Guide to Credit Card Processing

What to Expect

CardFellow’s Guide to Credit Card Processing provides accurate, unbiased information about credit card processing followed by a blueprint showing how you can quickly obtain truly low costs for your business.

First Things First

This no-nonsense guide will put you on the fast track to low credit card processing fees by teaching you the truth about charges, and then showing you how to put your new knowledge to work comparing processors. But before you jump into the guide, consider these important points.

Forget About It!

Much of the information available online and off about credit card processing is erroneous, slanted with sales jargon, or both. To get the most from this guide, do your best to disregard what you’ve learned from pushy salespeople. Start with a clean slate so you grasp the secrets of truly low rates quickly.

It’s Easier Than You Think

Credit card processing fees are not as confusing as many processors would like you to believe. To prove the point, we have summarized the key to the lowest credit card processing fees in one simple sentence:

Don’t worry if this sentence doesn’t mean anything to you right now; this guide will show you how to harness its cost-cutting power for your business.

There Are No Dumb Questions

This guide covers a lot of ground quickly and skips some finer points of credit card processing. If you have questions along the way, we are happy to provide answers. Be sure to check out the rest of our blog for more detailed articles on specific topics. Or, feel free to email questions to info@cardfellow.com.

Credit Card Processing Ecosystem

You don’t need to learn the intricacies of the credit card processing system to secure competitive pricing. In fact, the whole system can be boiled down to four primary components: issuing banks, acquiring banks, card brands, and credit card processors.

Issuing Banks

Banks that issue credit cards to consumers play a big role in credit card processing. In addition to putting plastic in consumers’ hands, issuing banks influence the rates that businesses pay to accept cards. JPMorgan Chase and Bank of America are examples of large issuing banks.

Acquiring Banks

Acquiring banks maintain merchant accounts for businesses so they can accept credit cards. Wells Fargo and HSBC Bank are examples of large acquiring banks.

Card Brands

The card brands are the architects and custodians of credit card processing. Visa and Mastercard both maintain a computer network that credit card processors use to route credit card transactions among issuing banks, acquiring banks, and businesses.

The card brands don’t directly issue credit cards to consumers or merchant accounts to businesses. Instead, Visa and Mastercard oversee a network of issuing and acquiring banks working in association to do the legwork.

The main duties of Visa and Mastercard include:

• ADMINISTRATION: Everything from setting the rates that businesses pay to accept credit cards to managing the issuing and acquiring banks.
• NETWORKS: Visa and Mastercard each develop and maintain a computer network that routes transactions among issuing banks, acquiring banks and businesses.
• MAKING MONEY: The card brands have shareholders to please, so increasing card usage and revenue is paramount.

Bonus: Where do American Express & Discover fit in?

You probably noticed that the above paragraphs specify only Visa and Mastercard. So why not Amex and Discover? There are some nuances that make those two brands a little different.

AMERICAN EXPRESS:

Unlike the networks of Visa and Mastercard that rely on many issuing and acquiring banks working together, American Express started off by handling all of its issuing in-house. While that has since changed, Amex does still issue cards itself.

American Express’s closed-loop network allows the company to dictate its own rates. Until 2015, that explained why American Express’s rate remained the same regardless of which processor handles the transactions. In 2015, American Express rolled out a new pricing model called OptBlue, which allowed processors to add a markup to Amex transactions. We’ll address that later in this guide.

DISCOVER:

The operational model of Discover’s network falls somewhere between the associations of Visa and Mastercard and the closed-loop scenario of American Express. However, Discover’s rates are similar to those of Visa and Mastercard and are generally less than those of American Express.

Where’d Your Money Go?!

A business pays fees to three separate entities each time it processes a credit card. It pays interchange fees to the bank that issued the customer’s card, assessment fees to the card brand (Visa, Mastercard, or Discover), and a markup to the processor. Interchange and assessment fees are fixed costs that remain the same regardless of which processor a business uses. Only the markup will vary among processors. Therefore:

The ability to differentiate the components of credit card processing cost is critical to securing competitive pricing. If you can’t follow your money, you won’t know where it’s going, or even when it left.

