Why Credit Card Processing Statements Are Complicated

CNNMoney’s Catherine Clifford is exercised, with some reason, about the complexity of monthly merchant processing statements. She correctly points out that they can be long and full of different rates that can make no sense to anyone but a qualified accountant. Actually I would disagree with that assertion. It is my firm belief that some of the statements I’ve seen over the years would be equally incomprehensible to accountants, as they are to laymen who don’t know how to read them.

But having described the statement complexity issue and quoted several experts who confirm it, Clifford does not even attempt to explain why this is the case, except for quoting one of her experts who accuses processors who “purposely provide confusing or ambiguous statements” of being “clever.” There is more to be said than that, so let me give it a try.

Why Are Monthly Processing Statements Complex?

There may be some clever processors who try to confuse merchants, but in reality the complexity comes from the huge variety of interchange fees that Visa and MasterCard set for transactions involving their cards. There are many dozens of such fees, which are collected by the card issuing banks, not Visa and MasterCard and certainly not the processors. Processors often list the interchange at which each transaction was settled, so that the merchant gets all relevant information. The side effect of course is that these additional data can pile up, especially in the case of merchants with high transaction counts.

Interchange fees vary by card type and payment processing environment (that is, card-present or card-absent, each of which have sub-groups). For example, a credit card transaction processed at a restaurant gets a lower interchange than one completed online. A credit card transaction featuring a rewards card has a higher interchange than one involving a non-reward credit card, regardless of the payment setting. Then there are various business-to-business, commercial and purchasing cards, which have even higher interchange than rewards cards. Additionally, debit cards have lower interchange than credit cards.

What you need to understand is that the processor pays the interchange to the issuer and then collects it, plus its own fees, from the merchant. Now, this could be done very simply by charging one flat rate for all transactions and you wouldn’t have to list all these confusing interchange rates in the statement.

Why Not Charge a Flat Rate?

This could be as simple as it gets, everyone would understand it and no one would get confused, right? Yes, but it also would be extremely disadvantageous to the merchant. See, if the processor were to charge a flat fee, it would have to make sure it was higher than the highest possible interchange, otherwise it would lose money on some transactions.

As it happens, some processors, most notably PayPal, but also UniBul, are actually doing it, losing money on some transactions, that is. But there is still a problem. Even as it is losing money on some transactions, a processor charging a flat fee must make sure that on the whole it is generating more income than it is losing. What inevitably ends up happening is that the flat rate is set so high that the aggregate processing fees the merchant is charged each month are typically substantially higher than they would have been, had the merchant account been set up using an interchange-plus type of pricing model, which is incomparably more complex.

To pre-empt an accusation of being clever, I should say that we introduced our flat rate pricing model not because it is the best one for merchants to use – on the contrary, in discussions with merchants and in our blog we regularly tell anyone who would listen to use interchange-plus – but because it is simple and that is what many merchants want. We tell merchants what we believe is best for them, but ultimately the decision is theirs and we accommodate.

The Takeaway

The biggest reason merchant processing statements are complex is that processors provide merchants with detailed transaction information. If we weren’t doing it, we would’ve been accused of hiding information and so misleading merchants.

However, once you understand how your pricing model works, you will find it much less confusing. For example, with interchange-plus, which as mentioned above is the most cost-efficient pricing model, what you need to focus on is the rate your processor charges you, which is the same for all transactions, regardless of card type or environment. The total rate will still vary from one transaction to another, because the interchange will vary, but there is nothing you or we can do about the interchange, as it is set by Visa and MasterCard (and as of late, by the Federal Reserve) and is non-negotiable.

At the end, a processing statement is only confusing until you learn how to read it. I would argue that it only takes a few minutes to get a handle of it, which would be time well spent.

Image credit: Ampestudiofotografiamadrid.com.