Credit Card Processing

Costco Credit Card Processing = A Big Mistake!


April 06, 2020

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 with bait and switch rates. In short, you will pay through the nose to process credit cards, and you’ll likely be stuck doing it until your multi-year contract expires.

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

Note: this article focuses only on Costco’s merchant services rates and fees. You can get a full review of Costco’s processing services in our Costco credit card processing review.

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 website and I’ll show you how to spot tiered pricing.

Coscto credit card processing rates

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 website shows a qualified rate of 1.22% plus $0.12 for on site and in-store transactions.

This leads us to believe that those transactions should be charged a fee of 1.22% plus $0.12. 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 1.22%, but they’re not telling you which interchange categories are routed to the “qualified” tier. Costco (or rather, Elavon) won’t consider all of your transactions “qualified.” They can decide which transactions to charge according to the “qualified” rate published and which to charge according to higher, unpublished, “non-qualified” rates.

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 website).

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 1.22% plus a $0.12 transaction fee on their website. This seems too good to be true considering that 1.22% is lower than the rate that banks charge processors (interchange rate). That means that Costco would actually lose money, as they would be charging less than wholesale cost.

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 1.22%?

Bait and Switch Pricing

The answer lies in the fine print (as always) on Costco’s site. After the 1.22% rate there’s a footnote (the number 2) that corresponds to the following paragraph:

Visa/MasterCard/Discover service is sponsored through Elavon. Rates listed are for qualified transactions. A monthly minimum charge applies when total transaction fees and per-item charges are less than $20 per month. A $25 Application Fee and $4.95 Monthly Statement Fee apply for Non-Executive Members. Rates and fees may change without notice. Rate and acceptance are subject to underwriting and business approval. Call Elavon at 877-240-3317 for all terms and conditions.

(Emphasis added by CardFellow.)

That paragraph gives Costco the cover to only publish the rates for qualified transactions.

Qualified Transactions

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.

Okay, so the 1.22% is only for qualified transactions. So where does Costco tell us what’s qualified? And since other cards will be processed at a higher rate, 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 1.22% 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 1.22% 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.

“Lowered” Pricing

A 2016 screen grab (below) from Costco’s site indicates that they’ve “lowered” the pricing. You’ll note that the quoted rate still references “qualified” transactions, which means you can expect the same bait-and-switch tactics.

Costco Merchant Services

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 could be 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 to every business that signs up? 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.

Marketing Tactics

Costco actively pushes its credit card processing, including through its customer magazine. The Spring 2016 issue, pictured, includes a full page ad dedicated to telling you that the pricing is competitive and the service excellent. There’s a nice anecdote about a happy customer, and a smiling Costco rep. It even includes the great news that Costco and Elavon have lowered pricing even further than in the past. The qualified rate quoted is a mere 1.22% + $0.12 per transaction! But of course, that’s not what you’re going to pay.

Costco Merchant Services 2016

As with disclosures on the website, the ad doesn’t provide details about what transactions “qualify” for that low rate. Since the qualified rate is below cost, it’s safe to assume that very few transactions will ever qualify. Instead, you’ll end up with more expensive “mid-qualified” and “non-qualified” pricing, which is conveniently omitted from the ad and disclosures.

Do yourself a (big) favor and steer clear of Costco’s credit card processing catastrophe. Find the best credit card processing here at CardFellow by getting multiple quotes from reputable processors instantly. No cancellation fees, no “qualified” transactions, just competitive pricing.

Ben Dwyer

BY 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.

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  1. 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

  2. from T., on November 4, 2012

    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.

    • 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.

    • from Kay Warren, on June 30, 2017

      Have a look at Square. I’ve had a bad experience with Elavon, and got a square reader in case of emergency. The rate is a little higher, 2.75%, but that’s for all cards, even rewards cards. The reports are easily available on your dashboard, even during the day while you’re still selling. The cost for the readers is cheap. I’m seriously considering making a permanent and full switch over to Square. The reports are extensive, there is no PCI compliance, no monthly wireless or statement fees. I’ve been doing traditional card processing with other companies for 15 years, and so far I’m really impressed with Square.

  3. from mo, on January 29, 2013

    I’m 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. I’m 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?

    Thank you,
    Credit Card Blues

    • Hi Credit Card Blues,

      The key to your frustration is right under you nose. Read my comment above…

  4. from Hosed in Oregon, on November 6, 2014

    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 sneakily included on the agreement in small print by reference to a 62 page website contract).

    Run, run, run away from this company.

  5. 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!!!

  6. from H in California, on July 1, 2015

    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!!