Fees paid to issuing banks and card brands are non-negotiable and remain the same regardless of the processor, but fees paid to the processor are open for negotiation. Here’s a closer look at which fees are negotiable and which are not.

Issuing Banks Charge Interchange: Non – Negotiable

Each time a business processes a credit card, it pays a fee to the bank that issued the customer’s card. This is called an interchange fee, and it is calculated by adding a percentage of the transaction volume to a flat transaction fee.
For example, 1.51% of volume plus a $0.10 transaction fee is an interchange rate for a swiped Visa consumer credit card.

If a business accepts this type of card as payment for a $100 transaction, it will owe the bank that issued the card an interchange fee of $1.61 ($100 x 0.0151 + $0.10).

Interchange rates are determined on a per-transaction basis using the details of the transaction. Things like card type (credit or debit), card category (reward, commercial, etc.), and processing method (swiped / keyed) dictate the interchange rate (percentage and transaction fee) associated with the transaction, and ultimately how much money the business will have to pay the issuing bank.
Issuing banks don’t set interchange rates independently. Instead, issuing banks collectively agree upon rates through Visa and Mastercard. This is why all issuing banks charge the same interchange rates, and processors have no influence on them.

Interchange rates are a non-negotiable component of credit card processing cost that remain exactly the same regardless of which processor a business uses and whether you see the rates on your statement or not.

The following table provides examples of how much money an issuing bank collects in interchange fees from a $100 purchase.

We’ve used Visa’s interchange rates in this example, but MasterCard and Discover’s interchange rates are similar to Visa’s. Interchange rates are subject to change.

Card Brands Charge Assessments: Non – Negotiable

A business pays Visa, Mastercard, or Discover a series of assessments each time it accepts a card branded with the company’s logo. Assessment fees are comprised of a percentage, a flat charge, and individual card brand fees. (For example, Visa charges a monthly fee while Mastercard charges a yearly Merchant Location Fee.) Some of the current assessments for Visa, Mastercard and Discover are:

For example, if a customer uses her Visa credit card to make a $100 purchase, the business accepting the card will have to pay Visa $0.15 ($100 * 0.0011 + $0.0195).

A full list of assessment fees is available here:
Credit Card Processing Dues and Assessments

Like interchange fees, assessments are a non-negotiable component of credit card processing cost that remain exactly the same regardless of which processor a business uses.

Processors Charge a Markup Negotiable

Any cost beyond the sum of banks’ interchange fees and card brands’ assessment fees is the processing markup.

The markup is where processors, gateway providers, sales agents, etc. make money, and the markup is the only area of cost that varies among processors.

Your goal in shopping for the most competitive credit card processing solution is to find the processor with the lowest markup and greatest value, and we will show you how to do that in just a bit.

Markup includes any costs that aren’t interchange or assessments. Markups include processors’ monthly or annual fees, percentages, per transaction fees, statement fees, etc. Every processor has a markup – the only part that differs is how they disclose it.

Putting It All Together

The sum of interchange fees and assessment fees is credit card processing’s version of wholesale, which remains consistent regardless of which processor your business uses.

The only component of cost that varies from one processor to the next is the markup over interchange and assessments.

For example, let’s pretend a customer uses their Mastercard credit card to make a $100 purchase at three different retailers, all using different processors. The table below splits the fee that each business pays into the three main components of cost: interchange, assessments, and markup.

Notice that the interchange fee charged by the customer’s issuing bank and the assessment fee charged by Mastercard are exactly the same for all three businesses. The only component of cost that varies is the processor’s markup.

Isolating the processing markup is the first step toward securing competitive credit card processing fees. Interchange and assessment fees are the same for all processors, so don’t worry about what you can’t change and focus instead on what you can: the processor’s markup!

CardFellow Makes It Easy! 

The pricing model a processor uses has a greater impact on cost than rates.

