Let me start by saying that processing rate structures are simpler than cell phone rates, but then again most things are.
The two rates that get the most attention are the discount rate and the transaction fee, so let’s start with those. The discount rate is the percentage of the transaction that will be deducted from the total transaction amount (also called the ticket size). The discount rate is calculated based on the interchange rate, a minimum percentage set by banks based on the industry and risk level of the merchant. Interchange rates can vary greatly depending on your business type and transaction methods. Card-present transactions in retail locations have a lower interchange rate than online transactions, just as supermarkets receive a lower interchange rate than pawnshops.
The transaction fee is a fixed amount deducted on each transaction. Some processors will include certain services within that fee, such as address verification and other authentications, while others will charge extra. It is important to differentiate between a transaction fee and an authorization fee, as many merchants are promised one but charged the other. An authorization fee is charged on every authorization performed, even if the transaction is declined, while a transaction fee is only charged on successful transactions. This can greatly affect the cost of your transactions, as a customer who mistakenly enters his card number wrong of few times before getting approved can shoot your cost up!
Some quick math:
| Ticket Size |
$45.00 |
|
|
| Discount Rate |
3.2% |
= |
$1.44 |
| Transaction Fee |
$0.25 |
= |
$0.25 |
| Total Cost |
|
= |
$1.69 |
| Amount You Collect |
|
= |
$43.31 |
Now that we got those out of the way, all we are left with are the basic service fees. The setup/signup fee should be carefully examined to see what it entails. This is the number one place where merchants discover that their bargain might not be the great deal they once thought. Merchants facing a signup fee + gateway fee + e-commerce fee should keep in mind that those fees are at the discretion of the processor, and quite often redundant and unnecessary.
Finally, monthly fees (sometimes called statement fees) are a fixed charge based on the services provided by the processor. Monthly minimums on the other hand are only charged if the transaction volume does not generate enough processing fees to cover the minimum. For example, using the math above, after six transactions a monthly minimum of $10 would disappear and not be charged to the merchant.
Final word of advice, don’t select a processor purely on their processing rates. Merchants with long processing histories will tell you that rates that are too good to be true often are, and repeatedly lead to a wide range of hidden fees and processing nightmares. Customer support, transaction speed, security and fraud prevention should all be carefully examined before making a final decision.
Understanding processing rates.
Let me start by saying that processing rate structures are simpler than cell phone rates, but then again most things are.
The two rates that get the most attention are the discount rate and the transaction fee, so let’s start with those. The discount rate is the percentage of the transaction that will be deducted from the total transaction amount (also called the ticket size). The discount rate is calculated based on the interchange rate, a minimum percentage set by banks based on the industry and risk level of the merchant. Interchange rates can vary greatly depending on your business type and transaction methods. Card-present transactions in retail locations have a lower interchange rate than online transactions, just as supermarkets receive a lower interchange rate than pawnshops.
The transaction fee is a fixed amount deducted on each transaction. Some processors will include certain services within that fee, such as address verification and other authentications, while others will charge extra. It is important to differentiate between a transaction fee and an authorization fee, as many merchants are promised one but charged the other. An authorization fee is charged on every authorization performed, even if the transaction is declined, while a transaction fee is only charged on successful transactions. This can greatly affect the cost of your transactions, as a customer who mistakenly enters his card number wrong of few times before getting approved can shoot your cost up!
Now that we got those out of the way, all we are left with are the basic service fees. The setup/signup fee should be carefully examined to see what it entails. This is the number one place where merchants discover that their bargain might not be the great deal they once thought. Merchants facing a signup fee + gateway fee + e-commerce fee should keep in mind that those fees are at the discretion of the processor, and quite often redundant and unnecessary.
Finally, monthly fees (sometimes called statement fees) are a fixed charge based on the services provided by the processor. Monthly minimums on the other hand are only charged if the transaction volume does not generate enough processing fees to cover the minimum. For example, using the math above, after six transactions a monthly minimum of $10 would disappear and not be charged to the merchant.
Final word of advice, don’t select a processor purely on their processing rates. Merchants with long processing histories will tell you that rates that are too good to be true often are, and repeatedly lead to a wide range of hidden fees and processing nightmares. Customer support, transaction speed, security and fraud prevention should all be carefully examined before making a final decision.