  7. from JAN, on November 4, 2015

    It started with upgrading my Costco membership to Executive to get financial breaks on the Elavon/Converge processing. Sari Rivers was the salesperson and Linda Jones was our Manager and I was very impressed with them. Well, that was the one and only time I was impressed with anything/anyone about this entire situation and by the end neither was helpful.

    We were sent the wrong equipment in the first place, so when it was time to activate the system, after an hour, Marvin told us we needed to mail that equipment back and they would send another one. We waited.

    The new equipment came and we finally got set up with a tablet and software and PC access, but we soon found out the Converge reports were horrible and we could not get nearly enough information from them to balance our bank statement at the end of the month. Repeated calls to Elavon yielded nothing useful to us. What was the $5.00 charge for? How can I access good reports? How can I find a breakdown for the charges on my statement??? Call to Delona on 8/7/15, at 11:10am – transferred to Chris, transferred to Michael (Manager), email to Sari Rivers 8/7/15. Call to same number at 11:20am same day – Clinton, transferred to Michael (again). 8/1/15 Sari Rivers – finally answered her phone (I was feeling like she didn’t want to speak to me after she signed me up!) I asked about purchasing a terminal since we were having difficulty with the tablet and PC software – she ended up hanging up on me. I left messages with each person to have someone call me back – but no one ever did. No help here.

    8/18/15 talked to Amanda – she was helpful but could not solve my tablet/PC software problems. And no one had called back letting me know how much it would cost to just purchase a terminal after all the tablet problems.

    Out of the blue, on 8/19/15 Linda Jones called back. I told her about all the problems we were having and she sympathized with me and would ask how much a terminal would cost and call me right back – to this day 11/4/15 – I have not heard back from her.
    So, we are switching again. Twice in less than 5 months.

    I wish I could complain to Costco since they partner with Elavon – but, alas, no one at the Costco store knows anything about Elavon. I am very, very disappointed. I will certainly think twice about partnering with any company Costco advertises.

  8. from mark, on February 14, 2016

    Worst customer service, I have dealt with hour and a half wait times. I lost a lot of business since I could not take a credit cards until customer service got around to answering the phone. Changing CC company ASAP.

    • from Tomi, on March 21, 2017

      Customer service is terrible and very slow. The rates are very high and they try to trick you into believing your getting lowest rate.

  9. from Kay Warren, on June 30, 2017

    I quit my old company after 7 years because they were falling down on the job as far as customer service goes.I went with Elavon because I trust Costco. The upfront equipment price is not cheap, but $600 later I figured I was set. I signed up for the seasonal program. They said, “you can turn it on and off at will, just give us a couple of days notice” they said.I figured that being able to shut if off for the months I don’t use it would balance out the $600 terminal cost. So I signed up, processed for 2 months with no issues aside from the usual monthly surprises of how many of the cards (75%) they shifted to “mid” or “non” qualified rates. Honestly, that’s pretty normal. No fun, but not unexpected. Headed into winter, turned it off. Spring came, time to turn it on. Called in with 2 days notice to turn it on, and was told they actually require 3-5 working days notice. This is my 3rd largest show all year, this is not good. Take the terminal to the show, it won’t connect. At all. For all 3 days. My wares start at $50…. most people don’t carry that level of cash anymore. Card sales are 90% of my business, this is terrifying! My friend and neighbor helped me get the Square app onto my phone, and loaned me her spare reader. It’s the only thing that saved that show financially. So, I get home and call Elavon. Yet another thing they failed to tell me in that sales process is that each time you turn your terminal back on, you also have to buy a new SIM card. WHAT? It’s normally $20. I am really not happy, this is flat out deceptive sales practices. They are sending me a SIM Card free, but I feel used. The equipment wasn’t cheap, and now, since it’s software isn’t really compatible with other companies’ I’m stuck with it. Can’t switch to another traditional processor without buying more equipment. So, I’ll be ordering a Square “dip & tap” device for $49, and taking it with me to this next show. I’ll be trying it out.

    I was never interested in Square before, I felt it was more for the “fly-by-night” type of retailer. I didn’t trust it, and I wouldn’t have taken someone seriously who used it. But after using it for a weekend, I’m re-thinking that. It was SOOO easy. With Square, you don’t have to wait until the end of the month to see your fees. Their rate is a bit higher at 2.75%, but you won’t get slammed with the “unqualified” tier at 4% for rewards cards at the end of the month. No surprise PCI Compliance fees either. I’ve been wary of companies like square because you have cell coverage or wifi for it to work but honestly, coverage is good enough now that it doesn’t seem to be an issue. The reports are so much better, very accessible and easy to understand. I’m very seriously considering dumping traditional processors altogether, and going with Square. If I hadn’t spent so much on a terminal I’d be dumping Elavon right now.


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