As mentioned in a previous post, the pricing quote you receive is not always the price you are going to actually pay. Anyone that's had to deal with online merchant accounts and credit card processing (with the exception of those that process strictly offshore) will tell you that its can be a pretty confusing subject. When you looking for a new merchant account there is a lot of things you need to factor, and although I have stated that price isn’t the only thing and that value is extremely important, you still need to understand exactly how your pricing works. So, when you start looking for a merchant account or would like to evaluate the one you currently have, there is a lot that needs to be taken into consideration. You've need to look at the discount fees, qualification rates, interchange, authorization fees and more. The list of potential charges can go on and on.
One of the biggest dirty secrets in the online payment processing space is to quote a merchant the qualified rate, which sounds great, but not really disclose all of the additional fees that you will pay. This is something that unfortunately has become common practice with too many companies these days (not all) and its something that I hear from merchants I work with all of the time. This is where most of the margin is, and my belief that it’s important to disclose all fees and teach merchants how the pricing work. I think if you are honest with a merchant then it’s much better for you in the long run.
Instead of looking at the big picture, merchants fixate on a single aspect of an account such as the discount rate or the early termination fee (which is a fee I am not a fan of). I completely understand this as I would do the same in a business that I am not familiar with, but what really needs to be looked at is what we call the EFFECTIVE RATE. Once you start looking at the big picture you will see that merchant accounts aren’t that hard to figure out and you will be able to not only accurately forecast your merchant account costs but also compare different quotes you receive.
The term effective rate is used to refer to the percentage of NET sales that a business pays in credit card processing fees.
For example, if a business processes $100,000 in NET credit card sales and its total processing expense is $4290.00, the effective rate of this business's merchant account is 4.29%. The qualified discount rate on this account may only be 2.25%, but surcharges and other fees bring the total cost over a full percentage point higher. This example illustrate perfectly how focusing on a single rate when examining a merchant account can prove to be a costly oversight.
Effective Rate = Total costs/ total sales
You need to make sure you are also looking at all of the possible fees, this can include:
- Discount Rates
- Monthly Service Fees
- Statement Fees
- Batch Total Fees
- PCI/DSS Fees (Data Security)
- Administrative Fees
- Transaction fees
- Any other miscellaneous Fees
In my opinion, when looking at costs the effective rate is the single most important factor when you're comparing merchant accounts. But again, cost shouldn’t be the only factor when deciding on the merchant account.
Calculating the effective rate of a merchant account for an existing business is easier and more accurate than calculating the rate for a new business because figures are based on real processing history rather than forecasts and estimates. Calculating the effective rate of a merchant account for a new business is a little tougher because of the lack of processing history from which to judge how a business's transactions will qualify. Nevertheless, making a conservative estimate of an account's effective rate is still vital.
To calculate the effective rate of a merchant account for a business without processing history you will need to estimate a few figures such as the business's average ticket, processing volume, etc. The actual methods involved in calculating the effective are pretty involved and beyond the scope of this article. Hopefully, these calculations aren't something you should have to worry about. In this case I would work with an experienced consultant of or a processor you can trust
If the effective rate ends up being significantly greater than your qualified discount rate, or the rate you were quoted, it’s time to re-examine your account and make changes. Using the example above, let's say the qualified discount rate for this account is 2.25%. That would mean the effective rate of 5% is more than double the qualified discount rate. In a situation like this, the chances are very good that there are a lot of additional surcharges being applied and you can either have a discussion with you current provider ( but would you want to work with a company that already has been deceitful) or look to work with a new provider.
Any provider that's courting your business should be able to speak with you and request the information they need to offer you a reasonably accurate effective rate. Alot of times this will be in the form of previous processing statements (if available) If they're unable to do this or they don't know what an effective rate is, they're probably not the best choice for your new merchant account provider.
If you need any help with deciphering credit card statements or if you are looking to get an effective rate quote on your business - please do not hesitate to contact me.
