Understanding Merchant Account Pricing or Swipe Fees
Interchange fees (the cost from Visa, MasterCard, or Discover) vary based on a number of factors, such as the card type, (premium, rewards, debit, and so on), your standard industry code (business type), and whether the card was physically present. These swipe fees are non-negotiable, there are no discounts, and all merchant processors pay the same bank interchange fees. However, the way in which merchant service providers charge businesses for their merchant account services can vary greatly from one provider to the next.
There are four main types of merchant account fee structures: flat rate, enhanced recovery reduced (ERR), tiered pricing, and interchange cost plus.
Flat rate programs offer a “simplified” card processing rate structure. In this pricing model, merchant providers bundle the interchange rates with their markup into their pricing model as one flat rate for all transactions. These bundled rates are typically designed for very small businesses, consultants, or freelancers with processing volume under $1,000 per month, and are not competitive with tiered pricing or interchange cost plus pricing models. For example, a business processing a $100 transaction with a 2.9% flat rate would incur a fee of $2.90. Read more about comparing merchant processing quotes here.
Enhanced recovery reduced (ERR) pricing, also known as “bill back” (BB) or “enhanced bill back” (EBB), is the most obscure and confusing pricing structure in the card payments industry. In this model, all transactions in a given month are charged the flat rate regardless of the interchange fee; in the following month they look back to evaluate what rates you really qualified for and charge you the difference on your next statement. Processors offering this model typically offer a “low” quoted rate (similar to the flat rate model), then use a myriad of complex pricing tables and language to extract additional hidden fees, statement fees, maintenance fees, compliance fees, and other surcharges to extract additional revenue from your business. It’s recommended that you avoid this pricing model entirely.
Tiered pricing is when the processor categorizes the interchange into larger categories. The most common categories are “qualified,” “mid-qualified,” and “non-qualified” transactions – essentially the low, medium, and high average rate for each level of interchange. In an effort to attract business, some merchant service providers will only advertise their “qualified” rate, thereby causing false impressions of overall low fees. In some cases, these rates increase before the agreement term is over; in other cases, processors use hidden fees and line item changes to offset the “low” rates. If the rate seems too good to be true, it probably is.
The third and most transparent pricing program is called interchange cost plus or “pass through pricing,” where a small constant markup is added to the actual interchange fee. Your rates will vary by card type, but you will only pay a fixed margin over the cost. This markup is typically expressed as basis points (1/100th of a percentage point) and is combined with an authorization fee (charge for each transaction authorization). By passing interchange fees directly to the business with a fixed markup, hidden costs and other surcharges are typically eliminated. This pricing model generally yields a substantial savings over flat rate or tiered pricing, but will depend on the markup.
Good merchant processors should be considered business partners and want your business to succeed. Always be sure to ask your representative for an account review to learn about ways to optimize your business operations for the best interchange and effective rate (learn more about the effective rate and how to calculate it here).