Processors can use different types of pricing to charge fees. Pass-through pricing separates the three components of cost, resulting in a consistent, transparent markup. Bundled pricing combines the three components of cost resulting in expensive surcharges and a hidden markup.

You know from the last section that interchange fees charged by issuing banks and assessment fees charged by card brands are the same regardless of the processor you use. What is not consistent among processors is how each one passes these fixed costs to your business.

Processors typically use one of two pricing models to assess charges to a business and can select the pricing model on a per-case basis. So, any given processor can charge some businesses using bundled pricing and others using pass-through pricing.

As we will outline below, pass-through pricing is the most transparent.

Pass-Through Pricing (What You Want & the Only One Allowed at CardFellow)

With pass-through pricing, a processor bills interchange fees charged by banks and assessment fees charged by card brands directly to a business at cost. Essentially, these fixed costs are “passed through” to the business.

The processor makes money by charging its markup as a single flat rate and a single transaction fee. For example, 0.25% of sales volume plus a $0.10 fee for each transaction is a typical pass-through markup.

You may also hear pass-through pricing referred to as interchange-plus pricing or cost-plus pricing.

The table below provides a few examples of how the components of cost are reported and charged on pass-through pricing.

Notice how all rates and fees are clearly visible as an individual component of cost, and how the processor’s markup stays the same regardless of the interchange rate charged by the issuing bank and the assessment charged by the card brand.

Separating the fixed costs of interchange fees and assessment charges from the processor’s markup, pass-through pricing:

• IS LESS EXPENSIVE. The processor’s rate remains the same regardless of the underlying interchange rate charged by the issuing bank resulting in a consistent, low markup.
• ELIMINATES SURCHARGES. There are no “mid-qualified” and “non-qualified” surcharges with pass-through pricing. (More on this in a moment).
• IS 100% TRANSPARENT. The three components of cost are reported separately on month-end statements, allowing a business to see a complete picture of fees.
• ALLOWS FOR INTERCHANGE OPTIMIZATION. Ensuring that the majority of transactions process at the lowest possible interchange rate is called interchange optimization, which is only possible when interchange categories are disclosed on a statement.

Bundled Pricing (Opaque and Often Expensive)

With bundled pricing, a processor pays interchange fees to banks and assessment fees to card brands and charges the business based on its own set of rates, typically called qualified, mid-qualified and non-qualified.
The “qualified” rate of a bundled pricing model is the lowest, followed by the “mid-qualified” rate and finally the “non-qualified” rate. For example, rates of 1.69% qualified, 2.25% mid-qualified, and 2.99% non-qualified each with a $0.25 transaction fee are a typical example of bundled pricing.

The processor effectively “bundles” interchange fees, assessment fees, and its markup into its own rates, thereby completely concealing the fixed cost of interchange and assessments from unsuspecting businesses.

You may also hear bundled pricing referred to as tiered pricing or bucket pricing.

To make matters worse, the processor gets to choose which transactions are considered qualified, mid-qualified, or non-qualified. The ability to route a business’s transactions to the rate of its choice allows a processor to increase the business’s cost without having to increase its rates. All the processor needs to do is route more of the business’s transactions to its higher mid- and non-qualified rates.

The final nail in the bundled pricing coffin is that it makes it impossible to accurately compare rates among processors. Even if several processors quote the same exact “rates,” one processor may route certain transactions to its lowest qualified rate that another will route to its highest non-qualified rate.

The table below is in the same format as the one used to illustrate pass-through pricing in the previous section. This table provides a few examples of how the components of processing cost are reported and charged on bundled pricing.

Notice how the fixed costs of interchange fees and assessments are not disclosed, making it impossible to calculate the processor’s markup.

Take a moment to compare this table with the one in the pass-through pricing section. Take note of how pass-through pricing fully discloses the components of cost separately, and how the processor’s rate and fee remains the same for all transactions. This is why pass-through pricing is less expensive and easier to reconcile.

