• What’s my Real Rate?

• How do I calculate my Real Rate?

• Study this statement example:

• What are the average monthly credit card merchant fees by industry?

• What are the major Merchant Rate components?

• What are the factors impacting my cost to accept card payments?

• What can I do to lower my costs of accepting credit cards?

• The bottom line

What’s my Real Rate?

Reading a merchant statement or shopping for processing quotes today can be confusing.  And comparing merchant account billing from one provider to the next is a challenge, as each has a different format and billing terminology.   Marketing materials showcase “rates as low as” and you hear terms like qualified, non-qualified and Interchange pass through.  Then you have to factor in the batch fees, annual fees, compliance fees, retrieval fees, authorization fees, early termination fees, etc.

So how do you cut through all the clutter?  Understanding the factors that impact your bottom line cost of accepting card payments starts with learning how to calculate your real rate.   Because what really matters is the service charge debited from your checking account, your real rate represents your true bottom line, all-in cost (the percentage of total fees on bankcard sales).

How do I calculate my Real Rate?

1. Pull one of your recent monthly bankcard merchant statements.

2. Locate the sum of all total charges and fees and write it down here:  X=_____ (total fees debited from your business checking account)

3. Calculate the total bankcard sales and write it down here:  Y=_____  (What you are looking for here is your total cost of service for processing bankcard sales.  Don’t include sales volume on AMEX cards since you get charged on a separate AmEx statement for these card sales.)

4. Calculate your real rate:  X / Y = ______%    (multiply by 100 to format as a %)

Study this statement example: 

What are the average monthly credit card merchant fees by industry? 

Are your merchant processing fees above average or below average?  Do you know if you have a good rate, an average rate or if there is room for improvement?  The best way to find out is to compare your real rate with other businesses in your industry. 

Until recently, merchants had no resource for comparing rates with each other.  The Texas Business development Center creates a nationwide database for comparing and sharing card processing expenses. Business owners can calculate their Real Rate to accept card payments and then benchmark their rate against others of the same size within their industry.  Many will find that they have very good costs while others may find that they are leaving too much on the table.   

For example, if you calculate your effective rate to be 3.22% and you subtract 2.66% - the lowest rate another business of similar size in your industry is paying - then you could realize a reduction of 0.56%.  Multiply by your monthly bankcard sales to calculate your savings (ex. $74,131/mo x 0.56% = $415/month savings or $4,981 a year). 

While not a perfect answer, this social networking site is helping answer the question: What is the lowest rate available for merchant services? 

So now you know your real rate and you know by comparison you could be doing better, what do you do next?  Obviously, making any decision without the proper knowledge and research can be a costly mistake.  Here is an overview of the key things you need to know:

What are the major Merchant Rate components?

There are three primary costs that make up your merchant rates.

Interchange:  Interchange fees are collected and paid to the card issuing bank. Interchange is the single largest component of your merchant discount rate pricing. All banks and merchant processing companies operate from the exact same Interchange.

Dues & Access Fees:  Dues, Assessments and Access fees are collected and paid directly to the Card brands (Visa, MasterCard, Discover). All banks and merchant processing companies operate from the exact same Dues & Access Fees.

Merchant Services:  This is the cost of service delivery including marketing, underwriting, risk management, customer service, terminal management and the network / communication costs for authorizing, settling and funding each transaction to your business checking account.

What are the major factors impacting my cost to accept card payments?

• Transaction size:  the larger the ticket the less impact from transaction fees

• Card types accepted:  debit cards have lower Interchange rates than reward credit cards

• Acceptance method:  swiped cards have lower rates than keyed

• Miscellaneous Fees: annual fees, compliance fees, minimum fees, etc. drive up your costs

• Gross billing: Interchange should be returned when you issue a cardholder credit

• Interchange incentives: either a tiered rate structure or incorrect merchant category prevents obtaining the best merchant rates

What can I do to lower my costs of accepting credit cards?

• Insist on direct Interchange pass through pricing

• Accept PIN Debit and encourage your customers to pay this way

• Understand billing terminology – words have meanings

• Make sure your MCC (merchant category code) is accurate

• Use the right payment technology

• Bundle transactions when possible

• Move to net billing so Interchange is returned on cardholder credits

• Read the contract fine print – read it, don’t take somebody’s word for it

• Shop smart to stop corruptive business practices – your choice of vendor matters

The bottom line

Sales people always say they can save you money.  But before you jump on the next promise of savings that walks through your door, first find out where you stand.  Calculate your real rate and compare with others.  Sharing with the merchant community is the next step in achieving lower merchant rates. Then remember that the payments industry is not a commodity business.  It is becoming more complex, with new rules and regulations, new pricing and qualification requirements, new payment technology and payment card industry data security compliance.  While it is important to have competitive rates, don’t neglect the importance of the payment industry professional, whose advice and assistance will save you more money in the long run than negotiating their value away.