“Sometimes the wrong choices bring us to the right places.”
With nearly 10 years of experience within the merchant services industry as an independent sales professional, I have signed many merchant accounts based not just on the professional competency and competitive proposals that I’ve bought to the table, but also based on the fact that the merchant flat out made the “wrong choice” when they signed with their previous Merchant Service Provider (MSP). Many merchants just make the wrong choice in choosing one particular MSP over another—choosing companies with poor customer service or malfunctioning terminals, to ones that charge the merchant $100 a month on a 24 month lease for a terminal that wholesales for $350. However, while said mentioned issues are bad, what’s also bad is accepting a non-competitive bundled rate structure from an MSP when there is another more transparent, fair and balanced structure available.
The Series Continues
This is part two of a three part series that explains , how, through the power of knowledge, a small merchant can fully comprehend the rates they are being quoted, negotiate rates that are being quoted, understand the best rate structure to utilize, and process transactions in a way such that most transactions are falling in the lowest interchange tier.
During part one, we took a look at the definition of interchange and how you as a small merchant can keep up on all of the interchange wholesale price charts as they are released in April and October of every year. For this second edition, we want to look at the different rate structures that your MSP can utilize for the pricing of your merchant account, and how only one structure provides true transparency.
Six Different Structures
When quoting rates for a merchant account, an agent representing an MSP usually has the choice of six different pricing structures. Only one structure is transparent in terms of educating the merchant on how the pricing works and how much their MSP is making in revenue. The other five structures are bundled and opaque, not allowing a merchant to truly understanding how pricing functions and how much their MSP is making revenue off of their processing volume. This makes it nearly impossible for a merchant to accurately shop processing rates in the marketplace.
The Best Structure: Interchange Plus Pricing
To understand what a bad pricing structure is, you have to first understand what a good pricing structure looks like. Interchange Plus Pricing, also referred to as Cost Plus Pricing or IC Plus Pricing, is a pricing structure where your MSP will pass through all of the interchange base costs (which are set by card brands such as Visa and MasterCard), and then you pay a basis point markup to your MSP. It’s basically as the name describes: Interchange Plus.
As mentioned in part one, you can find the Visa Interchange Chart here and the MasterCard Interchange Chart here. So for example, let’s say you receive a $200 transaction on a Visa consumer rewards card that lands under interchange category CPS/Rewards 1. This category has a base cost of 1.65% + $0.10. Let’s say your MSP adds in 30 basis points along with 10 cents for revenue. You would end up paying a total of $4.10 for this transaction, $3.40 of which would go to interchange and 70 cents would go to your MSP.
Interchange Plus Pricing is the most transparent pricing structure available as it provides full visibility over all of the following important aspects:
- The types of cards that you receive from your customer base. The types of card types that you could receive are regular consumer, consumer rewards, business and international credit cards, as well as offline/signature debit cards (also known as check cards).
- What you are paying in interchange base costs for the types of cards you receive.
- What you are paying your MSP for their basis point addition to the interchange base costs of the types of cards you receive. Note the only aspect that’s negotiable would be that of the MSP’s basis point addition to interchange as you cannot negotiate the base costs of interchange. But by having this knowledge, you are truly equipped to shop your processing costs between MSPs.
Now that we understand the best and most transparent pricing structure, we must now discuss the other five structures which are not only confusing, but give you absolutely no way to truly shop/compare rates between MSPs. Merchants have long been confused with the pricing structures of merchant accounts and would try shopping one bundled rate structure against another, often choosing the MSP with the lowest “fixed rate”, even though the truth of the matter is that “fixed rate” would only qualify for the lowest risk transactions on interchange, while all other transactions (which ends up being most of your transactions) downgrade into rates that are very expensive. This entire process just leaves merchants confused and frustrated when trying to decipher their processing costs.
With bundled structures, an MSP will take all regular consumer cards, consumer reward cards, business cards, international cards, and offline/signature debit cards and price them all at one flat percentage based on an aggregate estimate of interchange. You as a merchant will have no idea what types of cards you receive from your customers, what the interchange base costs are for said cards, nor what your MSP is making in revenue off said transactions. The bundles will manifest in five different structures:
2-Tier: You will get a flat qualified rate and a non-qualified rate. The qualified rate is going to be for your regular consumer cards and offline/signature debit cards and all other cards including the consumer rewards, business cards and international cards will be priced under a flat non-qualified rate. Note, your regular consumer cards and offline/signature debit cards could downgrade to non-qualified if you do not complete certain required batch procedures, such as batching out within a 24 hour timeframe. Also, if you are a Card Present merchant (which means most of your transactions are swiped) then expect your key-entered and e-commerce transactions to be listed under non-qualified as well.
3-Tier: You will get a flat qualified, mid-qualified, and non-qualified rate. The qualified rate will again be your regular consumer cards and offline/signature debit cards, but the mid-qualified rate will now be your consumer reward cards, while non-qualified will be your business cards and international cards. The same principle above applies—if you don’t batch within a particular time frame then your qualified and mid-qualified transactions could downgrade into the non-qualified rate category, same as if you are a Card Present merchant and receive some key-entered and e-commerce transactions.
4-Tier: Same as 3-Tier, but instead you will get a flat qualified, mid-qualified and non-qualified rate, as well as a special rate for offline/signature debit cards (also called check cards).
6-Tier: Same as 4-Tier where you will get a flat qualified, mid-qualified and non-qualified rate, as well as a special rate for offline/signature debit cards (also called check cards), but you will also will get a special rate for business cards and a special rate for international cards.
Enhanced Bill Back: This bundled structure is by far the worse of the five bundled options. With this structure you are going to receive a qualified rate which will usually include the regular consumer cards and the offline/signature debit cards, but then all other cards will be put into a “bill back bucket”. The bill back bucket will vary between MSPs, but usually you will pay the interchange related cost of all of the other cards that fall here, plus an additional surcharge that might be anywhere from 1% – 2%. MSPs might set the qualified rate at 1.75% and the bill back bucket at 2%, which confuses merchants into thinking they are on a 2-Tier pricing structure with non-qualified transactions at 2%, but that’s certainly not the case.
In the final edition of the series, I will conclude this discussion by going into more information on how your business can be structured in such a way to qualify for the lowest interchange pricing, as well as information on how certain industries receive special interchange pricing structures.
John Tucker is Managing Member of 1st Capital Loans LLC, as well as an M.B.A. graduate and holder of three bachelor’s degrees in Accounting, Business Management and Journalism. Tucker has over 9 years of professional experience in Commercial Finance and B2B Sales. Connect with Tucker on LinkedIn by clicking here, or contact Tucker at Tucker@1stCapitalLoans.com or at 586-480-2140.