It’s not enough to simply read a merchant processing statement; the real goal is to understand what you are reading, where your money is going, and to determine whether your business has competitive credit card processing fees.
This article will provide the general steps and knowledge necessary to decipher your small business credit card processing statement, and will link to detailed examples of actual statement analyses that will allow you to follow along as we dissect various merchant account statements.
Existing Clients: If you used CardFellow to find your current processor and you have questions about your statement, please contact us and we will be happy to help you. Keep in mind that all CardFellow clients also get free quarterly statement monitoring.
New to CardFellow: If you don’t have the time to learn how to read your statement, we would be happy to teach you in five minutes or less. Simply sign up for free to receive credit card processing quotes through CardFellow’s marketplace, and upon request, we will provide you with a comprehensive comparative statement analysis just like the ones referenced in this tutorial. If you would like, we will also take you through the analysis line by line to show you how processing charges are actually applied.
- The Goal of Understanding Statements
- Barriers to Understanding Statements
- Steps to Understanding Statements
The Goal of Understand Statements
The goal of understanding a monthly processing statement is being able to answer the following questions:
- How much am I paying in base cost?
- How much am I paying in markups?
- Can I lower base costs?
- Is my markup competitive?
Each of these components is crucial to ensuring that you’re paying as little as possible for credit card processing. By the time you finish this tutorial you will be able to read your own statement and answer these questions with confidence.
Barriers to Understanding Statements
The three main barriers to understanding a merchant processing statement are lack of knowledge, lack of consistency, and lack of transparency. Let’s look at how to address each of these barriers.
Not knowing what to look for is the main barrier to understanding a processing statement. Fundamental knowledge of how credit card processing fees work is a prerequisite to deciphering charges on a processing statement.
This tutorial will help you overcome this barrier by covering the necessary foundational knowledge about credit card processing fees.
The layout and structure of statements vary widely among merchant service providers, making for many different formats. Not only does this make it tough to understand charges on individual statements, it makes it tough to learn how to read a statement when tutorials such as this one don’t match your processor’s statement format.
The example statement analyses provided with this tutorial use statements from various processors. You should be able to find a statement analysis with a format that is very similar to your own, which will allow you to follow along closely.
Merchant service statements embody the lack of transparency that is a major systemic issue in the credit card processing industry. Tiered pricing (also called “bundled pricing”) makes it possible for processors to completely conceal base processing charges.
This tutorial will show you how to overcome the opacity of tiered pricing by reverse engineering base costs to create an accurate estimate of fees.
Related Article: The Tiered Pricing Trap.
Steps to Understanding Statements
Let’s get started by outlining the basic steps to dissecting a merchant processing statement. Each step is important, and some build upon the previous, so be sure to follow links that explain a supporting topic further if you’re unclear on any details.
Separate the Components of Cost
The first and most important step in reading a statement is separating base cost or wholesale from markups. Credit card processing is like anything else in that there’s a “wholesale” base cost and a markup on top of that.
If gross processing charges for a given month are $1,000, you should be able to look at your statement and see which portion of the $1,000 is going toward base cost and which portion is going toward the processing markup.
Comprehensive detail about the components of credit card processing cost can be found by clicking that link, but for the purpose of reading a statement, general knowledge of charges will suffice.
Base Cost / Wholesale
Interchange fees (fees that go to banks that issue credit cards) and assessments (fees that go to the credit card companies) combine to create the base cost of credit card processing that is the same for all processors. The sum of interchange fees and assessments is the credit card processing industry’s version of wholesale pricing.
Don’t worry about trying to decipher base cost on your statement right now; we will cover that in a moment. For now, the important point to understand about base cost is that it is non-negotiable and the same for all processors. The base cost your business pays now is the same base cost it will pay if you switch processors.
The markup portion of credit card processing services is any charge above the base cost (total of interchange and assessments). The markup is the only negotiable area of processing costs, and as you will see, it can also be the source of much aggravation when reading statements.
Identify the Pricing Model
Keeping in mind the differences between base cost and markup, the next step is to identify the pricing model that the processor is using to assess fees.
Tiered / Bundled Pricing
Tiered or bundled pricing is the most common form of pricing, and it is identified in a couple different ways.
Key Terms: Qualified, Mid-Qualified, Non-qualified
The easiest way to spot tiered pricing is by the terms “qualified,” “mid-qualified” or “non-qualified” listed anywhere on the statement. Keep in mind that the terms may be abbreviated in a number of different ways such as “qual,” “mqual,” and “nqual.” Tiered pricing is easily identified by the presence of these terms in the example statements below.
Another way of identifying tiered pricing is by rates that are repeated across different card brands. Examples of such statements are shown below.
Note: In recent years, Visa has started using the term “non-qualified” for some of its downgrade categories, so that by itself is no longer a 100% indication that you’re on tiered pricing. However, seeing “non-qualified” should still prompt you to check on your pricing model further.
Interchange Plus / Pass-Through Pricing
Another form of credit card processing pricing is interchange plus, or interchange pass through. Interchange plus statements look more complicated than tiered statements, but they provide far more useful information about charges. Interchange plus statements are most easily identified by a consistent low discount rate for all card brands, or by itemized interchange charges.
Consistent Low Discount Rate
Interchange plus pricing statements will show the processor’s discount rate as a single low percentage for all card brands. The statements below show examples of how the processor’s discount rate appears on various interchange plus statements.
Itemized Interchange Charges
Interchange plus processing statements will almost always itemize interchange detail. A few examples of interchange plus statements that itemize interchange charges are shown below.
Note: The existence of itemized interchange detail is a good indicator of interchange plus pricing, but tiered statements may also itemize interchange detail. So, don’t assume that just because interchange categories are shown that a statement is interchange plus. Look also for elements of tiered pricing such as the existence of the terms “mid-” or “non-qualified”, or consistent discount rates for all card brands. If any elements of these elements exist, assume the statement is based on tiered pricing.
Related Article: Understanding Interchange Plus Pricing.
Flat Rate Pricing
Another pricing model that has gained in popularity is flat rate pricing, where the processor charges you one fixed flat rate that doesn’t change by card type. It’s a form of tiered pricing. Popular companies like Square, Stripe, PayPal, and Braintree charge on a flat rate model. It’s important to note that flat rate pricing still includes interchange and assessments (the base cost) but that it conceals those costs from you. The result is that flat rate pricing is not a transparent pricing model, and makes it hard to see if you’re overpaying and by how much.
Remember, the way to determine if you have a competitive processing solution is to separate the base costs and the markup. If your statement doesn’t provide the details to separate those costs, it’s difficult to tell how much you’re paying in markup vs. non-negotiable costs.
Related Article: Flat Rate Processing = Fool’s Gold.
Identify the Discount Method
Credit card processors can charge fees using daily or monthly discount, and the discount method used will affect how total fees are calculated on a processing statement.
On daily discount, a processor charges its qualified rate prior to settlement, and then charges credit card transaction fees, non-qualified rates, and other charges at the end of each month. Daily discount is identified by the existence of the term less discount paid on a processing statement.
In order to calculate total charges on a daily discount statement, fees paid throughout the month must be added to fees charged at the end of the month.
On monthly discount a processor charges all fees in one lump sum at the end of each month. Statements based on monthly discount are much easier to reconcile than statements based on daily discount and many businesses prefer it.
Still need help with your statement? CardFellow clients can request a statement audit and assistance understanding the charges at any time. Give us a call or sign on to our livechat system with any questions