Confused by all the fees associated with accepting payment cards? Here’s a Credit Cards 101 lesson for you:
Here are some excerpts from the transcript:
“… Today we’re going to talk about interchange. That’s a term you hear all the time in my industry, and I’m going to explain exactly what that is for you. …
“Every single time a customer uses a credit card, there are different entities that are going to take a piece of that transaction. There’s the card issuing bank, there’s the card association member, there’s the processor. What the card issuing bank and what the card association member get out of each transaction is fixed by law, and it’s known as interchange.
“Now, there are hundreds of different interchange rates. They vary mostly according to risk, so the riskier a transaction, is the more it’ll cost merchants to handle that transaction. For example a keyed transaction is riskier than a swiped transaction. …
“Processors have a couple different ways to handle all these different interchange rates. They can take these hundreds of different rates and say, for the lowest third we’re going to charge you maybe 1.5%, for the middle third we’ll charge you 2.5%, for the top third we might charge you 3.5% This is called tiered pricing, and it’s .. not to the merchant’s advantage.
“What I strongly recommend for all my clients is what’s known as ‘cost-plus pricing’ or ‘interchange-plus pricing.’ The way this works is that the processor passes through all those fixed costs all those various interchange rates on every single transaction, and charges a ‘plus’ on top of that. The reason why this is advantageous to a merchant is because the card associations – Visa, MasterCard, etc. – make lower interchange rates available to certain kinds of businesses and organizations than they otherwise would. For example nonprofits qualify for a lower interchange rate on certain transactions. Business-to-business transactions can often come with a lower interchange rate than a business-to-consumer transaction. However, if you are not set up with interchange-plus pricing, you’re not the one who’s taking advantage of these lower costs…
“(Interchange-plus pricing) … allows the merchant to have the greatest advantage from the lowest possible rates, plus it allows me to guarantee that I will pass through those interchange cost to you and we will never increase the rates and fees you pay on top of interchange.”