Credit Card Processing Blog

Having read this article’s title, you may be wondering why anyone would want to write a whole blog post about credit card acceptance for merchants selling ringtones. Well, what I am about to share with you will actually be equally applicable to all merchants that sell products and services with very low average ticket. I chose to put ringtones in the title simply because I just signed up such a merchant last week and the experience gave me the idea of blogging about their specific circumstances, as related to pricing for credit card acceptance.

First, let me give you the bad news. If you sell very-low-average ticket merchandise, it is unlikely that, whatever you do, your cost of accepting cards will come even close to what merchants selling low-, medium- or high-ticket merchandise pay. However, there is a significant probability that a wrong choice will drive your cost much higher.

Why Are Ringtones a Special Case?

Merchants selling ringtones, as well as all other sellers of very-low-average-ticket merchandise, are hit especially hard by the way credit card processing pricing works. All pricing models are based, some more loosely than others, on Visa’s and MasterCard’s interchange rates, which for the most part do not take ticket size into account. Let me explain.

The interchange fee is the biggest component of the discount rate, which is the compound fee merchants are charged for each processed card transaction. The interchange consists of a percentage of the sale’s amount and a fixed per-transaction fee (for example 1.89% + $0.10). Then the processing company (e.g. UniBul Merchant Services) adds its own fee to the interchange, say 0.25% + $0.15 (I am using an interchange-plus model in my example for the sake of simplicity, but the rule applies to the other models as well). So the discount in this case would be 2.14% + $0.25.

If you sell ringtones for, say, a dollar a piece, the per-transaction portion of your discount in our hypothetical example will represent 25 percent of the total sale’s amount, while the percentage fee will only account for 2.14 percent. By contrast, if your average ticket amount were $100, the respective figures would be 0.25 percent and 2.14 percent. So the weight of the per-transaction component of the discount rate is in an inverse relation to the ticket size. That is to say, as the former increases, the latter decreases and vice versa. The percentage component’s weight is of course independent of the ticket size.

What Are You to Do?

Now that you know that the per-transaction component of the discount rate is disproportionately more important when you sell very-low-ticket items, what are you to do about it?

Firstly, you should select an interchange-plus type of pricing plan. We have previously examined in detail the basics of this type of pricing structure and have explained why you should choose it over any other available pricing model. The importance for very-low-ticket merchants to make this choice is even greater, as non-qualified rates in other models typically feature a higher per-transaction fee than qualified rates. This is what you should try to avoid at any cost. By contrast, with interchange-plus, the percentage component of your discount rate will fluctuate from one transaction to another, but the per-transaction fee will remain constant.

Next, after you have selected an interchange-plus pricing model, you need to negotiate the lowest per-transaction fee you can get. Tell your processor that you would agree to a much higher percentage, as long as they lower the per-transaction charge. You will find that many processors will be willing to accommodate. Make sure to add up all per-transaction fees your processor may be charging (starting with the authorization fee) and negotiate on the total.

The Takeaway

Even if you do what I am suggesting above and are able to negotiate a good per-transaction fee of your discount rate, its weight in very-low-average-ticket sales will still be significantly higher than the one of the percentage fee, because the per-item component of most interchange rates is $0.10 (this is non-negotiable). Then the processor will have to add a few cents to cover its own costs. So you can’t go lower than the mid-teens and will probably end up a bit higher than that. But that is a much better outcome than the one you would’ve had to live with, if you hadn’t done your home work.

Ringtone-selling merchants will be paying higher transaction fees than their peers in most other industries for as long as the interchange remains in its current form. The Fed is about to enact a rule that will limit the per-transaction component of the interchange for debit cards to $0.05, which will provide some welcome relief to low-ticket merchants, but there are no signs that similar changes will come to credit cards any time soon.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

A friend of mine recently told me that 90 percent of his company’s credit card transactions are processed at mid- or non-qualified rates, known as “downgrades” in industry speak. His business provides web hosting services mostly to small e-commerce merchants, which automatically places it in the high-risk category of the payment processing industry.

The high-risk designation, however, is not the issue here. After all, if you look at Visa’s and MasterCard’s interchange tables, on which all pricing models are based, what you see is that rates are determined by the interplay of two criteria: type of card and type of acceptance (card-present or not). The qualification tiers are used solely by the processors. So the issue is the tiered pricing model itself. Let’s see why this is so.