By grouping the fixed costs of interchange and assessment fees with the processor’s markup, bundled pricing:

• RESULTS IN A HIGH, INCONSISTENT MARKUP. The processor does not disclose what it pays in interchange and assessment fees for each transaction, so there is no way for a business to calculate the processing markup. Additionally, the processor bundles numerous interchange fees into just three rate categories (qualified, mid-qualified, non-qualified) resulting in an inconsistent markup.
• RESULTS IN HIDDEN FEES. Bundled pricing allows a processor to completely conceal the fixed cost of interchange and assessment fees making it impossible for a business to calculate its markup.
• DOES NOT ALLOW FOR INTERCHANGE OPTIMIZATION. Read more about the important topic of interchange optimization.

Note that not all types of bundled pricing break down into qualified, mid-qualified, and non-qualified rates. A popular type of pricing commonly known as “flat rate” is actually a form of bundled pricing. Instead of routing transactions to three “rate” bundles, flat rate only charges one rate for all transaction types. For example, you may be charged 2.75% or 2.9% + 30 cents. These rates will apply to all your transactions.

While flat rate-style bundled pricing looks simple, it’s not transparent and often expensive. The processor doesn’t show you what is paid in interchange and assessment fees, so there’s no way to determine what you paid as a markup. That is, there’s no way to see how much you paid the processor as profit.

Now that you know the credit card processing ecosystem, the negotiable and non-negotiable components of cost, and the two different pricing models processors use, let’s put your knowledge to work by learning how to compare processors to find the ideal processing solution for your business.

A Quick Note on “Non-Qualified”

In the past, the presence of “non-qualified” on a processing statement automtically implied bundled pricing. However, in recent years, Visa began using “non-qualified” as one of its downgrade categories. This means that you could see a non-qualified charge on your statement even if you’re on pass-through pricing. The non-qualified charge may not be your processor’s fault. However, ANY non-qualified charge indicates you paid more than you had to, and is worth investigating further. If you have questions, shoot us a message!

Did you know?

Warning — Pit Fall!

The most accurate way to measure the competitiveness of a processor’s rates and fees is to calculate the effective rate being careful to assume the same fixed costs of interchange and assessments for all processors. CardFellow’s software does this for you, but if you’re looking for a processor on your own, you can read more about the effective rate on our blog.

How to Compare Credit Card Processors

Take control and dictate your terms to prospective processors. Only consider offers based on pass-through pricing, and demand the best offer first. Concentrate on the processor’s markup and don’t get sidetracked by non-negotiable interchange and assessment fees.

Finding a competitive credit card processing solution means putting what you’ve learned from this guide to work by knowing what to look for and getting tough with processors — here’s how to do it.

Level the Playing Field

If the first question you ask a processor is, “What’s your rate?” The processor will likely offer bundled pricing, which opens you up to surcharges and hidden fees.

The pricing model a processor uses has a greater impact on cost than its rates, and the pricing model also dictates your ability to accurately compare offers.

The first thing you should say to a prospective processor is, “I will only consider quotes that use pass-through pricing.” Not only is pass-through the least expensive pricing model, it ensures you will be able to compare offers from different processors on a level playing field.

Target the Processing Markup

Interchange rates charged by issuing banks and assessment fees charged by card brands will be the same regardless of which processor you choose, so focus on what you can change as you’re comparing offers — the processing markup.

Pass-through pricing makes isolating the markup simple because the processor’s rate and fee remains the same for every type of transaction whether swiped, keyed, reward card, commercial card, or otherwise.

To calculate the markup, simply multiply the processor’s rate and transaction fee by your business’s average monthly volume and number of transactions.

For example, the table below shows how three pass-through quotes (of 0.20% plus $0.15, 0.35% plus $0.10, and 0.50% plus $0.08) compare for a business with average monthly credit card sales of $10,000 resulting from 100 transactions.

As you can see from this table, interchange and assessment fees are the same for each processor; only the markup changes. This is why it’s important to focus on the processor’s markup when comparing credit card processors.

Leave the number crunching to CardFellow!

How do I compare my current processor’s bundled rates to pass-through pricing?

