We at Fig Pay are always looking to bring to you the latest and greatest in the industry and we came across this article that we wanted to get to you in its entirety. An article done by Frank Kehl. The link for this article can be found here
Small Business Owners: This is the Biggest Misconception about Merchant Account Pricing
While cash and checks used to be the primary means by which consumers paid for their purchases, today people are increasingly using credit and debit cards when it’s time to check out. For businesses, being able to take “plastic” is more important than ever.
Accepting credit cards has traditionally required having a merchant account, and they can be very expensive. With an assortment of fees, complicated processing rates, and long contracts filled with fine print, it’s challenging to estimate the cost of a merchant account.
Why Processing Rates Aren’t Everything
Selecting a good merchant account provider for your business can be a bewildering experience. Competition is fierce, and there are dozens of providers out there vying for your business. Almost all of them will claim to offer you lower processing rates than their competitors.
Whether you check out an account provider’s website or talk to one of their sales agents, the story is the same: We have the lowest rates in the industry. There are two things that are wrong with this claim. First, it’s usually not true. Processing rates are complex and highly variable; many companies will quote you their lowest possible rate without telling you that the other, more common rates are three or even four times higher. Second, it’s misleading because it ignores the cost of all the fees you’ll also pay to maintain your account.
With so many variables to consider, it’s difficult to estimate the true cost of a merchant account. Bombarded by “lowest rate” promises and pressured by sales agents, many merchants are under the misconception that the company offering the lowest rates will be the least expensive overall. However, processing rates are only one part of the equation. If you don’t also consider your account fees, your merchant account will end up costing you much more than you thought it would.
Processing Rate Plans
The most common rate plans are tiered, interchange-plus, and flat-rate pricing. Tiered pricing consolidates processing rates into three tiers: qualified, mid-qualified, and non-qualified transactions. It’s the most common pricing model offered by merchant account providers, but it’s usually the most expensive as well. While rates for qualified transactions are reasonable, most transactions will actually fall into the mid-qualified or non-qualified tiers, which have much higher rates.
Interchange-plus pricing is more complex than tiered pricing, but it’s also more transparent. Interchange-plus rate quotes allow a merchant to see how much of a processing charge is going to the credit card associations (i.e., Visa or MasterCard), and how much their processor is keeping. Interchange-plus rates are generally lower than tiered rates.
Flat-rate pricing is used by companies like Square to bring processing costs down. Every transaction is processed at the same rate, making it easier to estimate your costs. While flat rates are usually higher than either tiered or interchange-plus rates, they also cover the costs of maintaining your account. This eliminates most monthly and annual fees, creating a fairer “pay as you go” pricing model.
Flat rate pricing generally works best for small or seasonal businesses that only want to pay for their account when they are using it. For large businesses with a high processing volume and for whom fees aren’t a significant expense, interchange-plus is usually the best option. There are no advantages to tiered pricing, regardless of anything a sales agent might tell you.
Fees, Fees, and More Fees
Merchant account providers are notorious for charging a variety of monthly and yearly fees to maintain your account. Besides a monthly fee, you’ll also have to pay for things like PCI DSS compliance, chargebacks, and terminal leases. If your business includes e-commerce, expect to pay extra for a payment gateway. Most providers offer optional services such as POS systems that also come with extra fees.
Compounding the problem is the fact that most providers don’t fully disclose their fees. Company websites rarely provide a complete list of fees, and sales agents have a poor reputation when it comes to fully divulging fee information. The only way to really know in advance what you’ll be paying for is to slog through every word of your contract’s fine print. Naturally, you’ll want to do this before you sign.
Just like that expensive membership you bought at the gym (that you never go to), a traditional merchant account will suck money out of your bank account on a regular basis, whether you use it or not. For a small business or one that’s just starting up, merchant account fees can quickly exceed the total processing charges you pay for actually using your account.
How to Estimate Your Overall Costs
Before you sign up with a merchant account provider, you’ll want a clear idea of what it’s going to cost you. Your overall costs will be the sum of both your fees and your average processing charges. You can accurately estimate your fees by thoroughly reviewing your contract and adding up every fee that you’ll have to pay on a regular basis.
Processing charges are much harder to estimate, but you can get in the ballpark by looking at not only your overall monthly processing volume, but also your average sales ticket size and your typical number of credit/debit transactions. For interchange-plus pricing, use the average overall processing rate. If you’ll be on a tiered pricing plan, ignore the low qualified rate and use the mid-qualified rate.
While the numbers you come up with will only be rough estimates, they should give you an idea of your total projected costs. As a very general rule, businesses processing less than $10,000 per month will usually benefit from signing up with a no-frills service like Square–despite the higher processing rates. Businesses processing over $10,000 per month will typically benefit from a full merchant account with lower interchange-plus rates.
>>>> Great advice to what you need to look for when you are considering your credit card payment processing partner! We would like to discuss with you all that is involved in getting you the best rates, and cost savings possible for your situation. Please feel free to contact us by CLICKING HERE