Tiered Pricing Basics

The tiered pricing is still by far the most widely used model by payment processors, well ahead of the interchange plus and flat rate merchant account models. The reason is that it is, on its surface, quite easy to understand. You get one rate for all “qualified” transactions and a higher one for your “non-qualified” ones. Some processors will mix it up by adding a “mid-qualified” rate for payments that fall somewhere in between the other two.

In theory the qualification tier for each transaction would be determined by applying the following guidelines:

• Qualified. These are all credit card payments that:
  • Are processed in accordance with the rules and standards established in the merchant agreement and
  • Involve a regular consumer type of card.
• Non-qualified. These are all credit card payments that:
  • Involve a special type of card (reward, purchase, commercial, etc.) or
  • Are not processed in compliance with the rules set out in the merchant agreement or
  • Do not comply with some applicable security requirement.
• Mid-qualified. These are all credit card payments that:
  • Are key-entered, rather than swiped through a point-of-sale (POS) terminal or
  • Involve a special type of card.

It is immediately evident that the difference between a mid-qualified and a non-qualified designation can be quite murky. But even if we focused solely on the difference between the qualified and non-qualified tiers, it could be tricky to tease it out.

The Issue with Downgrades

Looking at the above definitions, it is clear that it is left largely to the processor’s own discretion to determine whether a transaction gets a qualified designation or not. Even if you can understand the terms of your merchant agreement, which by itself would be quite an achievement, your processor can typically make amendments at will.

We have previously analyzed in detail the cost-efficiency of the tiered pricing model and have repeatedly advised against using it, however merchants invariably tell us that pricing is not the main issue here. No one wants to be overcharged, of course, but what we keep hearing is that what merchants want, more than anything else, is predictability. They want to be able to calculate exactly how much payment processing will cost them for any give transaction volume, so that they can plan in advance for their monthly expenses.

Well, the tiered pricing model offers no predictability. Add to it the fact that most transactions are processed at a rate substantially higher than the applicable interchange fee and you get a real strong case against it.

Credit Card Processing Takeaway

The reason the tiered model persists is that its main alternative – the interchange-plus pricing – is much harder to wrap your mind around and does not make it any easier to calculate your processing costs in advance, as each transaction’s rate is independently determined.

We still recommend the interchange-plus pricing model, but there is another option that you may want to consider. By giving you one single rate for all transactions, the flat rate pricing does allow processing costs to be easily calculated in advance and in some cases may even be more cost-efficient than the interchange-plus model.

Accept credit cards at one flat rate!

Accept credit cards with our flat rate merchant account with no fixed monthly fees! You will get:

• One rate for all types of MasterCard and Visa cards (including rewards, commercial, etc.).
• No mid-qualified and non-qualified fees.
• No merchant account application or set-up fees.

Recently we updated our interchange-plus credit card processing pricing model and I thought I should say a few words about how this type of pricing works. We have written about interchange-based models a couple of times before on this blog, but based on the feedback we get, it seems like we need a refresher.

What Is Interchange?

In the payment card industry, interchange is a fee that a processing bank pays a card issuing bank for a transaction involving a MasterCard or Visa card. The interchange is a composite fee, made up of a percentage and fixed-amount components, for example 1.80% + $0.10 (so in this case the interchange fee for a $100 transaction would be [1.80% x $100] + $0.10 = $1.90).

Interchange fees are set by Visa and MasterCard and are published on the two Credit Card Associations’ websites. Each Association uses dozens of different interchange rates, based on two major criteria:

• Type of card used. Regular consumer types of cards get lower interchange than special cards like rewards, business-to-business, commercial, etc. Additionally, debit cards get lower interchange than credit.
• Transaction setting. Payments processed in a face-to-face environment get lower interchange than not-face-to-face ones.

How Does Interchange-Plus Work?

The interchange-plus pricing model works by adding the processing bank’s fee, as listed in the merchant agreement, directly to the interchange fee. Typically, the processor’s mark-up is also a composite fee, made up of a percentage and fixed components.

So if a processor charges 0.25% of the transaction amount + $0.15 for its services, this fee would be added to whatever interchange rate each of the merchant’s transactions get. As there are dozens of different interchange rates, so there will be dozens of different fees the merchant will pay for its transactions.

Should You Be Using Interchange-Plus Pricing?

