Costco Credit Card Processing = A Big Mistake!

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Costco's credit card processing is a lot more expensive than its bulk soda.

Costco may sell some things at wholesale prices, but it's not merchant accounts. In fact, Costco doesn't even provide credit card processing. Instead, they outsource merchant services to a company called Elavon.

Costco's merchant accounts use tiered pricing, bait-and-switch rates and have a cancellation fee. In short, you will pay through the nose to process credit cards, and you'll be stuck doing it until your multi-year contract expires.

Here's a breakdown of why Costco's credit card processing services are so horrible.

Tiered Pricing

Costco's merchant accounts use tiered pricing. On a tiered pricing scheme a processor (in this case Costco's partner Elavon) groups interchange fees into several tiers called qualified, mid-qualified and non-qualified. By doing so, they're able to mask the true cost of processing while increasing profits.

I'll explain exactly how processors game the system with tiered pricing in just a moment. For now, check out this screenshot taken from Costco's Web site on 9/06/2011 and I'll show you how to spot tiered pricing.

Costco Tiered Pricing Example

Tiered pricing is always quoted as a percentage and a flat transaction fee, and the qualified rate is typically a little greater than the lowest credit interchange fee. For example, this screen grab from Costco's Web site shows a qualified rate of 1.48% plus $0.20 for "retail classified transactions."

This leads us to believe that swiped retail transactions should, for the most part, be charged a fee of 1.48% plus $0.20. It seems easy enough, but as I'm about to explain, it's not quite that simple.

Inconsistent Buckets

The real sliminess of tiered pricing is showcased in something called inconsistent buckets. Inconsistent buckets is the processing industry's term that describes why it's impossible to compare tiered rates among processors.

As the name implies, inconsistent buckets refers to a processor's ability to route interchange charges to the pricing tier of their choice. In this case, Costco is advertising a qualified rate of 1.48%, but they're not telling you which interchange categories are routed to the qualified tier.

For example, let's pretend that we know Costco's processor is routing only consumer debit cards to the qualified tier, and all other transactions are being routed to the mid-qualified and non-qualified tiers (the rates for which aren't disclosed on their Web site).

Let's also pretend that we're considering another processor that's advertising 1.69% for a qualified rate, but they're routing consumer debit, credit and rewards card to the qualified tier. Costco's offer appears to be the better deal superficially, but the second processor would actually be less expensive.

We've got an article over here that explains the differences of tiered pricing compared to interchange plus — a more transparent form of pricing.

Costco's Bait-and-Switch Rates

So, Costco is advertising 1.48% plus a $0.20 transaction fee on their Web site. This seems too good to be true considering that 1.48% is lower than the rate that banks charge processors (interchange rate). No kidding!

Here's a screenshot of Visa's current interchange fee schedule (the lowest possible credit card processing fees). As you can see, the lowest standard credit interchange fee is 1.54% plus $0.10. Costco is obviously not losing money on every transaction, so how are they able to offer 1.48%?

Bait and Switch Pricing

The answer lies in the fine print (as always) on Costco's Web site. After the 1.48% rate there's an asterisk that references a paragraph that says:

"Rates listed are for qualified transactions. Reward cards process at a higher rate. Contact Elavon for details. A monthly minimum fee applies when qualified transaction charges and per-item charges are less than $20 per month. Annual interchange or assessment increases by Visa/MasterCard or Discover may affect these rates. Rates and fees may change without notice."

There's a whole lot of bad stuff going on here, but for now, let's focus on the sentence that says, "Rates listed are for qualified transactions. Reward cards process at a higher rate."

Okay, so the 1.48% is only for qualified transactions. So where does Costco tell us what's qualified? Oh, and I also see that reward cards process at a higher rate. So, what's the higher rate? This is a pretty important detail when considering that reward cards typically account for 50-60% of total credit card volume.

In the interest of transparency, Costco should have phrased their disclaimer paragraph as such:

"The 1.48% rate used to advertise our merchant accounts makes our processing services look way better than they actually are. Realistically, you will pay a mid and non-qualified rate on many of your transactions. However, we've decided not to list those rates because they are a lot higher than the 1.48% qualified rate, and they would make it obvious that we're using bait-and-switch marketing tactics to take advantage of our customers."

Doesn't that read a little more true to form? If you're still considering Costco for a merchant account after reading this, be sure to ask them what the other* rates are before signing any agreements.

Cancellation Fees

Let's pretend for a moment that, like many people, you signed up for a Costco merchant account before you knew how horrible they are. It's not a big deal, right? You can just cancel the account and find a processor that offers more reputable rates and interchange plus pricing.

Surprise! You're locked into a three-year contract with a hefty merchant account cancellation fee. Costco's partner, Elavon, isn't stupid. They know they're selling overpriced processing services, so they need a way to keep people around once they realize they've been had.

The perfect solution is a tactic used by many processors — the dreaded cancellation fee. This leaves businesses with two choices — stay and overpay for processing, or leave and pay a hefty cancellation fee. Either way, Elavon profits nicely.

There's no reason for a processor to impose a cancellation fee if they're offering honest, competitive rates.

$300 Cash Giveaway

Wow! You can get a $300 Costco cash card just for opening a new merchant account. Hmm, how much does Costco have to make from a merchant account to justify giving away $300? Even with a product markup of 50%, they're still starting off $150 in the hole. That's not even taking into consideration their profit sharing with their partner Elavon.

Cash Giveaway

The point is that Costco is making a lot of money on credit card processing at the expense of small business owners. They're a great big-box retailer, but they should choose their partners more carefully.

