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Getting the Best Prices for Processing Credit Cards

Negotiating rates for your nonprofit's merchant account

By: Elliot Harmon

September 30, 2008

We highly recommend that before reading this article, you read A Few Good Methods for Processing Credit Cards. That article will familiarize you with the basics of credit card processing, while this article focuses on pricing structures and negotiating rates.

A merchant account — an account used to process credit and debit cards manually or electronically — can be an important part of any nonprofit’s strategy. Merchant accounts can be used for accepting credit and debit card donations in person or online, selling merchandise and e-commerce. Note that a merchant account is not synonymous with a business bank account. Although many banks that provide business bank accounts also provide optional merchant account services, merchant accounts and bank accounts are separate services with different prices and terminology.

Pricing for merchant accounts is often quite complicated, utilizing rate schedules with different prices for various types of transactions. How, where and how often you plan to process payments can make a huge difference in what your ideal rate schedule should look like. Knowing which rates are most important for your nonprofit’s needs might save you hundreds of dollars every month. Fortunately, most reputable merchant account providers are happy to work with you to help you find the right arrangement.

Before you attempt to negotiate rates with a merchant account provider, be sure to familiarize yourself with the various types of transactions and the fees associated with them. Types of transactions include in-person transactions, mail order and telephone order (MOTO) transactions and Internet transactions. Credit and debit card transactions often cost different rates, as do transactions on rewards cards and other special types of cards. More information about each type of transaction is provided in the following sections.

In order to make sure that you’re receiving a competitive rate schedule, compare rate schedules from several financial institutions and find out which types of transactions are most crucial to your organization’s needs. With that information in hand, you can work with an institution to find the best possible merchant account rates for your nonprofit.

Where the Money Goes

Merchant account providers can sometimes be misleading in their marketing. Many providers overemphasize the small percentage they charge of your total intake, while deliberately deemphasizing their large per-transaction fees. As we’ll see later in this article, per-transaction fees can add up quickly. Your best defense is to understand the various fees involved with credit card processing and to know what rates are reasonable to expect.

Discount Rate

Each time your nonprofit processes a credit or debit card transaction, a small percentage of the charge — usually referred to as the discount rate — is subtracted before the money is deposited into your account. To get the best deal, it’s vital that you understand the discount rate and how it’s calculated. In most cases, your merchant account provider determines the discount rate by adding together the interchange rate, the processing fee, and the transaction fee.

Interchange Rate

The largest portion of your discount rate is, unfortunately, the part you have the least control over. The interchange rate is set on a national level by credit card networks like VISA and MasterCard. The financial institution that issued the card receives most of the interchange rate, while a small portion goes directly to the network.

The interchange rate for most types of transactions includes both a percentage and a flat per-transaction fee. For example, as of April 2008, the interchange rate for a standard MasterCard transaction is 1.68% + USD 0.10, meaning that the card-issuing institution receives 1.68 percent of all payments and an additional 10 cents for each transaction performed.

Although legislation currently in Congress may make it possible for businesses to negotiate interchange rates directly with VISA and MasterCard, it’s unlikely that anyone but the largest of corporations will realistically have enough leverage to lower the rate.

Current interchange rates can be downloaded from VISA and MasterCard.

Since Discover and American Express serve as both credit card networks and card-issuing institutions, they do not have published interchange rates. Traditionally, Discover and American Express have issued funds directly to merchants, but recent changes in policy have allowed financial institutions to process these transactions the same way they process VISA and MasterCard transactions (824 KB PDF) . Check with your institution to see how Discover and American Express transactions are handled. Additional fees may apply.

Processing and Transaction Fees

The rest of the discount rate consists the processing and transaction fees, the fees paid to your merchant financial institution. The processing fee is a percentage of each transaction. The transaction fee, sometimes called the authorization fee, is a flat rate charged each time a transaction is attempted. The transaction fee applies whether the transaction is approved or not. Processing and transaction fees vary widely, depending on the type of card and type of transaction.

When most financial institutions quote their fees, they simply quote the total discount rate rather than separating the interchange fee from the processing and transaction fees; therefore, it’s a good idea to look over your financial institution’s rate schedule with the VISA and MasterCard interchange rates in hand. By subtracting the interchange rate from the discount rate, you can find the exact fees that your provider charges for each type of transaction. If your organization relies upon any transaction types with unusually high markup, you may be paying too much.

When looking at your rate schedule, don’t forget that VISA cards account for 70 percent of all transactions in the United States: competitive processing and transaction fees for VISA cards are essential. Also remember that terminology may vary from provider to provider. Many providers simply refer to the discount rate as the processing fee, even though it also includes the interchange rate and transaction fee. Discount rates include both a percentage and a per-transaction rate, but some sources refer to only the percentage as the discount rate.

Additional Fees

Scour your contract for any fees not included in the discount rate. Although additional fees may look small, they can quickly add up and, as we’ll see later, can actually waste more of your money than interchange and processing fees.

Monthly/quarterly/annual fee:

Some institutions charge periodic fees, regardless of the number of transactions processed during that time period.

Monthly minimums:

A provider may require that the merchant pay a minimum amount in fees every month. If that minimum is not met, the provider bills the remainder at the end of the month. Some merchant account plans include monthly minimums or monthly fees, and some include both.

Batch fee:

Institutions may charge a fee each time your organization’s payments are deposited into your bank account (many, but not all, institutions perform this task automatically once every day, meaning that the fee would be charged daily).

Early termination fee:

Some institutions have a minimum contract length ranging from one to three years, with a fee charged for early termination.

Hardware rental:

Some institutions give merchants the option to purchase a terminal, while others require merchants to pay rental fees each month.

