In the payments industry, it’s common practice to analyze credit card processing statements to help merchants understand what they’re paying — and where they could possibly save.
But, reading monthly credit card processing statements isn’t as clear-cut as one would hope. Fortunately though, once you have some basics down, the review process becomes much less daunting.
Here are a few pointers to help you quickly review a monthly credit card processing statement:
Step #1: Identify the Pricing Method
The first step is to determine how the account has been set up. What pricing model is being used?
The most common pricing methods are: Tiered, Interchange Plus (also referred to as Pass Through or Cost Plus), and Flat Rate.
- Tiered Pricing, sometimes referred to as bundled or bucket pricing, describes a pricing model where the processor essentially divides the 400+ permutations of risk factors, into three groups, sometimes called buckets. Most commonly, tiered pricing is offered in a three-tier system: Qualified, Mid- or Partially-Qualified, and Non-Qualified. For more on tiered pricing, see the article: Understanding Credit Card Processing Charges.
- Interchange Plus Pricing, also known as Pass Through or Cost Plus, is a method where the processor will apply the interchange cost (or what you can think of as wholesale pricing), and add a fixed mark-up fee to facilitate the transaction. Although this is the most transparent pricing program, it can be a bit confusing since there are hundreds of interchange categories and rates that could be applied in each billing cycle.
- Flat Rate Pricing is where a single rate and/or per transaction fee is applied to all transactional activity. Most frequently, the transactional activity is separated into two categories: Card Present (Swiped/Dipped) and Card Not Present (Key Entered). A Flat Rate and/or per transaction fee is established for each Card Present and Card Not Present activity. This fee structure is typically most attractive to merchants with very low volume and transactional activity each month, as it’s the easiest to understand.
Another tip for identifying the pricing method: know the merchant business type. Certain pricing methods pair up with specific types of businesses or size of businesses.
For example, small business merchants are likely set-up on a Tiered Pricing method, whereas a large volume merchant is more commonly placed on Interchange Plus. Micro merchants — merchants with very low volume — are more attracted to a Flat Rate model.
Step #2: Determine Current Rates
The Discount Rate is the rate charged to a merchant by the bank or processor for providing debit and credit card processing services. The rate is applied as a percentage and/or per item fee, and is calculated for settled transactions/volume. The rate will vary widely based on the pricing method.
Step #3: Review Authorization Fees
Authorization Fees are charged whenever the point-of-sale device or software system communicates with the processing network. This is most commonly used when the system is attempting to authorize a sale transaction on the cardholder’s account.
Authorization Fees are often mistaken for the per item fee, which is the fee assessed in the discount charges for settled transactions. The Authorization Fee can also widely vary, based on the card type (VISA, MasterCard, Discover, American Express), and if the authorization attempt is being conducted electronically or by phone/voice.
Step #4: Review Other Fees
Other Fees come in many forms. Most frequently are the monthly fees and annual fees.
Examples of Other Fees are: Monthly Service Fee, PCI Fee, Statement Fee, Equipment Rental or Lease Fee, Maintenance Fee, Reporting or Online Access Fee, Annual Fee, Regulatory Fee.
Step #5: Assess the Effective Rate
The Effective Rate is the overall percentage rate the merchant is charged, taking all fees (discount, authorization, other fees, etc.) into consideration. To calculate the Effective Rate, take the total fees paid and divide by the total volume.
A couple other factors to consider when calculating the Effective Rate:
- Are all card types funded by the processor? For example, American Express may be funded separately, by American Express. If this is the case, you’ll want to exclude American Express volume from the Effective Rate calculation.
- Are there any one-time or miscellaneous fees on the statement? If there are any one-time or miscellaneous fees, you may want to exclude these from the fee amount you use to calculate the Effective Rate. Doing this will help you to understand what is a typical Effective Rate.
Getting the Most Cost-Effective Rates and Fees
Yes, reviewing a credit card processing statement can seem intimidating, but it’s worth familiarizing yourself with the basics so that you understand the numbers and can make informed decisions about your business’ finances.
As a merchant services provider, Constellation Payments works with thousands of small to medium-sized businesses to make sure they are receiving the most cost-effective rates and fees.
If you’re unsure you’re receiving the best rates possible — or have specific questions about your credit card processing statement — contact us. We’ll gladly review your most recent statement with you so that you fully understand what you’re currently paying and where you could save.
Jennifer Sumii is Manager of Partner Relations for Constellation Payments. Within her role, she oversees critical company partnerships, including partners with custom integrations, large core processing accounts, and processor or origination companies. Her background includes extensive processing and banking experience, specifically FI/ISO/ICA relationship management, corporate and commercial banking relationship management, national account management, and new ISO/MSP implementation and training. You can reach Jennifer at firstname.lastname@example.org.
Image courtesy of Pixabay.com.