Processing terms you should know before negotiating

Processing terms you should know before negotiating

Before you can negotiate your credit card processing costs you'll need to know how processors arrive at those costs. Here are some important terms:

• Interchange fee - The amount paid by the bank that processes your transactions to the bank that issued your customer's credit card. The card networks also get a small part of this fee, which is a percentage of your transaction plus a per-transaction charge.

Credit card companies determine the interchange fee based on the type of business you have,  the number of credit card transactions processed, the chargeback risk, and the type of credit card used (standard or rewards, card present or not present, for example). There are more than 100 interchange categories.

Interchange fees make up anywhere from 70 to 90 percent of the cost of processing your credit card transaction. They are not negotiable unless you are a very large merchant.

• Discount rate - The rate charged by credit card processors to the merchant. The discount rate is a percentage of a transaction plus a per-transaction fee. It also includes the interchange fee, which the processor pays on behalf of the merchant to the banks. It may include additional fees.

The discount rate varies by the type of transaction, and is based on the number of credit card purchases a merchant handles each month, on the average size of the sales and on the way that the credit card information is being sent (swiped, entered manually, from an online site or from a brick and mortar store, etc.). Processors may use tiered pricing or interchange plus pricing to determine the discount rate.

The processor makes its money through discount rates and fees.  Both are negotiable.

• Tiered pricing - With tiered pricing (also called bin or bucket pricing), the processor divides credit card transactions into different categories (based on the interchange classification) and charges a different rate for each category. From least expensive to most expensive, the tiers are qualified, mid-qualified and non-qualified rate.
• Interchange plus pricing - This form of pricing is based on the interchange rate for each transaction plus a fixed markup that the processor adds. It is the easiest type of pricing to understand, and can be negotiated. Interchange plus pricing was formerly available only to large businesses, but today, some processors may offer it to smaller merchants as well
• Fees imposed by credit card processors can include:
  • Authorization fee -- charged for verifying the authenticity of the credit card number and getting approval for the transaction
  • Transaction fee -- charged to the merchant by the processor for each credit card purchase
  • Returned item fee -- charged when customers get a refund on their credit cards after returning an item
  • Address verification fee -- charged when the merchant needs to verify a cardholder's address, often in card-not-present transactions
  • Gateway payment charge -- paid to the computer network that the credit card transaction passes through

  (Visit our full story on negotiating card processing fees.)

Published: March 10,2023