Processing Fees

This is the largest piece of the cost of accepting credit cards that you can control. Interchange fees, Card Mix, and Average Ticket all offer some opportunities to limit your credit card processing costs, but who you choose to trust to share in your business profits is up to you. 

The Significance of Processing Fees

Processing fees are the largest controllable cost when accepting credit cards. While interchange fees, card mix, and average ticket offer some ways to manage costs, choosing the right credit card processor is crucial. Viewing your processor as an advisor who benefits when you do can help you select a partner that aligns with your business goals.

What Are Processing Fees?

Processing fees encompass all charges above the mandatory interchange fees set by Visa, Mastercard, Discover, and American Express. These fees can come in three main forms:

  1. Interchange-Plus Pricing
  2. Tiered Pricing
  3. Fixed Pricing
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Interchange-Plus Pricing

Interchange-Plus Pricing (also known as Pass-Through or Cost-Plus Pricing) is the most transparent model. It itemizes the fees going to the credit card networks and the markup from your Merchant Services Provider. Though it makes statements harder to read, it generally results in lower rates compared to tiered pricing.

Example:

  • Interchange rate: 1.58% + $0.10
  • Processor markup: 0.20% + $0.10
  • Total cost for a $100 transaction: $1.98 (1.98%)

Tiered Pricing

Tiered Pricing is the most common but often the least favorable. It simplifies numerous processing rates into three tiers: qualified, mid-qualified, and non-qualified. The criteria for these tiers, set by the processor, often lead to higher overall costs and lack transparency.

Fixed Pricing

Fixed Pricing blends the three tiers into a single flat rate for all transactions. While this rate is higher, the absence of monthly fees can be more cost-effective for small or seasonal businesses.

Why Interchange-Plus Pricing is the Best Option

Interchange-Plus Pricing is straightforward:

  • Interchange: The base cost paid to the issuing bank and credit card association.
  • Plus: The processor’s markup.

This model’s transparency allows you to see the true cost breakdown and encourages processors to set fairer markups, usually resulting in lower overall rates.

How Interchange-Plus Pricing Saves Money

Tiered pricing hides interchange costs, allowing processors to charge higher markups by rounding up rates within each tier. In contrast, Interchange-Plus Pricing separates interchange and markup costs, making it easier to identify and avoid excessive fees. This transparency often leads to lower rates overall.

Your credit card processor needs to profit, just like you. The key is finding a processor you trust to provide a balance of reasonable processing costs, equipment fees, and reliable service. Always remember the adage: “If it sounds too good to be true, it probably is.” Verify any promises made by your processor to ensure you’re getting the best deal.