The Merchant Processing Guru Tip#5: How Interchange works… The foundation of the credit card processing industry is Interchange. Understanding Interchange is the first step to truly grasping how this industry works. As I mentioned in my last post, Interchange is set by the Associations; Visa & MasterCard. It is comprised of the fees that the issuing bank (the bank who issues the credit card) and Visa or MasterCard charge the merchant for taking that card. It is from here that the processor marks up those fees, how they do that is what makes all the difference to you, the business owner.
When you run a transaction in your business you probably have no idea what card type you are running, you just run it. It could be any number of the 70+ rates that Visa or MasterCard have in the interchange system. The key is not to pay too much for any of these card types. In a tiered rate account, as an example, you could run a card that costs 2.39% to the processor but because they treat it as a Non-qualified transaction you will actually pay 3.29% a whole 0.9% more than their cost. This adds up fast and is far more important to reign in than any of the miscellaneous fees associated with a merchant account. By using a processor who gives you a true pass-through of interchange, with a standard “across the board” markup you can guarantee that you will not pay too much for your processing. Take for instance a markup of 0.25% across the board on interchange. On $10,000 you know that 0.25% of that is $25.00 that you will pay to the processor on top of interchange. You have to pay interchange no matter what! It is how much you pay above interchange that matters.
A typical 3 tiered rate structure could look something like this for example:
Qualified rate: 1.63% + $0.25
Mid-qualified rate: 2.49% + $0.25
Non-qualified rate: 3.29% + $0.25
This means, anything that falls between the 1.63% & 2.49% will be charged the 2.49%. I call these buckets. As another example of this and to demonstrate this point a “Rewards 1” level credit card is 1.74% cost but you will pay 2.49% because it falls between the qualified and mid-qualified rate tiers.
If you paid an average of 0.50% – 0.75% on $10,000 with a tiered rate structure because of the constant downgrading to a higher “bucket” called mid-qualified and non-qualified you would pay $50.00 – $75.00 instead of the $25.00 with a true interchange system. That is $25.00 – $50.00 more than you should be paying in this area alone. This of course is only an example but used to demonstrate the difference having the right set-up can make to the fees that you will pay for processing cards. It is also only one of the areas that make a difference to those fees. Stay tuned and I will share more tomorrow, or call me if you are ready to see a true analysis of your merchant statement: 888–368-4878