Let’s face it. Credit card statements are confusing at best and misleading at their worst. In our experience, both inside and outside the firearms industry in Canada and the US, clients look at them passingly as they are handed to a bookkeeper or accountant and never looked at again.
That is a mistake. Not just from the point of view of having a deep and intimate level of understanding of the goings on of your business, but from an ownership point of view. If you don’t care what you are paying for services that are critical to the operation and survival of your business, who will?
Understanding how card processing works is not that hard. Don’t mix up the industries attempt to confuse you with overly detailed or blinding vague statements fool you.
The statements are complex. The process isn’t. And understanding it is critical to ensuring you are getting the most ROI from money you pay for card services.
WHO TAKES WHAT
A transaction is your customer paying you a sum of money for a product or service. There are a few specific ways that a cut (percentage usually) can be taken out of that sum to pay for the process of moving money from the customers credit balance (their card) to your bank account. These specific ways to take those cuts are called “Pricing Structures”.
Key Fee Information
The Three Cuts
There are three places where you pay for the services:
The Interchange Fee
The interchange fee is what the merchant bank the hold the debt on the credit card charges to move the cash. Its not negotiable with your merchant services provider (Chase, Moneris, Elavon, Global Payments etc). They change once in a while in sync with economical change, and are widely published on the internet.
The Card Brand Fee
The card brand fee is the the cost that covers all the bells and whistles that a card offers to its user. What you need to know up front so that anything else beyond this point makes sense is this. The fees are calculated on hundreds of factors, but one of the biggest factors is what kind of card your customer is using to pay you.
Points and rewards cards are so popular today, that you would be hard pressed to come across a plain old credit card with no program attached to it. Aeroplan, Avion, Diner Club, Airmiles are just few programs that give a cardholder a points reward for using the card they can redeem for travel or convert to cash to buy things.
Who do you think pays for those programs? The card companies? They are in the game to profit, so no. The customer? Not very rewarding to pay for your rewards points is it.(though many allow customers to buy points LOL)
YOU, the merchant, pay for those points. And that means the more rewarding or “high end” a card is, the higher the fees associated with using it are. So the rate you pay when your customer is a college student paying with the pre-paid Visa their parents fill up for them every month is VERY different from the effective rate you pay when I walk into the store with my Visa Infinite Avion Platinum card. Often the difference is whole percentage points apart.
The Margin Fee
This where the processor take their profit. This is also how we get paid. We partner with multiple firearms friendly merchant processors like Global Payments and Elavon and when we resell we get a cut of this part of the fees.
Understanding the Different Payment Processing Pricing Structures
There are four main ways that fees are taken from the sun your customer is paying you. These are:
FLAT RATE – You get one rate based on the Interchange, the Card Brand Fee and the Margin. While this gives you fixed costs, if someone is paying with a card that has lower Interchange or Card Brand fees, you are losing money. On the other hand, if someone is paying with a High End card that has really high Interchange Card Brand fees you win. Its a crap shoot, and this kind of cost certainty is not always a great trade off. It depends on knowing your customers and what cards they like to pay with.
INTERCHANGE PLUS – The best option for saving money and keep costs as low as possible. Each individual transaction is prices by adding up the Interchange Fee, the Card Brand Fee and the Margin Fee. This is the best approach if you have a wide variety of card types used by your customers, and you are less worried about price certainty and are more focussed on saving as much money as possible
TIERED – more common in the US than Canada, this pricing model has almost no advantages for the business. Its basically a way of grouping cards, and assigning a rate to those cards. The group names might be familiar to you. They are “Qualified, Mid-Qualified and Non-Qualified”. Most times the business is show the “”Qualified”rate that is low, but only applies to the most basic cards (remember who pays for those fancy rewards programs) and if a customer pays with a Mid or Non Qualified card, the higher rates are STACKED. Not used instead of, but all added together. SO where a customer using a Qualified (read: no rewards program credit card) might have you paying 1.69% for that transaction, me paying with my trusty Visa Avion Infinity Elite Platinum Super Duper Card (Non Qualified) would have you paying 1.69% PLUS 1.7% for a total of 3.39%
DIFFERENTIAL – Like TEIRED in the US, this is more prevalent in Canada, but in addition to the stacking rates, adds different “Qualified” and “Non-Qualified” fees to Interchange rates as well as the Margin rates to double charge you on each transaction.
It’s pretty obvious here why we endorse Interchange Plus as the go to pricing model for our customers. It’s the best set of rates, allowing you to keep costs as low as possible, and it also make understanding these rates clear enough so you can actually READ your statements with a bit of coaching, and figure out what you are really paying.
When we ask you for three months of your existing statements, we are using the info above to reverse engineer and calculate what your REAL effective rates are so we can determine if we can save you money by moving you to a new provider.
Oh and guess what? These are the fees you pay on the transactions ONLY. There are line item fees you pay for things like security, monthly network access, PCI, “Administration” (one of my favourite made up ones) that add on to what comes out of your pocket for the privilege of taking peoples money.
We will get to those in the next blog post. Stay tuned.