The Components of Credit Card Processing Cost
While it's logical to assume that processors are responsible for the majority of credit card processing cost, the greatest portion of expense is actually paid to card-issuing banks through interchange fees.
Credit card processing charges are the sum of interchange, assessments and markups. Interchange fees are paid to card-issuing banks, assessments are paid to the card brands (Visa, MasterCard and Discover), and markups are any rate or fee beyond the first two areas of cost.
Markups are paid to merchant service providers and to any other entity that facilitates transactions such as gateway or software providers.
Believe it or not, if you have a competitive merchant account, most of your money is going into the pockets of card-issuing banks.
Interchange is a system of rates and fees used to determine how much your processor's acquiring bank pays your customer's card-issuing bank when you processing a credit or debit card transaction.
Interchange fees generally consist of a percentage and a flat transaction fee such as 1.54% and $0.10, which is the current interchange fee for a swiped Visa consumer credit card transaction.
If you have competitive merchant account pricing, such as interchange plus, the costs associated with interchange fees will account for the majority of your business's processing expense.
Interchange charges generally make up roughly 70-80% of total processing expense. And although interchange is responsible for the bulk of expenses, unfortunately, it's not possible to lower interchange fees by switching credit card processors.
Interchange fees are set by the member banks of Visa and MasterCard, and they are the same for all credit card processors. Interchange fees are a fixed credit card processing cost.
While it's not possible to get lower interchange fees, you can lower interchange expense through a process called interchange optimization.
Interchange optimization is the process of adapting your business's processing behavior or methods to ensure the maximum number of transactions fall into the interchange categories with the lowest fees as often as possible.
Assessments are a series of small rates and transaction fees that Visa, MasterCard and Discover charge to generate income.
Assessments account for a much smaller portion of expense than interchange fees, generally 2-3%, and are fixed component of credit card processing cost.
Some assessments are applied to your business's gross processing volume, while other will only be charged on certain types of transactions.
For example, as of September 2011, Visa's current assessment charged on gross volume is .11%. The card brand also charges $0.0195 on all authorization requests, and $0.003 on all settlement requests that pass through its network. Since most transactions are in fact settled, Visa's current assessments are .11% plus $0.0225.
Like interchange, assessments are a fixed processing expense is the same for all credit card processors.
Markups are any rate of fee beyond interchange and assessments. Markups generally consist of the credit card processor's charges, and any costs incurred from gateway, equipment or software providers.
Markups are the only non-fixed cost associated with credit card processing, and it is the only area where you can negotiate rates, fees and pricing model to achieve a lower processing costs.
Processing markups typically account for 25-30% of gross processing costs, but this figure can differ significantly depending on the type of business you have, your business's average ticket, and the method used to process cards.
Getting the best merchant account begins with ensuring you're currently processing under an interchange pass through pricing model, opposed to a tiered or bundled model. Once you've secured a pass through pricing model, scrutinize individual rates and fees to uncover areas where credit card processing charges can be reduced.
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