Do yourself (a big) favor and steer clear of Costco's credit card processing catastrophe. Find the best credit card processing rates here at CardFellow by getting multiple quotes from reputable processors instantly.

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11 Responses to Costco Credit Card Processing = A Big Mistake!

  1. Bobbie says:

    Have had Costco Elavon for going on 6 years – retail sales. Process about $200,000 a year through them. I thought since it was Costco it would be a good deal – ABSOLUTELY NOT!. Their processing fees are the highest I have found. The highest interchange on Visa that I could find is 2.10% and 2.40% if swiped – MY HIGHEST COSTCO ELAVON FEE IS 3.25% + .29 TRANSACTION FEEAND THAT’ AFTER NEGOTIAITNG 10% OFF. 35% OF MY MONEY VOLUME IS AT 2.55% AND 3.25%
    I can’t believe that I really just started delving into this. Before it just seemed like to much to learn to weed through all the companies and rates. The cc processing sales reps are usually new to the job (it’s a tough job) and even though I didn’t know alot, they couldn’t provided answers.
    Seriously, do your homework, i’m down to 2 companies and they are both able to beat Costco Elavon by 66% savings. Elavon is riding on the fact that people trust Costco. Costco Elavon bundles their cards, which if you investigate- HAS YOU PAYING THE PROCESSOR THE MOST AMOUNT OF MONEY.

  2. H in California says:

    Elavon provided me with the wrong credentials and thousands of dollars went into someone else’s account when I swiped a credit card for payment. Elavon’s management really did not see that this was a big deal to a small business. They said the process to reverse this is 10 working days and they acted like they were doing me a favor to even rectify this issue they were responsible for. They refused to offer me any kind of restitution like waiving the credit card fee, they were rude and acted like I was bother them (I was speaking to a manager) They are NO friend of small businesses and shame on Costco for partnering with a company that is so incompetent!!

  3. Dean Tucci says:

    STAY FAR, FAR AWAY FROM THESE CON ARTISTS!! This company is a huge scam operation. We are a multi-million dollar media company and we process millions of dollars per year with zero chargebacks. When Charter One Bank was sold to US Bank in June of 2014 US Bank contacted us to move our merchant processing to them. Well, after 9 months we decided to give it a try primarily due to the potential money saving on fees and the added advantage of next business day deposits on batch settlements (normal V/Mc batch settlements come in 2 business days, not 1 day so for cash flow purposes this is a great selling point to use them . What a horrible mistake. Just as others have found out with Costco merchant processing, it’s not really Costco doing the back-end. It is a company called Elavon. We started processing and the first couple days, all ran as planned. The next couple of days they started to hold our deposits. They then called us to tell us they “needed to verify our website” before they could release our funds. We gave them the website and I point blank asked if there was a problem to continue and they said no. Just “some account verification was needed” and that our funds would be released that day. Well, 3 more business days went by and a total of a now $11,000 was being held in 6 days. When I called again, they lied again about the release of funds, but did tell me that they were closing my merchant account and my funds would be held for 270 days?! I had a meltdown and now our legal is involved and complaints have been filed with the IL and TN AG and the BBB. US Bank is also trying to get this resolved, but to date no funds. When asked why they were closing our account, they simply stated “this is not a business that we want to handle”. This company is a total scam operation. Luckily we are a large enough business to where this really won’t effect our cash flow, but if you run a small business a merchant processor plays games like this it could devastate your company or put you out of business. STAY FAR, FAR AWAY FROM ELAVON!!!

  4. Hosed in Oregon says:

    Our local bank, through a partnership with Elavon, steered us to Elavon for processing. This was a very expensive mistake in the thousands of dollars and after six months of this fee and that fee, this rate and that rate, indecipherable statements and lousy customer support, we finally switched processors.

    It was only after threatening a small claims lawsuit — to include our local bank — that we were allowed to leave without incurring termination fees under the three year contract (which is very sneakingly included on the agreement in small print by reference to a 62 page website contract).

    Run, run, run away from this company.

  5. mo says:

    Im a small business that has been using the same company for about 12 years. I have never quit them because when I call to quit, they always rate review and make adjustments. I realise this is a big game business and for the layman can be daunting. Im frustrated as I thought costco may be the better route, but after reading reviews they seem just like the rest of the sharks. Does anybody have a better source or can anybody refer a better processor.?
    credit card blues~~
    Thank you~

  6. T. says:

    I’ve been doing a lot of research on merchant services/credit card processing for my start-up. This is the great information. A buddy of mine is a franchise owner and recommended Costco. He uses them for lots of different things/reasons. He does a lot higher volume than I and can (apparently) afford to take unnecessary losses on hidden fees. I can’t. My search goes on for the best merchant services company for my web based company.

    • Ben says:

      Hi T.,

      The most competitive credit card processing service is right here at CardFellow. Simply sign up for free to receive instant quotes from multiple credit card processors, and I can assure you, the quotes you receive at CardFellow will be more competitive than what your buddy is paying through Costco Merchant Services.

  7. Thank you for this very insightful post. I just moved to Massachussets and the bank I opened an account with uses Elavon. The rep was incompetent and unaccountable and gave me a story after I questioned her and wanted something in writing about how Elavon doesn’t allow credit card transactions for phone consultations. She didn’t realize I’m from the media, because I also work as an energy healer and the account was for those services. I’m planning to investigate what she said but I was considering Costco as an alternative. Your post could not have been more timely for me even though you wrote it a few months ago. I plan now to do a cover story on this.
    Thank you

  8. Pingback: Sam’s Club Credit Card Processing Reviews, Rating and Complaints « Merchant Maverick

  9. Pingback: Costco Merchant Services, Reviews, Rating and Complaints « Merchant Maverick

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