There is no doubt that accepting credit cards is a necessity in today’s world of plastic payments. While a credit card processing company may provide you a quote for what is considered “the best rate”, it might only be the “best rate” if ideal conditions are met. Performing a phone transaction is less than ideal. A transaction by phone might cost you much more if you don’t collect and enter the proper data. When shopping for a credit card processor you need to be knowledgeable about the way credit card processing fees work to completely understand what is negotiable and what is not.
Is It Really The Lowest Rate?
Most funeral homes looking for the best rate will call and ask credit card processors what their lowest rate is. The lowest rate quoted may yield a big surprise down the road. The assumption that the lowest rate is the best rate doesn’t always work out. The lowest rate quoted could end up costing you more money in the long run. Let’s say you are quoted a rate of 1.59 percent. When you review your statement at the end of the month you might find you are really paying 3.10 percent in what is known as an “effective rate”. You would probably be upset but the truth is, the lowest rate of 1.59 percent is a rate that only applies to “qualified transactions”. Based upon your processing history, types of credit cards you accept and the way you process them, you likely will not have many “qualified” transactions. There are many rates for different types of credit cards and transactions that contribute to the overall effective rate. Never sign a contract that locks you into a long term relationship with a credit card processor. A reputable processing company doesn’t need long term contracts.
Cost vs. Rates
You might be inclined to believe that a low processing rate would equal low processing costs. That’s not really true and here is why:
Each transaction is comprised of four separate parts
• The card issuing bank’s fee
• The card brand’s (Visa, Mastercard) fee
• The acquiring bank’s fee
• Your credit card processor’s fee
Card-issuing banks (such as Chase, Capital One, Wells Fargo) along with the card brands such as Visa and Mastercard set the price for each type of transaction through fees known as “interchange rates”. The issuing banks collect the “interchange rate” as their piece of the pie. The credit card companies (Visa, MasterCard) set an additional price for each transaction which is known as dues and assessments.
The “acquiring bank”, also known as the back end processor” (such as First Data) charges your credit card processor a fee to utilize their network and platform. The credit card processor that you have a relationship with then charges a small fee to maintain your account on top of the other three fees. This is the same regardless of who your processor is.
One of the most common myths is that your credit card processor controls the bulk of your fees. Here is an example of who gets a piece of every transaction:
Using an effective rate of 3.0% here is an example of where the money goes:
• 2.50% – Card issuing bank (Wells Fargo, Citibank etc.)
• .20% – Card Brand (Mastercard, Visa etc.)
• .15% – Acquiring bank (First Data)
• .15% – Credit Card Processor (ie. Chosen Payments, Chase Payment Tech)
These are interchange and assessment rates. The first two categories are the same for all credit card processors. Think of this as the wholesale cost of the transaction. No wiggle room for anyone. There are literally hundreds of interchange “categories” than can apply to an individual transaction.
What To Ask For
When obtaining a quote from a processor, ask the processor to quote fees based on a pricing model called “interchange plus” which separates the processor’s markup from the wholesale cost described above. “Interchange plus” quotes do not need to meet any type of minimum sales volume and this is the most transparent way for the processor to bill a merchant.
What To Compare
The fees you pay above the interchange or wholesale rate is the markup paid to the credit card processor. The most competitive credit card processor is the one that will offer the lowest markup, not the lowest rate. Some credit card processor have logic and history built into their business models in which they can assist their clients in obtaining an overall lower effective rate. This is why it is important to do business with a provider that really understands your industry as it can have a huge impact on your bottom line.
Savings Quoted Don’t Always Materialize
Make sure that you don’t simply accept promised savings as a guarantee but shop based upon total markup. Since each separate transaction is subjective, one rate cannot be assumed for every transaction. You must ask how much each category of qualified, mid-qualified and non-qualified transactions will cost. However, as addressed, the most important factor is to consider is not how the watch was built but learning to tell what time it is.
We use this analogy to say: Your effective rate should be your guide to see your overall costs, savings, fees etc. Take your monthly credit card sales volume and divide the total amount of fees paid into that number. If the rate you come up with is lower than a proposal from another provider, you’re in good shape. If not, you probably need to change processors and take advantage of lower rates.
Simple Might Prove Foolish
There are very simple ways to process credit cards such as PayPal and Square but that simplicity will cost you more in the long run. These companies are not processing companies but known as “aggregators”. Aggregators provide flat rates that appear attractive and easy to use. But, in the end, they will cost you much more than a genuine credit card processor. This is not only due to the high flat rate but mainly a lack of knowledge of your industry. They also have a lack of connections in areas that help grow your business and overall you are treated as a number rather than a true client with a dedicated account representative.
Square charges a rate of 2.75 percent for all swiped transactions while the online processor Stripe charges 2.90 percent + 30 cents. Remember that the wholesale cost remains the same no matter what company you use to process. All processing companies pay the exact same interchange and assessment fees.
Your goal is to pay the lowest cost for processing and it doesn’t make good business sense to process a transaction through an aggregator. The goal is to pay the lowest possible markup over the processor’s cost. Why would you pay 2.90 percent on a transaction when you could be paying 1.59 percent to process the same transaction?
When shopping for a credit card processor, avoid common pitfalls that can cost you more in the long run. The closer you pay to wholesale, the lower your costs will be. Be wary of quotes that look too good to be true. Ask for the cost of processing different types of transactions other than simply the “qualified ones”. Ensure the processor has solid references within your industry. FBA
Jim Luff is a Manager with Chosen Payments, a national credit card processor serving the funeral care industry. He is an active member of the California Funeral Directors Association serving on the Legislative, Public Relations and Expo committees with firsthand industry knowledge and 25 years of experience working with Central California funeral homes. Jim can be reached by phone at 805-427-9180 or by email [email protected]