Shopping for a merchant account: What you're really comparing

When shopping for the best merchant account, what you're really looking for is the lowest markup over base costs. There are true costs associated with credit card processing that merchant service providers can't control.

Think of credit card processing as a tangible product for a moment. Like with any product, there are costs to bring it to market that aren't negotiable at the retail level. The aspect of price that is negotiable is the markup over wholesale. This same model applies to credit card processing services.

Whether it's an individual agent or a large acquiring organization, merchant service providers have to pay for the ability to offer credit card processing services. The costs that they pay are determined by something called a buy rate. Buy rates are the base costs and fees that the provider must pay to the organizations above them in the processing food chain.

The greatest contributor to credit card processing costs is interchange. Interchange is the amount of a credit card transaction that a merchant's bank pays to the issuing bank of a customer's credit card. Interchange fees are set by the issuing banks that are stakeholders of Visa and MasterCard, and merchant service providers have no control over the charges.

Interchange fees are public knowledge and they are posted at Visa and MasterCard's Web sites. If you're not already familiar with interchange, visit Visa and MasterCard online and download the interchange fee schedules for each card brand.

The next expense that provider's can't control are the fees charged by the card brands. Visa, MasterCard and Discover charge various dues and assessments. All transactions are subject to dues and assessments, but some are subject to additional charges. For example, international transactions are assessed additional fees by the card brands.

After interchange, dues and assessments there are also fees charged by the acquiring organization that accepts the risk associated with a business's merchant account. Acquiring organizations are named for the role that they play in credit card processing. They acquire the risk associated with transactions and are liable for any financial losses associated with a merchant account that can't be reclaimed from the merchant.

Another common contributor to credit card processing charges is fees paid to the processor. The processor is the entity that facilitates communication between the different organizations and financial institutions.

The last major contributor to processing cost is the merchant service provider's markup. This markup is the area where you can negotiate the best type of pricing such as interchange plus or flat rate merchant account pricing along with cheap merchant account rates and fees.

The term used to describe the collective rate that a business pays to process credit card is called the merchant discount rate. As you've learned from this article, many of the fees that make up the merchant discount rate aren't negotiable, but the merchant service provider's markup is. In order to accurately gauge the provider's markup, you've got to compare merchant account quotes that are based on clear pricing where all charges can be itemized. The interchange plus and flat rate pricing models mentioned earlier will make this possible.

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