For more than two decades that I have been in the merchant services business. I have frequently been shocked by how many merchants hand me unopened merchant statements, for review. They often tell me that they are just too complicated to understand. Unfortunately, many merchant service providers do this by design so that merchants don’t know too much. Obviously, if you’re in any kind of business you need to accept plastic as a form of payment. Many merchants are simply resigned to the fact that it is going to cost them something and it is just accepted. What I want to try and do here is give you some things that will hopefully help you in your understanding of your own merchant statement.Before I get started, let me just say, there are numerous types of statements that would encompass the numerous types of pricing models. There is Three Tier, Four Tier and Cost-Plus or Interchange-Plus pricing models, each with their own form of jargon. First let’s talk about some basics of the differences. THREE TIER PRICINGIn this form of pricing model you would likely see these “bundled” type listings:QUALIFIED: This would be one rate listed such as 1.85% + $.15. This “qualified” rate would include swiped debit cards and generic, no perk type credit cardsMID-QUALIFIED: Again, one rate listed such as 2.25% + $.15. These types of transactions would typically be hand-keyed, card-not-present or some form of Visa/MC “perk” card that pays the cardholder points or frequent flyer miles.NON-QUALIFIED: Rates listed would be the highest of the three and would typically represent business cards, for example.The problem with this form of pricing is it is at the processors discretion which category they place the various card/transaction types. So, consequently, you may be paying more that is necessary on some. FOUR TIER PRICINGThis form of pricing came along when debit cards became more prevalent in the marketplace. Better than Three Tier because it provides for a lower rate for debit cards.TIER ONE: This level would be for swiped debit cards (not pinned debit cards) and would represent your lowest rate. Debit cards, of course, have less risk to you, the merchant, and therefore have a lower rate structure.
TIER TWO: This would be mostly equivalent to what is shown above for Qualified transactionsTIER THREE: Here again, this would be similar to Mid-Qualifed transactions in the Three-Tier modelTIER FOUR: Transactions that would mostly mirror the Non-Qualified transactions above.Again, as with Three Tier pricing, the processor places card/transaction types if the categories that they best deem appropriate. This is not necessarily the “best” from a financial for the merchant. COST-PLUS/INTERCHANGE-PLUS PRICINGThis form of pricing is, by far, the most transparent and most desirable form of pricing. That is, as long as the processor utilizes a format on their statements that are easy to read and understand. As an overview, here’s how this pricing differs from the two previously discussed. Keep in mind that not all statements will look alike but these are the types of categories you would typically see:DEPOSITS: This would be a daily listing of your batch totals for the day. It would give a reference number, total number of items, the dollar volume, number of items and the Net Deposit.DEPOSITS ITEM SUMMARY: This section would be totals as far as your total number of transactions and the amount along with any credits.CARD SUMMARY: On some statements, you may see this category which just breaks down how many different card types you received, i.e. Visa, MasterCard, Discover, Amex, Diners or Others. Really nothing here to be concerned with and is mostly offered for information.SETTLEMENT/DISCOUNT: This is where we get into the section where you really need to be paying attention. It may be quite lengthy based on the specific card and transaction types that you see in your business. As mentioned earlier, this Cost-Plus/Interchange-Plus pricing is the most transparent pricing model. And, here is where you can determine what you are really paying. It can, at first glance, seem complicated and intimidating but it doesn’t need to be. So, here’s an example of what you might see and I have taken this from a recent merchant statement that I analyzed. The numbers you want to focus on here are the Amount, Discount Rate, Item Rate and Fee Amount. Here’s an example of 21 MasterCard transactions:ITEMS AMOUNT DISC RATE ITEM RATE FEE AMOUNT21 $2,968.31 0.1700 0.0000 $5.04INTERCHANGE $50.64So now let’s apply the math to see what we are being charged. The processor, in this instance is charging, as a “Plus” factor, 0.1700 Discount Rate. Take this figure and divide by 100 and you will get the number of basis points, or percentage and you come up with.0017. $2,968.31 x.0017=$5.04. This amount represents a portion of what the processor is making on this $2,968.31 in volume. Next, we have the Interchange charge which is a direct pass through on these MasterCard transactions. In other words, these fees get paid back directly to the card issuing entity. So, take the $50.64 and divide by $2,968.31 and you get 1.71%. So, if you add the two together, this merchant is paying 1.88% on these MasterCard transactions. Furthermore, if you wanted to take it to the next level in analyzing your statements, you could go online and find the MasterCard and Visa Interchange rates and compare all your transactions for yourself. However, there are hundreds of different Interchange Rates for Visa/MasterCard transactions based on the type of card or transaction type that you would need to fully understand. Or, you need a rep that truly cares about your business and is willing to walk through your statement with you for greater understanding. This section of your statement is where the majority of your fees are represented.OTHER FEES: Now let’s move on to what is typically called “Other Fees” or something similar. Here, you will likely see something referred to as Wats or Per Item fees. These are typically Authorization fees being charged by the processor. So, in the above example, the processor is charging 0.17% above Interchange and in this section you might see something like $.10 per item. So, using these numbers, this merchant is on a Cost-Plus pricing of Cost-“Plus” 0.17% plus $.10. So, in other words, the processor is making $.27 on a $100 transaction.
Additionally, under this category, you will find numerous “pass-through” fees that are assessed by the card brands or networks and are the same for all providers and are not negotiable. Make certain that you look for any fees that you don’t understand and seek clarification from your rep or their Customer Care department. This section will typically also have Monthly Service Fees, Statement Fees, PCI fees, Online access fees, or a myriad of “other” fees. Ask what they are and why you are being charged them. There may be fees you can have removed and/or reduced simply by asking. One last thing you can consider doing is determine your NET EFFECTIVE RATE. Simply take your total fees and divide by the total volume. This will give you a good overall view of what you are paying. If you come out over 2.50%, you may be paying too much.MESSAGE: I find it interesting how few merchants ever pay attention to this section. There could be some important pricing or fee information referenced there that needs attention. For example, a recent statement I looked at showed that the merchant was in non-compliance regarding their PCI/DSS (Payment Card Industry/Data Security Standards). This is an annual thing that all merchants need to take care of to ensure that you are protecting yourself and your customers when processing and handling credit card transactions. This merchant statement I looked at indicated the merchant was being charged $19.95 per month for non-compliance. All they needed to do was go online to do a self-assessment questionnaire (SAQ) or call their Customer Care number for assistance. It takes about five minutes and the monthly fee was then waived. Please be sure and READ ALL NOTES IN THE MESSAGE SECTION.Well, I suppose this article is long enough and hopefully has provided some insight. Thanks for taking the time to read and I wish you much success, lower costs and increased profitability in your business.