Many merchants feel uncomfortable with an interchange-plus pricing model, precisely because it lacks predictability. They have grown accustomed to two- or three-tiered pricing structures, where they know that transactions can only be processed at two or three different rates, respectively. Is it really necessary to make things more complicated than that?

Yes, it is, if you want to be saving money. To understand why, you should look at the two-and three-tiered models as attempts to simplify the interchange tables. To illustrate, let me explain how a tiered pricing structure is designed.

Assume that there are 50 different MasterCard interchange fees. The two-tiered model breaks them down into two groups, one containing the 25 lowest rates and the other containing the rest. The processor sets one rate, called “qualified” for the lowest-rate group and another, called “non-qualified” for the other group.

The crucial thing to understand is that both the qualified and non-qualified rates must be higher than the highest interchange in their respective groups. So if the lowest rate in the qualified group is 1.04% + $0.10 and the highest is 1.80% + $0.10, the qualified rate must be higher than 1.80% + $0.10. The same rule applies to the other group.

Now you can see that in a tiered model the rate your processor charges you can vary in a quite wide range. This doesn’t make sense, because a payment is processed in exactly the same way, whatever the applicable interchange. As far as the processor is concerned, all transactions are the same. So why should it get paid much more for one transaction that it is for another?

More to the point, why should you be paying your processor much more for some transactions than for others? See, there is nothing you can do about the interchange. It is beyond your control. It is well within your powers, however, to select a pricing model and to negotiate what your processor charges. As unpredictable as it may seem, the interchange-plus credit card pricing model is the one that lets you get the most of your negotiating position.

Personalize your credit card processing with interchange-plus pricing!

Get the lowest possible credit card processing rate for each individual transaction! Our interchange-plus pricing model gives you:

• Processing rates calculated separately for each transaction to ensure that not a single one of them is overcharged.
• No more mid-qualified and non-qualified fees.
• No fixed monthly fees.

One of our biggest ongoing challenges at UniBul Merchant Services has been coming up with a pricing structure that would be both highly competitive and easy to understand. The types of models we’ve used so far have been either cost-efficient, but hard to comprehend or quite simple, but somewhat expensive for our merchants. We just weren’t able to accomplish both objectives in one pricing model. But we never stopped trying and have now designed the flat rate merchant account pricing plan that we believe is as simple as they get, while still quite cost-efficient.

The Merchant Account Pricing Status Quo

Before I review our new pricing structure, I’d like to say a few words about the two dominant models: the interchange-plus and tiered pricing models. Full disclosure: we offer them both. These are quite different pricing structures and their main features are as follows:

• Tiered pricing. This type of pricing comes in several types, based on the number of tiers used. The most widely used are the two-tiered and three-tiered pricing models, where the merchant’s transactions are processed at a qualified, mid-qualified (in the three-tier model) and non-qualified rate, each progressively higher than the one before.
  • Qualified are transactions involving regular consumer types of cards, processed in the way agreed to in the merchant agreement.
  • Mid-qualified are transactions involving a special type of card (e.g. rewards, business-to-business, etc.) or that are processed not exactly in accordance with the merchant agreement.
  • Non-qualified are transactions again involving a special type of card or that are not processed according to the merchant agreement or are not in compliance with some security requirement.

  
  Even though the difference between a mid-qualified and non-qualified transaction can be quite arbitrary and a cause of frequent disputes, this is a pricing structure that merchants generally understand. The problem with this model is that merchants are often significantly overcharged. The reason is that the discount rate for each tier must be set at a level that is high enough to ensure that the processing bank does not lose money on any transaction.

  
  This is where we enter the area that is often hard to understand. Processors can lose money on a transaction if they charge less than the interchange fee, which is the fee they pay to the card issuing bank. The problem is that there are dozens of interchange fees, which can vary quite substantially. So what ends up happening is that, with the tiered pricing models, some transactions can be processed at a rate that is only ten basis points over interchange, while others can be processed at a rate that is 150 basis point above interchange or more. This is clearly not merchant-friendly.

• Interchange-plus. Interchange-plus emerged as an attempt to resolve the issue described above. It works by adding the processor’s mark-up fee to whatever the interchange rate happens to be. The reason it is merchant-friendly is that the processor’s fee remains the same for all transactions, ensuring that the merchant is never overcharged for any transaction, as there is nothing we can do about the interchange fees. Unfortunately, that is not necessarily the way the merchant sees it, because as I already said, interchange rates vary, causing the merchant’s discount rate to fluctuate accordingly. So when the merchant looks at his statement, he sees dozens of different rates and he doesn’t know what to make of them.

