Ins & Outs of Credit Card Processing Rules and Regulations

Ins & Outs of Credit Card Processing Rules and RegulationAccess Payment Systems understands that credit card processing can be complicated to the merchant and so we want to educate you about the ins & outs of credit card processing. Be informed about credit card processing rules and regulations. Those of you who have been accepting credit cards for a while, know that the industry can sometimes be very cut throat and not exactly honest. Businesses that are new to accepting credit cards are easily sold on bottom line pricing and have no idea what will happen when their first statement arrives in the mail. Mainly because they don’t read the fine print and simply don’t understand the complexities of Interchange Rates. It is important to know that the way you process transactions and the cards you receive will affect your pricing. If your eyes are beginning to glaze over we understand but this is probably one of the most important reads you will have when choosing a credit card processor and will give you the tools you need in pricing with whomever you process with.

Credit card merchant accounts are set up according to the industry type the business is in. This includes point-of-sale (retail, restaurant, grocery stores, petroleum, etc), Internet and Mail Order/Telephone Order (MOTO). Each of these industry types process credit cards differently so they are priced differently. This is basically determined by the risk associated with the transaction or a specific industry. A point-of-sale transaction will have a cheaper rate then an Internet transaction because the card is present and easier to verify as compared to an Internet transaction where the card is not present and more difficult to verify.

One of the first things a credit card processing provider will ask you is what business type you have and how you want to submit transactions. Your pricing will be determined by this in addition to the amount of volume you have and what your average transaction amount is. Just like pricing in any other industry the more volume you do the cheaper your pricing is but at the same time if your business is high risk such as on-line pornography then you will pay high rates no matter what. Just so you know…Access Payment Systems won’t do business with any pornography or online gaming companies.

 

How is credit card processing priced?

Pricing for credit card processing comes in two formats. Bundled or Tiered pricing and Interchange pricing or to be more precise Interchange & Assessments Plus. For the most part new businesses and small to medium size businesses doing under $100,000 per month in credit card volume will typically be priced in a Tiered format. For instance, when you are quoted 1.81% plus $.24 for your point-of-sale retail account that would be considered tiered pricing.

Merchant Category

Discount Rate & Authorization Fee
Point-of-Sale (retail or restaurant) 1.81% plus $.24
Internet, Mail Order/Telephone Order (MOTO) 2.25% plus $.27

Interchange & Assessments Plus means you will be charged the base cost of each Interchange Category passed on by Visa, MC and Discover for each credit card and transaction type plus a discount rate & per item charge. Card types can be consumer credit cards, business cards, check cards, award cards, corporate cards, purchasing cards, gas cards, store charge cards, etc. It is the discount rate charged and per item fee where the processor makes their money and it is the most strait forward pricing structure and the cheapest. A typical discount rate charge would be something like .35% or 35 Basis Points and $.15 per item. So this means if you swiped a credit card through a terminal that had no awards attached to it you might be charged something like 1.43% and $.10(Interchange & Assessment) plus .35% and $.15 (processors take) or 1.78% plus $.25.

Interchange is a very important word to you no matter what category you fit in because it applies to every company that accepts credit cards. It is important because this is where new merchants can be ripped off or taken advantage of if you are set up on a tiered pricing structure. For just Visa, Master Card and Discover there is over 300 interchange categories and for the most part each category has a different price. American Express is a different beast all together. In tiered pricing scenarios the Interchange will affect your surcharges for mid and non qualified categories, which we explain in more detail below.

 

Don’t be fooled by credit card processing salesmen!

Most new business owners think when they are given their base rate of 1.81% plus $.24 that this is the bottom line rate and it isn’t. For a point-of-sale retail account the only way they will receive that base rate is if they swipe the credit card through a terminal, get a full approval and the card is a regular consumer credit card with no awards attached to it at all. This is called a qualified transaction. In this case, you would get your base rate of 1.81% plus $.24. However, if you are like the majority of consumers they all have a card with some award attached to it such as cash back, flight miles and so forth. If this was the same scenario but the card happened to be a United Mileage Plus card then the transaction would be classified as a mid-qualified transaction depending on the processor. Then you will be charged an additional fee or what is known as a surcharge. How much higher? Well…that depends on the pricing your salesmen gave you and if you are like the majority of merchants looking for pricing you probably have no idea what this is because the salesmen didn’t show you. It gets even worse. You can have a non qualified rate that goes even higher and this is typically affected by a card not being swiped through the terminal. It is because of these surcharge rates where businesses can get ripped off and more then likely will. Especially if they are giving everything away for free such as a free credit card terminal.

Pricing for mid-qualified transactions with a tiered rate price should be no higher then .80% and a non-qualified rate should be no higher then 1.50%. However, many processors that sell the low price scenarios with free terminals have rates as high as 1.50% for mid-qualified and 3% for non-qualified added to the base rate. So your retail rate of 1.81% gets another 1.50% for a mid qualified transaction totaling 3.31% and another 3% for a non qualified totaling 4.81%. This is where most merchants get taken advantage of. To top it off many statements sent to merchants from the processors are not very easy to read and hard to tell the difference between the qualified, mid and non-qualified transactions. If you are diligent you can figure out if you are being ripped off but most merchants get frustrated and simply don’t want to deal with it and assume they are paying the correct fees.

