ERR Pricing Format – what it is and why you don’t want it!

ERR Pricing Format – what it is and why you don’t want it!

Have you ever heard the phrase “if it sounds too good to be true, it probably is?” This as an apt descriptor of the ERR rate. ERR stands for “Enhanced Recover Reduced”, and is sometimes called a mixed or blended rate, and was formerly known as a Bill Back or Enhanced Bill Back (EBB) Rate. The ERR pricing system was developed with two goals in mind – to give the lowest possible STATED cost to the merchant, and to thereafter extract the most money possible. And it does just that; the ERR pricing system is the ultimate “bait and switch” in the credit card processing industry. Once you understand how an ERR rate works, you’ll understand why you want no part of it.

An ERR rate is a mix of a tiered rate with an interchange plus rate (for more info on these, please click here). On their own, these are both very useful pricing platforms. First, it’s important to understand the basics of these two staple merchant account types:

Tiered – this is the most common pricing platform for small to medium sized merchants. There are usually two or three tiers (Qualified, Mid-Qualified and Non-Qualified), and sometimes a fourth for check cards. Any given transaction is placed in its applicable tier. The processor therefore bundles the hundreds of possible interchange rates into a few simple to understand “buckets” as they are known in the merchant account industry.

Merchant Advantages: Clear, relatively simple, and predictable

Interchange Plus: this is more common of larger or higher volume merchants. This rate gives a straight pass through on interchange cost plus a set mark up, measured in basis points. While it may make things a little more confusing for the merchant due to the hundreds of different rates they may get on a given transaction, on higher volume accounts it can generate significant savings.

Merchant Advantages: Provides the lowest possible rates

The ERR Rate

An ERR rate is a mix of the two, with a twist. An ERR rate takes a flat discount off all transactions (this is what they will call a qualified rate or sometimes a target rate), and then tacks a surcharge on any card type that does not meet a minimum profitability threshold. The low “qualified rate” is what they show you when they sell you the service…the target profitability they do not.
Therefore, you can state a qualified rate even below interchange cost (and unscrupulous merchant account providers often will), and have it technically be true, as the term “qualified” is defined in this pricing scheme. Then come the surcharges at the end of the month

The ERR rate, therefore, is typically sold under the guise of a tiered rate. If an honest merchant account provider is giving a very competitive qualified rate of 1.69%, and an unscrupulous merchant account provider can easily undercut them by offering a 1.4% qualified rate, just not mentioning it’s an ERR rate. The unsuspecting merchant is then left to think the honest sales rep is profiteering, and the unscrupulous sales rep selling the ERR rate is looking out for them, when in reality it’s quite the opposite.

How an ERR rate works

For both the below scenarios, lets say our merchant account provider quotes an ERR rate of 1.4%, with a minimum margin of 80 base points (.8%). For simplicity sake, we will ignore per transaction charges and just look at discount rates.

Example 1:

The merchant accepts a card for a transaction for $100, and the card clears as CPS/Rewards 1, with a 1.65% discount rate. Here’s how that would appear on the merchants statement:

Visa Qualified: 1.4% x 100 = $1.40

Then later on in the statement, typically listed as “interchange charges”, the merchant would see:

VI Rewards 1 – $1.05

How is this calculated? Here’s the math that goes on behind the scenes:

Interchange rate: 1.65%
Qualified rate:  1.4%
Margin:   (-.25)%
Target Margin:  .80%
Amount to be billed: 1.05% (or in this case, $1.05)

Example 2:

Lets say the same merchant then accepts a $100 transaction that clears as a CPS/Restaurant Debit, with an interchange rate of 1.19%. This would play out as follows:

Visa Qualified: 1.4% x 100 = $1.40

Then later on in the statement, typically listed as “interchange charges”, the merchant would see:

VI Restaurant Debit – $.59

And again, here’s the math that goes on behind the scenes:

Interchange rate: 1.19%
Qualified rate:  1.4%
Margin:   .21%
Target Margin:  .80%
Amount to be billed: $.59%

Real world example – how it appears on a statement

Below is an excellent example of an ERR rate. This statement was a bit of a find as they are usually far less clear than this, but is perfect for demonstrating an ERR rate. Most statemetns are not nearly this explicit in showing thier percentage surcharges. This is an odd one as the standard “qualified rate” is a fairly high 1.8% to begin with. To keep this simple, we’ll just look at a few examples.

Example of an ERR rate

YELLOW: here you can see all Visa cards are coming through at either 1.5% if they are a check card, or 1.8% if they are a credit card.

Green: Visa Signature Preferred Electronic

Interchange Rate: 2.4%
Qualified rate:   1.8%
Surcharge  1.11%
Total Discount:  2.91%
Total Margin:  .51%

Purple: Visa Corporate Electronic

Interchange Rate: 2.25%
Qualified rate:  1.8%
Surcharge:  .96%
Total Discount:  2.76%
Total Margin:  .51%

As we can see here, the minimum margin is .51%. Therefore, any card that clear that make .51% or greater at the qualified rate of 1.8% do not get a surcharge. Anything that makes less than .51% is hit with a surcharge in order to increase the profit for the credit card processor up to that amount.

Sneaky, isn’t it?

The ERR Rate Game

So as you can see, when you are dealing with an ERR rate, you really don’t know what your effective rate will be unless you know the target margin and the actual interchange rate. And count on these same merchant account providers to stick a hefty early termination fee in their contracts, so that once you realize what’s going on its already too late.

Call it an ERR rate, a blended rate, a bill back rate or whatever they will to keep up the confusion, it’s nothing more than a legal, contractually binding lie. There is no reason you cannot get a qualified rate of 0% on this system and still pay an astronomically high effective rate.

The Merchant Solutions Difference

Here at Merchant Solutions, we do not, unless specifically requested by the merchant, provide ERR rates. We don’t want your business for the next few years; we want your business for the life of your company. And we want your friends and collogues business, and theirs as well. And we earn this by providing clear pricing, full explanations of our rates, and back it up with exception service and seamless processing.

ERR Pricing Format – what it is and why you don’t want it!

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