So for years we’ve been struggling to convince merchants that interchange-plus is the way to go. To be fair, many merchants, especially those with previous processing experience, explicitly ask for it. Nevertheless, the fact remains that the vast majority find it way too complex and simply don’t trust it and, by extension, don’t trust us when we propose it.

Flat Rate Merchant Account Pricing

The flat rate merchant account pricing is an attempt to find a middle ground between the two pricing structures reviewed above. Its main features are as follows:

• One rate for all types of MasterCard and Visa cards (including rewards, commercial, business-to-business, etc.).
• No mid-qualified and non-qualified fees.
• No transaction authorization fees.

So you have one single rate at which all transactions are processed. You just can’t make it any simpler than that. Now, this rate has to be higher than a typical qualified rate, for the reasons having to do with interchange fees that were described above. On the other hand, this single rate has to be low enough if it is to be appealing to merchants, which helps prevent overcharging.

Credit Card Processing Takeaway

Our flat rate merchant account pricing has only been active for a few weeks, but the initial signals are positive. Inquiries are steadily increasing, mostly coming from merchants currently accepting credit cards. This tells us that we may be on the right path, although it is still too early to tell. We’ll keep you posted on our progress.

Accept credit cards at one flat rate!

Accept credit cards with our flat rate merchant account with no fixed monthly fees! You will get:

• One rate for all types of MasterCard and Visa cards (including rewards, commercial, etc.).
• No mid-qualified and non-qualified fees.
• No merchant account application or set-up fees.

UniBul’s Twitter Lists are now on Mashable

Merchants accepting American Express cards are subject to various fees that can be assessed for a number of reasons. Mostly these are card acceptance-related charges, but can also include fees for non-compliance with AmEx policies and procedures.

American Express’ merchant fees are listed in each processing agreement. Following is a list of these fees, with description and amount.

Card acceptance discount fees.

• Discount – the amount varies. The discount is one of the amounts American Express charges merchants for accepting their cards.
• Monthly flat fee – $7.95 per month. If American Express charges a monthly flat fee, they will debit the merchant’s account for the amount of the fee instead of debiting the amount corresponding to the discount rate.

Authorization fees.

• Gateway fees – $0.001 per charge. If the merchant’s processing bank routes authorization requests through the Visa or MasterCard processing gateways, AmEx passes the associated fees to the merchant, after a certain thresholds are met.
• Non-swiped transaction fee – 0.30 percent of the transaction amount. This is a fee applied to any charge for which AmEx did not receive the full magnetic stripe-read data from the card.
• Voice authorization fee – $0.65 per request. If the merchant’s point-of-sale (POS) system cannot connect to American Express’ electronic authorization system, the merchant needs to call American Express and obtain a voice authorization.

Submission and settlement fees.

• Check fee – $1.50 per check. This is a fee assessed for any check issued by AmEx.
• Paper statement fee – $4.95 per statement. This fee can be assessed if the merchant chooses to receive paper statements.
• Paper submission rate – varies. Transactions are typically submitted electronically. Exceptions are made for merchants like taxis and limousine services, street fairs, etc., where transactions are submitted on paper and are charged a higher discount rate.
• Technical specifications non-compliance fee – $0.10 – $1.00 per transaction. This fee applies to any transaction submitted to American Express that does not comply with their technical specifications.
• Monthly gross pay fee – 0.03 percent of the transaction amount. This fee is charged to merchants enrolled in the Monthly Gross Pay Option, if the transaction amount exceeds a pre-determined threshold amount.
• Data incident management fee – not to exceed $100,000 per data incident. This is a fee assessed to a merchant in respect of a data incident.
• Data security non-validation fee – $50,000 – $400,000. Depending on the merchant’s transaction volume, the merchant has reporting obligations under AmEx’s Data Security Operating Policy including providing Validation Documentation.

Excessive dispute fee – $5 per disputed transaction if the merchant is in the Immediate Chargeback Program or $15 per disputed transaction if the merchant is not there. This fee is assessed if in any three months, a merchant’s monthly ratio of disputed transactions to total transactions (minus credits) exceeds three percent, and then in any month when the merchant again exceeds this ratio. It is applied for each disputed transaction in excess of this ratio.

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• Free merchant account set-up.
• No fixed monthly fees.
• 24 / 7 customer support.