With a versatile payment gateway connecting your merchant account to banking, credit card, and ACH networks, you can process payments faster, automate key expenses, and protect yourself from fraud and other risks. Finding the right payment processing service that meets your merchant needs is one of the most important decisions you’ll ever make for your business. With a versatile payment gateway connecting your merchant account to banking, credit card, and ACH networks, you can process payments faster, automate key expenses, and protect yourself from fraud and other risks. When assessing your payment processing options, it’s important to know what you’re looking at when you’re reviewing fee structures to avoid being tripped by deceptive “bait and switch” pricing.
How Payment Processing Pricing Works
In order to understand the pricing structure of payment processing, you first need to know how payment processing for credit cards actually works. Every credit card translation follows the same basic process:
- The transaction details are submitted to the merchant payment gateway, which are then shared with the processor.
- The processor passes the information along to the payer’s credit card network, which reviews the transaction and either approves or denies it.
- If the transaction is approved, the funds are released to the merchant account while the approval notification is sent back to the merchant through the payment gateway. If the transaction is denied, no funds are transferred and the denial notification is delivered instead.
As a general rule, every entity that “touches” the transaction levies a fee upon it. In the case of credit cards, this includes the payment processor (who manages the merchant’s payment gateway) and the credit card company (which maintains the transfer rails for credit funding). The payment processor’s fee is often called a “markup,” which consists of the processor’s core costs (technology infrastructure and overhead) and a marginal profit fee.
Credit card networks, however, charge a slightly more complicated fee called an “interchange.” This fee represents a number of factors, including core costs, risk assessment, additional banking fees, and a fee for using transfer rails. While interchange fees vary based upon the type of card being swiped, the important thing to know about them is that they are fixed and non-negotiable. Because the credit card networks have substantial negotiating leverage, they can charge the same rate to all processors, banks, and merchants.
When payment processors charge their customers a fee to process a credit card translation, the merchant is paying both the processor’s markup and the credit card network’s interchange fee.
In other words:
Merchant processing fee = markup (processor’s fee) + interchange rate (credit card fee).
In the payment processing industry, this formula is often referred to as “interchange plus” because merchants are actually paying two separate costs when they submit a credit card transaction for processing.
The “Bait and Switch”: How Deceptive Processors Mislead Customers
While this formula is quite simple, unscrupulous payment processors often take advantage of the fact that many customers don’t understand how interchange rates work. Instead of listing their processing fee along with the interchange fee or rolling both into a single, flat fee, they do something like this:
Low Processing Costs! You pay 0.2% per credit card transaction!
Sounds great, doesn’t it? There’s just one problem. The advertised fee doesn’t actually reflect the full price merchants will be paying for each transaction. That’s because it doesn’t include the interchange rate that credit card companies charge on every processing request. While not technically incorrect or false because the processor does charge 0.20% on every transaction, the advertised rate is definitely misleading due to the omission of the interchange charge.
A more accurate advertisement would read something like this:
Low Processing Costs! You pay 0.2% per credit card transaction (plus interchange)!
More accurate, for sure, but if you don’t have any idea of what an interchange is, it’s not that much better. It would be perfectly understandable to assume that the interchange fee is so low that it’s hardly worth mentioning (After all, that’s the kind of information you put in parentheses, right?). And even if it was a bit higher, it couldn’t possibly be more than the stated processor’s fee, could it?
But both assumptions would be wrong. In fact, interchange fees are significantly higher than the payment processor’s fee. The average interchange rate for a credit card payment is about 1.81%, which would bring the total fee in the previous example to just over 2.0%, or ten times more than the advertised rate!
Again, the example ad isn’t necessarily false, but it creates a misleading impression of actual processing fees a customer will be charged. The deceptive practices can go even further when processors advertise the lowest possible interchange rate as their standard rate. For instance, while the average credit card interchange is 1.81%, the average charge for debit card processing is much lower (about 0.3%). That doesn’t stop some processors from portraying this as the interchange rage for all card processing.
The Value of Transparency
At Transcend Pay, we believe that every merchant deserves full transparency when it comes to their payment processing fees. That’s why we always share our true costs with current and prospective customers. Whether you’re a low-risk or a high-risk merchant, you deserve to know exactly what you’re paying for every form of processing that comes through your payment gateway. Our extensive network of banking partners helps us to secure the most favorable processing rates for our customers. That’s why we’ll never resort to “bait and switch” tactics that leave you stuck paying hidden fees or burdensome reserve requirements.
To find out how much you could be saving right now with our merchant gateway, contact one of our payment processing experts for a free quote. We approve 99% of high-risk merchant accounts to help you start accepting payments as soon as possible to help you grow your business.