Once you start shopping rates, you begin playing a shell game that is fixed in the processor's favor. You can't win, and you will end up paying hefty processing costs even if you choose the processor that offers the "lowest rate." As I'll explain in this article, it's not a processor's rates that are most important. It's the pricing model and markup that have the greatest impact on cost.
Learn the Fundamentals
Knowledge is money when it comes to credit card processing. You will pay the highest fees if you don't take the time to learn the fundamentals of how processing charges truly work. CardFellow has quite a few resources that outline these fundamentals in great detail, such as our credit card processing guide and articles on credit card processing fees. I encourage you to explore these articles, but for now, I'll provide a brief overview of the processing landscape. Credit card processing is like any product or service in that it has fixed costs and markups. Fixed costs are those that are the same for all processors, and markups are where an individual processor makes its money. With credit card processing, fixed costs are comprised of interchange rates paid to the issuing banks of customers' credit cards and assessments that are paid to card brands (Visa, Mastercard and Discover). The sum of these two components of cost will be exactly the same regardless of which processor a business uses. A processor makes its money by charging fees beyond the sum of interchange and assessments. At CardFellow, we refer to these processor charges as markups. So, the three components of credit card processing cost are interchange, assessments, and markup. The first two (interchange and assessments) comprise wholesale or fixed costs, and the last one (markup) is where the processor makes its money. Here's the key: the most competitive processor for your business is not the one with the lowest rates, it's the one with the lowest markup.Rates Distract from Markup
Processors use rates to obscure the actual cost of processing. Rates are only one component of cost, and in some cases are invented and manipulated by the processor. This is common when using a specific type of credit card processing pricing model referred to as bundled or tiered pricing. Essentially, tiered pricing functions by allowing a processor to make up its own rates. Then, the processor uses something called a qualification matrix to route interchange rates (its cost for a transaction) through the rates it created. For example, there are a few hundred different interchange rates among Visa, Mastercard and Discover. However, processors typically quote businesses six or fewer rates as their own pricing. They're able to condense a few hundred interchange rates into just a few contrived rates by bundling them via a qualification matrix. So it doesn't matter what the actual interchange cost is - a variety of transactions with different interchange rates will end up at one (usually higher) processor-set rate. The real kicker is that a processor can change its qualification matrix at any time without notice to a business. This is what completely eliminates any correlation between low rates and low cost. Processors like Intuit, that make tons of money through tiered pricing, want you to believe that low rates equal low cost, but that is simply not true. In fact, more often than not the exact opposite is true. The following two articles go into more detail about bundled pricing and how processors use rates to extract maximum profit from businesses. They're definitely worth the time to read: Non Qualified Rate: A Figment of Your Processor Imagination Qualified, Mid-Qualified & Non-Qualified Credit Card Processing Rates Rates are nothing more than a distraction from the true ingredient of a competitive processing solution, which is a low markup.Focus on Pricing Model & Markup
When shopping for a competitive credit card processor, your first concern should be pricing model followed by markup. Disregard any processor that quotes "rates." Referring back to the first section of this article, any processor's cost is the sum of interchange and assessments. So, the most competitive processor will be the one that allows your business to process for as close to the sum of these two components as possible. Instead of asking a processor "What's your rate," ask, "What's your pricing model and markup?" After all, it's not a processor's "rate" that really matters; it's the markup over cost. So, when you're shopping for a competitive processor the first step is to ensure the processor is using a pricing model that assesses the components of cost separately. In other words, you don't want the processor's markup intertwined with its costs of interchange and assessments - which is exactly what happens when a processor quotes "rates" via a bundled pricing model. Once you've secured a pricing model that separates the components of cost, focus on any costs beyond the sum of interchange and assessments. Collectively, these costs make up the processor's markup. CardFellow makes it easy to find a competitive processor following the above rules. Check out more about how CardFellow will help you lower processing costs on our About Us page or How it Works.Beware of Pricing Model Complacency
It's been my experience that people tend to become complacent as they learn more about the inner workings of credit card processing charges. For example, the category of pricing models that separate the three components of cost as described in this article are generally referred to as interchange plus or pass-through. Once people learn these phrases they often believe interchange plus pricing automatically equates to competitive charges. This is not true. In fact, it's almost as short-sighted as asking a processor for its rates. The following two articles address this misconception in more detail: What is a Good Interchange Plus Rate? Interchange Plus Pricing: You Can Still Get Gouged! When it comes to credit card processing, it's easy to learn just enough to be dangerous. There is no one attribute that makes a competitive processing solution, including the pricing model. A truly competitive processing solution is a combination of many small details that impact overall pricing and terms. Creating a profile in CardFellow's marketplace will allow you to see what a competitive processing quote actually looks like. Just be sure to do your homework so you know a competitive quote when you see it.
Ben Dwyer
Ben Dwyer began his career in the processing industry in 2003 on the sales floor for a Connecticut‐based processor. As he learned more about the inner‐workings of the industry, rampant unethical practices, and lack of assistance available to businesses, he cut ties with his employer and started a blog where he could post accurate information about credit card processing. As the blog gained in popularity, Ben began directly assisting merchants in their search for a processor. Ben believes in empowering businesses by providing access to fair, competitive pricing, accurate information, and continued support. His dedication to transparency and education has made CardFellow a staunch small business advocate in the credit card processing industry.
