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Merchant Account and Credit Card Processing
How To Read and Understand Your Credit Card Processing Statement
If you’re like most businesses, credit card processing charges are the proverbial black hole in your budget. While other areas such as purchasing, advertising allotments, and utility bills are scrutinized and micromanaged for savings, credit card processing is often taken for granted as a cost that just nets itself off the bottom line. This is ironic, since in many businesses, credit card processing charges are the lowest common denominator in your sales. If for instance you run a web store and 100% of your charges come through via credit card, then 100% of your sales are affected by your credit card processing charges. Even in retail locations, many see easily 50% of their income via credit card. Think about it – if 50-100% of your money is subject to a surcharge, shouldn’t you know and understand these charges inside and out?
Getting to know your processing bill
Credit card processing statements can often be confusing. Many processors intentionally make the bills convoluted so that they can mask their charges and confuse the merchant so that they cant be sure what they are paying. Additionally, the card networks themselves don’t make it any easier, as they have a myriad of different charges they bill both to the reseller and to the merchant directly. Sorting through these charges can be intimidating at first, but in the end can help you gain an understanding of what you are really paying, and what you can do to take control of the costs associated with credit card acceptance.
Effective Rate
The Effective Rate is the most important piece of info NOT shown on your statement. Thankfully for the merchant, it is very easy to deduce of the numbers your processing statement does show.
Your effective rate is defined as your total processing charge divided by the total dollar value processed in a given month. As it is based on the gross charge you receive, it takes into account the discount rate, per transaction charge, batch charges, monthly maintenance or statement charges, or any other additional charges or fees, special services ordered, etc.
To determine your effective rate, simply divide the amount you were billed by the amount you processed. If you are on daily billing, be sure to double check your statement and factor in the daily discounts taken on top of the month end discount. As an example, you may only be debited $100 at the end of the month but paid $300 during the course of the month on daily billing. In this case, you really paid $400. This would obviously produce a very different effective rate.
If you take a significant amount of American Express transactions, it makes sense to net that volume off your total volume before determining your effective rate. That is because the total volume processed listed on your statement includes the American Express, but as you know American Express will bill you on a separate statement. As an example, let’s say you processed $20,000 total, $5,000 of that was American Express, and your total processing bill was $500. If you divide $500 by $20,000 volume you end up with a very nice effective rate of 2.5%. If you divide by the $15,000 of actual bankcard volume, you’re left with an effective rate of 3.33%.
Effective rates vary greatly based on the type of business, average ticket, method of acceptance, and even the practices the merchant is following in credit card acceptance. This is before even considering the rates their processor is charging. Two merchants with the exact same deal from their processor can end up with significantly different effective rates.
As a general rule, almost any business should be able to end up under a 4% effective rate unless they have a very low average ticket (under $10). Most card not present merchants (E-commerce or that key in card numbers) will end up in the 3% to 4% range. Retail merchants with at least a $20-$25 average ticket can expect anywhere from 2.5-3.5% effective rates. For certain higher ticket businesses or merchants that qualify under certain SIC codes (supermarket, for instance) that take swiped transactions and are diligent about taking PIN debit, we’ve seen rates under 2%.
When you speak to a reseller of credit card processing services, you typically hear a lot about qualified rates, non-qualified rates, and per transaction charges. However, at the end of the day it’s the sum of these charges plus fixed costs that truly matter. After all, if a card processor can save you 1 cent here and charge you 2 cents somewhere else, they really didn’t save you anything at all.
Effective Discount Rate
The Effective Discount Rate is a little different than your effective rate. This takes a little more digging to get, but is useful in several ways. First, if you are a start up, there is naturally the reasonable expectation of growth for your company. Therefore, your effective discount rate is important because if you put through $2000 in charges in your first month, $5,000 the next, and $10,000 the month after, you’ve depreciated your fixed costs over significantly different volumes.
For an established, relatively stable company, knowing your effective discount rate is highly useful in understanding how to reduce your processing bill. For instance, what could you save if you ran the same set of cards with PIN based debit vs. running them as a check card? What would be my difference in cost to use mobile processing vs. manual keyed in entry? How many of my cards are coming up at non-qualified vs. mid-qualified vs. qualified rates (and therefore which is most important to my business to actually save money?) This is all determined by your effective discount rate.
You effective discount rate is just the discount rate after all charges have been stripped away. To determine this, take the total bill and deduct all fixed costs (statement fees and the like), all fixed transaction charges, batch charges, risk assessments, AVS fees, NABU and APF, etc. Basically to where it is just the total discount charge and the total amount processed. Then divide the total discount amount by the total amount processed and you’ll have your effective average discount rate.
The effective average discount rate, therefore, averages all of what rates may apply. Depending on how you are set up, this may include PIN based debit transactions, check card, EBT, qual (qualified), mid-qual and non-qual credit card rates. Or if on an IC+ pricing system it can be just as helpful in showing what kind of cards you are actually accepting.
Once you have your effective discount rate, there are two ways to optimize your savings. One way is to look for a plan that optimizes what you are already doing. For instance, if you are a business that is getting mainly mid and non-qualified rates on your transactions, you may be better served by a MOTO account than a retail account set up.
The other option is to try to change how you accept cards to better align with your best rates. That is to say, if you get 1.59% on your check cards but 1% on PIN based debit, you would want to consider getting set up for PIN based debit. Or if you are manually entering cards and getting a mid-qualified rate on cards you could be swiping in person with a wireless terminal and getting a qualified rate on, it may be worth considering adding a wireless service to your plan.
Charges to watch out for
At the end of the day, everyone is in the business to make a buck. Each company will set up their charges in slightly different ways to make their services more attractive to the customer. Some companies are very reputable and upfront with their charges, others are downright sleazy. However, what it all comes down to is understanding which deal is best for YOUR company to improve your bottom line.
At Merchant Solutions, we work to tailor a plan to best suit your needs, not trick you into a plan that best suits our profit. We believe a full and honest understanding of the costs associated with your processing services is the true way to establish long term business relationships, for you and your valued referrals.
If you’re interested in having a full statement analysis, identifying exactly what you are paying now, what are legitimate charges, and what are simply “junk”, feel free to contact Merchant Solutions at 866.326.3480 or email at contact@merchantsolutionsllc.com. One of our knowledgeable staff will show you not only what you are paying now, but what we can save you to work with us.