The short answer is: there is no comparison. Bundled pricing is almost always more expensive than pass-through pricing. Aside from the cost difference, bundled pricing conceals the fixed costs of interchange and assessment fees, results in surcharges, and allows the processor to increase costs without increasing rates.

When is flat rate less expensive?

Flat rate pricing may be cheaper if your average transaction is under $10 or if you process less than $5,000/month in credit cards.

Comparing bundled pricing and pass-through pricing requires a solid understanding of banks’ interchange charges, which is not something most people care to take the time to learn.

Part of the free service we provide at CardFellow is a comprehensive analysis comparing your current processor’s rates to the lowest quote you receive in our marketplace. Businesses currently on bundled pricing see an average cost reduction of 40% after selecting a pass-through quote in CardFellow’s marketplace.

If you’d like to know how your bundled pricing stacks up, get quotes for a baseline, and then send us your statement for assistance.

Look at the Big Picture

Processors charge several different types of fees, including transaction fees, monthly fees, and annual fees. With this in mind, it’s important to look at each quote in aggregate, being careful not to focus solely on one particular fee such as the processor’s rate.

Continuing with our example from above, the rate of 0.20% quoted by Processor A produces $20 in monthly fees. If this processor also charges an $18 monthly statement fee and a $160 annual fee, the combination of these two charges breaks down to $31.33 a month (($160 annual fee / 12 months) + 18 statement fee), which is more expensive than the $20 fee resulting from the rate.

Compare each processor’s quote by calculating the total monthly markup including every charge. The easiest way to do this (aside from signing up at CardFellow and letting our software do it for you) is to use a table like the one below to calculate each processor’s monthly markup using your business’s average monthly sales and transaction figures.

As you can see from the table, once we add each processor’s monthly and annual fees to our running cost, the processor with the lowest rate (Processor A) becomes the most expensive, and the processor with the highest rate (Processor C) become the least expensive.

This is why it is important to consider all rates and fees equally when comparing processors. The processor with the lowest volume markup (rate) is often not the most competitive overall.

At CardFellow, we guarantee that each processor’s quote will be fully disclosed, and all fees are separated by category as shown in the screenshot of a sample quote below.

Name Your Terms

Finding a competitive credit card processor is a game that’s all about offense. If you don’t make the rules, processors will, and the odds of getting competitive pricing will be stacked against you. Take a page from our playbook at CardFellow – stop asking questions and start telling processors what it takes to earn your business.

To protect businesses that use our service and to ensure processors offer only honest competitive quotes, each processor must sign a contract agreeing to abide by CardFellow’s terms before it is allowed to offer you a quote in our marketplace.

We’ve listed the terms below that processors must abide by before being approved by CardFellow. If you are shopping for a credit card processor on your own, use our terms as a template for what to require from prospective processors. Doing so will save time and ensure you receive only honest competitive quotes.

