interchange Pass Through (Interchange Plus)
- Traditional three tier Merchant Accounts
Basically, you’ll find that there are two primary rate plans. One for the enormous retail chains which is Interchange Pass Through, aka Interchange Plus, and the traditional three tier merchant account. At the foundation of all of this is the Interchange.
The Interchange is the cost of a transaction based on the card type and method of use e.g. swiped or manually keyed (more on that later). There are about 350 or so such rates that reflect the issuing bank fees for that particular card, and the Duties & Assessment charges applied by Visa, MasterCard, etc. The Interchange fee for a gift card might be different than for a debit card that was swiped at the register. What’s important to understand is that “ALL” these Interchange Fees are the same for everyone and reflect the actual “cost” of facilitating that transaction.
Below is an example of some popular categories of cards. When you think about the different variations of each, then the processing type, e.g. swiped, or manually keyed transactions, you can begin to see why there are so many variations of processing rates.
- standard debit cards
- standard check cards
- pin passed debit cards
- pin based check cards
- standard credit cards
- rewards credit cards
- signature credit cards
- mileage credit cards
- benefits credit cards
- business credit cards
- corporate credit cards
- government credit cards
- international credit cards
Interchange Pass Through – Interchange Plus
Of course, if the Interchange cost of the transaction is the same for everyone, the goal is to pay the least amount above these fixed costs. And that’s exactly what big companies do, including many of the big retailers, fast food chains, etc. They pay a flat fee above these fixed costs also known as “Basis Point” (one hundredth of a percent).
As a retailer, they might secure an Interchange Plus rate which includes 25 basis points, or .25% in addition to the fixed Interchange Fee. And that my friend is what we call “Interchange Pass Through!”
Note: Interchange fees can also be made available for smaller businesses. See our Interchange Pass Through page for more information regarding how you can secure these low rates for your business.
The Traditional “three tier” Merchant Account
Remember that complex structure called the Interchange? Well, that figures into the traditional Merchant Account as well. What happens is that a processing institution will take these 350 or so rate variations and separate them into three separate categories, also known as “bins” or “buckets”. The names of these “buckets” are always the same, it’s the content that changes.
The processing rate for each category generally reflect the highest rate in that category. So if there were 120 rates the processor placed into the “Mid-Qualified” bucket, the highest of those rates would determine the rate for that entire bucket. Those that fall within the “qualified“ bucket are often those transactions that are “swiped” at the point on sale.
The problem is that each processor can divide those rates differently into those three categories. And with this freedom comes confusion and often abuse.