Merchant Account Pricing
Your total merchant processing fee consists of many different pricing components. Combined, they all add up to an effective processing rate (total fees divided by total processed volume). Below is a table that shows a sample breakdown of the different categories, and where those fees end up once they are collected from your business.
| Pricing Category | Who Gets Paid ? |
|---|---|
| Interchange | Card Issuing Banks |
| Assessments | Visa/MC/Discover/ American Express |
| Pass through fees such as: Nabu, APF, ISA, MOA, ZFL, FANF | Visa/MC/Discover/ American Express |
| Chargeback Fees / Retrieval Request Fees | Processor / Visa/MC/ American Express/ Discover (both groups have costs associated with the dispute process) |
| Processing Fees (.xx% or basis points) | Processor uses this small fee to cover the auth and capture expense as well as any additional fees charged by the Acquiring Bank. |
| PCI Fees | The 3rd party PCI assessment company that performs the PCI compliance testing |
| PCI Breach Coverage | The 3rd party that provides a dollar amount of coverage should the merchant have a PCI breach event. |
| Authorization and Capture Fees | Processor uses this fee to cover the auth and capture expense as well as any additional fees charged by the Acquiring Bank. |
| Debit Network Fee – Monthly | Debit Network: Star, Nyce, Interlink, etc. |
| Debit Network Interchange | Card Issuing Banks |
| Regulatory Fee | This is used to cover the cost of producing and managing the requirements set forth by the IRS for the 1099-K process. |
Pricing Methodologies
The 3 most common pricing methods are:
- Interchange Pass through
- Discount Rate with downgrades
- Three or Four Tier pricing (qual, mid qual, non qual)
Interchange Pass through
This is the most transparent method of pricing. This method allow the merchant to see the actual processor cost of all of the processing fees plus whatever markup or processing fee is added on.
We like to use a restaurant business as an example when discussing this pricing method. If you went to a restaurant, ordered a bowl of pasta with a meatball, and received your check, it would look like this:
Pasta actual cost – $1.25 (pass through)
Sauce actual cost – $0.50 (pass through)
Meatball actual cost $0.75 (pass through)
Mark-up $8.00 (margin)
Total bill: $10.50
In addition to being the most transparent method, this is also the most cost effective method for the business. There are many advantages to this.
1: Easy for a competitive analysis
2: You can analyze the interchange and make adjustments to the way you process cards to qualify for lower rates.
3: You will always know what kind of income the processor is making regardless of the interchange cost.
Here is an example of interchange pass through:
| Category | Fee | Volume | Transaction count | Total Cost | Who gets paid? |
|---|---|---|---|---|---|
| Visa US Regulated Debit | .05% + $0.22 | $1000.00 | 15 | $3.80 | Card Issuer |
| MC Data Rate II | 2.65%+$0.10 | $5500.00 | 20 | $147.75 | Card Issuer |
| Visa Assessment Debit | .11% | $1000.00 | $1.10 | Visa | |
| MC Assessment | .125% | $5500.00 | $6.88 | MC | |
| Processing Fee | .25% | $6500.00 | $16.25 | Processor | |
| Total Fees | $175.78 |
In the above example, the merchant pays a total of $175.78. Only $16.25 goes to the processor to cover all of the additional expenses associated with your merchant account. $159.53 gets collected by us and then passed back to the card issuers and the card associations.
Discount Rate with Downgrades
Discount Rate pricing is another widely used method of pricing. An example of this would be:
| Category | Fee | Volume | Transaction count | Total Cost | Who gets paid? |
|---|---|---|---|---|---|
| Discount Rate | 2.25% + $0.10 | $6500.00 | 35 | $149.75 | Processor |
| Visa US Regulated Debit | 0.00% | $1000.00 | 15 | $0.00 | Card Issuer |
| MC Data Rate II (downgrade fee) | .80% | $5500.00 | 20 | $44.00 | Card Issuer |
| Visa Assessment Debit | .11% | $1000.00 | $1.10 | Visa | |
| MC Assessment | .125% | $5500.00 | $6.88 | MC | |
| Total Fees | $201.73 |
In this example, the merchant pays a specific discount rate (2.25% + $0.10) for all of the volume. For transactions that have an interchange cost greater than the base discount rate, a surcharge is applied to collect the difference (MC data rate II @ .80%).
At first glance, you might think that this is an easier pricing method to use. In reality, it almost always generates more processing expense to the merchant. The only way for this method to be advantageous to the merchant is if the base rate is very low and the surcharges have little or no mark up.
Processors still collect the total fees as they do with Interchange pass through pricing and pass along the fees to the various parties.
3 or 4 Tier Pricing
In this method of pricing, the merchant is given 3 or 4 rates (Qualified, Mid Qualified, Non Qualified). Each of the interchange categories are then designated for a specific rate tier or bucket. With hundreds of Interchange categories, all with varying rates, this can be one of easier methods for a merchant to understand. It is also the easiest way for a processor to build in a bigger margin creating a more costly fee structure for the merchant.
In the example below, the merchant is given a 4 tier rate.
Qualified Debit: 1.25%
Qualified Credit: 1.59%
Mid Qualified: 2.55%
Non Qualified: 3.45%
| Category | Fee | Tier or Bucket | Volume | Transaction count | Total Cost |
|---|---|---|---|---|---|
| Visa CPS Card Not Present | 2.55% | Mid Qualified | $6500.00 | 35 | $165.75 |
| Visa US Regulated Debit | 1.25% | Debit Qualified | $1000.00 | 15 | $12.50 |
| MC Data Rate II (downgrade fee) | 3.45% | Non Qualified | $5500.00 | 20 | $189.75 |
| MC Merit III Credit | 1.59% | Qualified | $2000.00 | 10 | $31.80 |
| Visa Assessment Credit | .13% | $6500.00 | $8.45 | ||
| Visa Assessment Debit | .11% | $1000.00 | $1.10 | ||
| MC Assessment | .125% | $7500.00 | $9.38 | ||
| Total Fees | $418.73 |
One disadvantage to this type of pricing is that the merchant is overpaying for certain interchange categories. Take a look at the Qualified Debit category. The merchant is paying 1.25%, when the actual Interchange cost is .05% +$0.22.
Debit Qualified
$1000 * 1.25% = $12.50
Interchange Pass through
$1000 * .05% = $0.50
plus 15 transactions * $0.22 =$3.30
Grand total of $3.80.
It will cost the merchant $8.70 more to process the same transactions. When multiplied by 12 months, that comes to $104.40.
While there is no perfect methodology for merchant pricing, there are definitive advantages and disadvantages. At Renaissance Associates, regardless of the pricing method that is chosen, we will always present you with a pricing agreement that had full disclosure of all of the fees that your merchant account will incur.