CardFellow’s Terms

• Pass-Through Pricing
  Only accept quotes based on pass-through pricing.
• Best Offer First
  You’re busy and haggling is a waste of time. Demand that each processor offers its best pricing first. Don’t provide statements or disclose other offers you’ve received before you are offered a quote.
• Pass Assessment Fees at Cost
  Processors can mark up assessment fees charged by the card brands to increase profits. To avoid these hidden costs, require all processors to charge assessments at cost. You can reference a list of assessment fees at CardFellow so you know how much these fees should be: https://www.cardfellow.com/blog/credit-card-processing-fees/
• Pass Interchange Credits
  When a business issues a credit card refund it is supposed to receive a credit from the issuing bank for a portion of the interchange fee paid on the original purchase transaction. However, many processors keep this credit instead of giving it to the business. Require all of your prospective processors to pass interchange credits to your business.
• Full Disclosure in Writing
  Don’t waste time asking processors if they have certain fees. Require each processor to provide a fully disclosed quote in writing listing every rate and fee.
• No Rate Increases — Ever
  Processors will go kicking and screaming at the mention of this demand, but we know it can be done because every quote at CardFellow is guaranteed for life. CardFellow provides each business that uses our service with free lifetime monitoring to ensure rates never increase. If you’re shopping processors on your own, don’t ask if a rate will increase; demand that it never increases, and get it in writing.
• No Cancellation Fees
  Refuse to pay a cancellation fee, and get a waiver in writing. A processor that offers an honest competitive quote should not have to charge a cancellation fee to retain your business. However, a processor that waives a cancellation fee is acting fairly and has earned a chance to address issues before you cancel. A processor may claim that it can’t waive a cancellation fee, or that it can’t edit its bank’s application in order to waive a cancellation fee in writing. Every quote at CardFellow is accompanied by a written cancellation fee waiver, so we know that such a waiver can be provided. Keep in mind that some processors (like a few at CardFellow) may waive a cancellation fee by providing a signed addendum to the formal application instead of updating the parent bank’s terms directly.
• No Equipment Leases
  Never lease a credit card machine. You’ll end up locked in a long contract and pay much more than you would have by purchasing the machine outright. Equipment leasing is forbidden in CardFellow’s marketplace.
• Disclosure of Proprietary Equipment
  Certain credit card machines, POS software, and gateways only work with one particular processor, making it necessary to purchase new equipment when switching to another processor. Require all processors to disclose whether the equipment they are selling is proprietary. If so, strongly consider asking for alternative equipment that is universally compatible.
• Full Cost Detail on Statements
  Require all processors to disclose a detailed breakdown of the three main components of cost on monthly processing statements. Without this information you can’t calculate the processor’s markup to ensure your costs are accurate and competitive. We have searched far and wide for quality processors willing to agree to our stringent demands, so if you’re shopping on your own, don’t be discouraged if processors scoff at your list of requirements. Simply move on to the next prospect; there are literally thousands to choose from. Of course, you can also let us do the work for you by signing up for free at CardFellow to receive multiple quotes from processors that already abide by these terms.

Keeping Costs Low

Processors’ rates and fees increase if left unchecked, and interchange fees charged by banks must be monitored to ensure the lowest cost. Read processing statements monthly to ensure the processor’s markup does not increase and that interchange fees are optimized.

Getting competitive rates and fees is a task with a clear finish line, but making sure costs remain low requires an ongoing commitment and a little bit of know-how.

Monitor the Processor’s Fees

We call it “rate creep” at CardFellow, and it goes like this: You sign on with a processor that offers competitive rates, but shortly thereafter the processor slowly increases rates and adds additional fees. By the time you notice what has happened, a year has passed and you’ve been duped out of hundreds or even thousands of dollars.

The only way to stop rate creep is to monitor a processor’s charges — even if you have a guarantee that pricing will not increase. This is exactly why CardFellow provides free lifetime monitoring for every business that chooses a processor through our marketplace. If we find that a processor’s rate does not match what was quoted, the processor is required to correct the discrepancy so you don’t lose money.

Monitoring your monthly processing statement is the only way to ensure the fees you worked so hard to obtain remain low and unchanged. If you are unsure of how to read your statement, ask your processor for an explanation. Any business that chooses a processor through CardFellow is also welcome to contact us with any questions about charges or for help reading a statement.

Optimize Interchange

Interchange fees charged by issuing banks account for the largest portion of credit card processing cost, and every type of transaction is associated with an optimal (lowest) interchange rate.
Many things can cause a business’s transactions to be processed at higher-than-optimal interchange rates – also called downgrading – resulting in increased cost.

In many cases, it is possible to reduce interchange fees by modifying a business’s processing behavior or equipment/software to allow more transactions to process at a lower interchange rate.
Ensuring that the majority of transactions process at the lowest possible interchange rate is called interchange optimization.

Since interchange optimization requires some know-how, we provide it as part of the free monitoring service for businesses that select a processor through our marketplace.

About CardFellow

The interchange fees charged by issuing banks are credit card processing’s version of wholesale, and Visa and MasterCard publish a large portion of these fees online at the links below.

• Visa Interchange Schedule
• Mastercard Interchange Schedule