Miscellaneous fees:

Additional fees can take many forms, including Address Verification System (AVS) fees, Internet processing fees, Watts surcharges (a fee sometimes added when a terminal needs to dial a backup phone number in order to process a transaction), technical support fees and customer service fees.

Types of Transactions

Since each category of transaction will cost you a different discount rate, it’s important to understand what each transaction designation means.

Online and Offline Debit Cards

When used to describe debit cards, the terms “online” and “offline” refer not to Internet connectivity, but to how the payments are processed. Online debit cards require the user to enter a PIN number, and transactions are posted to the user’s bank account immediately. Offline debit cards do not require a PIN and take longer to post to the user’s account. Since offline debit cards work like credit cards, they are often referred to as credit cards in common parlance, but it’s important to note that offline debit cards and credit cards don’t have the same processing fees.

Credit Cards: Qualified, Mid-Qualified and Non-Qualified

The qualified rate is charged for a normal payment made on a standard credit card. These transactions are the least expensive for a merchant because they carry the smallest risk of fraud or human error. Because the qualified rate is almost always the lowest rate a merchant can pay for any transaction, the qualified rate is usually the price institutions quote when asked for their rates.

The mid-qualified rate is charged for transactions that do not fit the criteria for the qualified rate; for example, the mid-qualified rate is charged if a sales clerk manually types in the credit card information instead of swiping the card. (The clerk must perform address verification; otherwise, the merchant will pay the non-qualified rate.)

Mid-qualified rates are also used for rewards cards and corporate credit cards. As the use of rewards cards grows, it’s important to remember that you’ll frequently pay the mid-qualified rate for transactions.

The non-qualified rate is the highest rate a merchant can be charged for a credit card transaction. The non-qualified rate is charged when a sales clerk manually enters a card and does not perform address verification, or if other necessary information is absent at the time of the transaction. Some types of corporate and promotional cards may also fall into the non-qualified bracket.

Retail, MOTO, and Internet

Mail order and telephone order (MOTO) transactions are more expensive for the merchant than in-person retail transactions; thus, your merchant account contract will show separate rates for retail and MOTO in each qualification level. Some institutions have a third set of rates for Internet transactions.

If the majority of your transactions will be over the phone or Internet, be sure to ask for the best possible rates for MOTO and/or Internet. If you’ll be using a manual card imprinting machine, remember that you’ll be paying for those transactions at MOTO rates.

Which Numbers Are the Most Important?

Here’s an example to give you an idea of how all of the fees fit together. Andrew works for Anytown Community Theatre. He wants to be able to accept credit cards at ACT’s box office. After researching various options, Andrew finds two different services with competitive-looking rates, shown in the following table.

In the “Ticket sales” column are estimates for how many transactions ACT will make using each type of card. We’ll use an average of $25 for each purchase. For the sake of simplicity, assume that ACT only sells tickets in person, so we’ll ignore MOTO rates.

  A B Ticket sales
Online Debit Rate 1.81% + $.05 1.71% + $.15 $125 (5 sales)
Offline Debit Rate 1.91% + $.10 1.81% + $.20 $75 (3 sales)
Qualified Rate 1.89% + $.05 1.79% + $.15 $450 (18 sales)
Mid-Qualified Rate 2.47% + $.10 2.37% + $.20 $200 (8 sales)
Non-Qualified Rate 3.45% + $.25 3.35% + $.35 $50 (2 sales)

Service B’s processing fees are consistently lower than Service A’s for each type of transaction, but Service B charges more per transaction. At first glance, Service B might appear to be the better value, but the larger transaction fees of Service B add up quickly. Using Andrew’s estimates, Service A will cost ACT approximately $21.62, while Service B will cost $24.32 — before any additional fees. If the average ticket prices were significantly higher, the balance would tilt in Service B’s favor.

Some people make the mistake of treating the processing fee as the bottom line and ignoring the transaction fee and additional fees. Some wily institutions are accustomed to prospective clients asking for their “lowest rate available,” and will quote a good-looking processing fee with an unfair transaction fee tacked on. As the Merchant Accounting Blog aptly illustrates, a difference in one cent per transaction will have a greater impact on the average organization’s monthly bill than a difference of .1 percent of each transaction. If the institution is further scattering miscellaneous fees throughout the bill, suddenly your “lowest rate available” is a joke.

Most importantly, be aware of the card-processing needs of your organization. If you’re planning on a low volume of transactions, a lower processing fee might not justify a large monthly or minimum fee. If the majority of your transactions will be over the phone or Internet, don’t be dazzled by low retail rates. If you’re looking to try card processing on an experimental basis, don’t lock yourself into a three-year contract with a large early termination fee.

Some merchant institutions even use an old trick they learned from credit card institutions: offering low “introductory rates” and then quietly raising them a few months later. Make yourself familiar with your merchant agreement before you sign it, not after.

Thanks to Sasha Daucus at FundRaiser Software for her assistance with this article.

Additional Resources

Merchant Account Blog:
Fantastic resource with ample information about what to look for in a merchant account.
What Does All This Mean? - Merchant Account Fees:
An overview of the fees associated with credit card processing.
Saving on Credit Card Processing Fees (Forbes):
Hints for finding the best financial institution and negotiating a contract.
Guide to Shopping for Merchant Account Rates:
Includes additional information about interchange and hidden fees.
Interchange Myths and Facts (MasterCard) (110 KB PDF) :
A fact sheet about interchange.
Merchant Account Glossary:
A glossary of terms you may find on your rate schedule or bill.

About the Author:

Elliot Harmon is a Staff Writer at TechSoup.