 

A clever sales ploy for credit card processing

This is where we have to chuckle sometimes. We must admit that we have lost many potential customers in pricing because of aggressive and dis-honest sales strategies by competitors. It is something we simply won’t do. A very typical approach you will see with other processors is to give you a teaser rate of something like 1.49% plus $.24 for a point-of-sale account. Compare this to 1.81% plus $.24 and it doesn’t even compare. However, what they are forgetting to tell you is that this rate only happens when a check card is being used compared to a regular credit card. In many cases they won’t even tell you the rate of the regular credit card or they put it in fine print that many merchants wouldn’t even read. Then you get your statements and all of the sudden you notice that you are being charged a rate of 1.96% for the regular credit card transactions and only notice a few of the check card transactions coming in at 1.49%. Combine this with the mid and non-qualified surcharges and you can end up paying a lot more in fees then you should.

 

How does Internet or phone order credit card transactions differ?

In essence, the same process applies for Internet or MOTO transactions. Since the card information is gathered differently then they have different requirements to get a qualified transaction. Since the card number will always be keyed-in rather then swiped they have to take different steps to help reduce the possibility that the card number hasn’t been stolen. This process is called an AVS or also known as an Address Verification Service. This means that the billing address needs to be connected with the card being used and is included in the transaction. So as long as the card is approved with an AVS and it is a regular consumer credit card then it will be a qualified transaction. But if it doesn’t get the AVS it will be non-qualified or if it is an awards card then it will be mid-qualified. Depending on the processor they will only have a non-qualified rate for transactions in this category and won’t offer any mid-qualified rates.

 

Dishonest information on credit card processing application doesn’t help

We also get many calls from merchants that try to tell us they are a point-of-sale business when they are not because they want that lower rate. They decide they want to use a regular credit card terminal and key in their transactions thinking we won’t know they are not swiping the credit cards. Unfortunately for them this is something that can’t be hidden no matter who the processor is. The terminal communicates when the transaction is keyed in compared to being swiped so when you key in the transaction you will be hit with a non-qualified rate. It will end up being a higher rate then if you set it up as a Mail Order/Telephone Order account in the first place. For example: A point-of-sale rate of 1.81% plus $.24 can have another 1.20% to 2% added because of the non qualified surcharge. That means a total of 3.01% to 3.81% plus $.24 per transaction when you could have paid only 2.25% plus $.27 for the MOTO account.

 

So what should I look for when finding a credit card processor?

When you receive pricing from a company make sure they disclose everything discussed above. If they are giving you Interchange Plus pricing then it will be hard for them to hide anything. Most of the dishonest practices happen with the tiered pricing so make sure you ask for all potential fees. Below is a list of things to look for.

  • What is your base discount rate depending on whether you are a Point-of-Sale(POS) account or Internet/MOTO account? For POS you shouldn’t be higher then 1.90%. If they quote you something like 1.50% then ask them if that applies to both a regular credit card and a check card or check card only? If you get this I would ask for them to show you what the regular credit card rate will be and what the check card rate will be and have them put that on the contract pricing. So you might have something like 1.80% and 1.50%. Internet/MOTO works the same and you should not be higher then 2.40%. If they quote you 2% then ask the same question above.
  • When they give you an authorization fee of $.24 for POS or $.27 for Internet/MOTO make sure it includes the AVS fee. Sometimes they don’t show this and you get hit with another fee for the AVS. In addition, make sure they show you their batch fee. It should be the same as your authorization fee or a little less. Batch fee is the charge to take an entire batch of transactions for the days business and send it off to be settled.
  • If getting tiered pricing ask for the mid and non-qualified surcharge rate. The mid-qualified rate should be no higher then .80% above the base rate and non-qualified should be no higher then 1.50% above the base rate. If they fumble on this question and tell you that is something that Visa or Master Card controls and they don’t know then send them away. They know what it is and they are simply being dishonest.
  • Most companies charge a monthly statement fee and also offer other service options that cost more. What you typically see is a monthly minimum and annual fees. We don’t charge these fees but in some cases it really isn’t a big deal. If they charge you a monthly minimum but you run more then $1000 per month then it won’t matter but if you are a new business and are not sure if you will ever do any transactions at all then it might be worth it.
  • Ask if they offer monthly discount billing. This means that the billing related to each days transactions will be billed once a month on the following month and not taken out of the daily deposits giving you a net deposit. If you have not processed credit cards before you will quickly determine that reconciling your statements each month becomes very difficult when your deposit total for the day is a different number then what your actual sale amount is.

 

Call Access Payment Systems today at (877) 410-8447 or submit an inquiry from our Contact Us page.