If you have read any of my articles, you know I am a proponent of Interchange Plus pricing and I detest the use of Tiered pricing on merchants.   However, please understand that a merchant on Interchange Plus pricing can still be grossly overpaying for card processing.  In fact, of the hundreds of merchant statements I have analyzed, the majority of merchants that were overpaying were already on Interchange Plus pricing.  Interchange Plus pricing only gives merchants the “potential” for being priced fairly and nothing more.

A real example where the Interchange Plus pricing was not “fair” pricing

I have worked with several merchants recently who were offered Interchange Plus pricing.  Fortunately, they were not wowed into thinking that Interchange Plus pricing automatically meant fair pricing.  As a result, each received far better pricing and terms and conditions than originally offered.  Here is an example of one such merchant.

This merchant was with one of the largest merchant account providers in the country.  They were on a tiered pricing schedule and were grossly overpaying.  Their provider offered Interchange Plus pricing at 0.31% + $0.05 and typical fees which would save them in excess of $100,000 over a three year time frame.  Pretty impressive savings, right, not true!  In fact, there were three glaring problems with this offer.

First, the merchant was overpaying by more than $175,000 over that timeframe!  The provider thought they could wow this merchant into thinking that the savings they offered would keep this merchant.  The merchant ended up getting pricing at 0.07% + $0.08 and typical fees which saved the merchant the additional $75,000 over three years.  Both rates were Interchange Plus but only the 0.07% + $0.08 pricing was fair pricing.

Second, the provider had a “Liquidated damages” clause for early termination.  I NEVER let any of my clients sign a processing contract with a liquidated damages clause.  Depending on the liquidated damages clause, it could cost you thousands of dollars or more should you wish to terminate your contract early.  In fact, I am aware of an ecommerce merchant who was forced to keep processing with their provider or it would have cost them several hundred thousand dollars to terminate early.  Keep in mind; it should never cost more than $400 to terminate your contract early.

Third, the provider was charging their processing percentage on returns.  What does this mean?  As an example, say the provider charged the merchant 3% to process a $1000 sale with a specific card type.  Therefore, the merchant paid $30 in processing for the sale.  Now say the customer returned the goods.  This provider would charge an additional 3% for the return.  Therefore, the provider received $60 and the merchant had a net sale of $0. I NEVER let my clients sign up with a provider that charges a processing percentage on returns.   I my opinion, there is no reason why the average merchant should pay a processing percentage for refunds other than it’s another way a provider can make money without the merchant understanding they overpaid.  I am aware of one ecommerce merchant that was paying up to $6000 per year in refund processing fees.

A real example where the published interchange rate is not being used

The following insertions were copied from two sections of a merchant statement.  The first insert is from the summary page and shows this merchant processed $11,228.42 in Visa sales for the month.  The merchant negotiated Interchange Plus pricing with a provider mark-up of 0.20% (see “Disc %”) and a 10 cents per-item fee (see “Disc P/I”).  Based on the mark-up, the provider received $28.86 (see “Discount Due”) for the mark-up. This is correct.

The following inserts are from the itemized fee section (interchange rates, pass-through fees, and monthly fees).  The first insert states the 0.11% Dues & Assessments charge by Visa which equals $12.35. This is correct.

The second insert states the Visa Acquirer Processing Fee (something listed as “APF fee” on merchant statements).  This equaled $1.31. This is correct.

So now we have the provider mark-up, the Dues& Assessments, and the APF.   What’s the main component left with Interchange Plus pricing – the Interchange, right?  Let’s look at one of the card types listed on the statement.

CPS/Rewards 2” is a Visa rewards card rate.  Three customers used this type of card for their purchases during the month for a total of $2,427.71. Supposedly, the interchange cost was $59.05. However, let’s do the math.

$59.05 on $2,427.71 in sales with (3) transactions means the rate is 2.42% + 10 cents.  There is just one problem.  Visa’s published interchange rate for the Reward 2 card type is 1.95% + 10 cents.  Apparently, what this merchant account provider calls “Interchange” for CPS/Rewards 2 is 0.47% more expensive than what Visa publishes as interchange.

The merchant thought he was paying 0.20% +10 cents over the published interchange rate and pass-through fees.   In reality, the merchant was paying 0.67% + 10 cents over published interchange rate and pass-through fees for Visa Reward 2 transactions.  There were other card types on this statement with questionable interchange costs as well.

 

As a side note, I reviewed my findings with the salesperson who sold this merchant card processing and he was devastated at what the merchant account provider was doing.  He honestly thought that he was offering Interchange Plus pricing based on published interchange rates.  I have talked to salespeople with other merchants where I have seen this and they were equally devastated.  Please understand that there is no regulated certification program to sell card processing like there is with securities or real estate.  A salesperson could literally be selling door knobs one week and card processing the next week.  A high percentage of salespeople and customer service people do not have a detailed understanding of interchange and how it works.  In fact, I’ll lay odds that most would not be able to do the above analysis.

A real example where the card association pass-through fee is not being used

As mentioned above, Interchange Plus pricing should include published Interchange rates, card association pass-through fees, plus the provider’s negotiated mark-up.  Unfortunately, I am seeing more and more merchant statements where merchant account providers are inflating the actual card association pass-through fees.

The following is one example.  The insert below is from a merchant statement and shows the Visa Acquirer Processing Fee (APF).  It states that there were (190) transactions where the Visa APF was charged.  The fee was 5 cents for each transaction and totaled $9.50.  There is just one problem.  As shown in the above example, Visa only charges 1.95 cents for this fee.

As I said, I am seeing more and more of this.  I am seeing statements where a “Visa Access fee” or “Visa Auth fee” is being charged in lieu of the APF.  I have seen these fees as high as 10 cents.  I’ve seen the same for MasterCard and Discover fees.  In my opinion, these inflated fees are nothing more than a way for some providers to squeeze an additional transaction fee out of the unknowing merchant while putting the blame on the card companies in the process.  In fact, I’ll bet if the merchant in the above example called customer service, they would swear Visa was charging the whole 5 cents.  Again, do not expect the salesperson or customer service to have a detailed understanding of interchange and fees.

Summary

1)      Interchange Plus pricing is not a panacea

2)      Interchange Plus pricing is not immune to misleading practices

3)      Be specific in what you want during negotiations

4)      Audit your statement to make sure you get what you negotiated

5)      Your salesperson and customer service may not understand card pricing details