What Will My Rate Be with You?

Rates, rates, rates.

The most important part of accepting credit cards is the rate that a business will pay for it. After all, businesses need to manage their margins to stay profitable and payment processing is a considerable cost on a bottom line. This is even more so the case nowadays since consumers are paying by card for almost everything.

When a business asks PolyPay, “what will my rate be if I switch to you?”, we usually can’t tell them right away. They may not always like this answer, but we prefer not to give a cookie cutter response since the determining a business’ rate is not a cookie cutter process.

There are many defining factors that go into a processing rate. Those below are the most important ones, and a brief description of why they make a difference:

Business Industry Type (i.e. restaurant, e-commerce, etc.)

Industry type is one of the primary variables that will determine what Interchange rate (i.e. the rates and fees charged by the card associations, like Visa) a business can attain. Every business is classified by a merchant category code, or MCC for short. The MCC then determines the Interchange rate bracket they fall in to.

For example, where a restaurant will pay 1.54% + $0.10 to accept a Visa Classic credit card, a non-profit organization will pay 1.35% + $0.10 to accept the same card - 0.19% less. That means on a $100 sale, the non-profit would pay $0.19 less than the restaurant.

Percentage of Card-Present vs Card-Not-Present Transactions

This is definitely another important piece of the rate puzzle.

Card-present transactions are considered ‘safe’ because the customer’s secure card information is physically read by a credit card terminal or POS system. The card associations determined that the risk level for fraud is much lower for these types of sales, therefore they can charge a business a lower Interchange rate.

On the contrary, card-not-present transactions (i.e. phone, online or mail orders) carry a higher Interchange rate because there is a bigger risk for fraud and chargebacks (i.e. customer disputes). A customer who is not physically present at a business could potentially be using stolen or fraudulent credit card information to make a purchase over the phone or online, but the business will not know this until they potentially receive a chargeback for the sale.

For example, if a restaurant accepts a Visa Classic credit card as a card-present sale, they will pay 1.54% + $0.10. If they keyed in the same card details for a phone order, they would pay 1.80% + $0.10.  On a $100 sale, that is a $0.26 increased cost for the phone order.

Downgraded Transactions

Using the same example from above, let’s say that the restaurant did not ask for the customer’s billing ZIP code during the phone order. The Interchange rate that the business would incur from this transaction would then rise from 1.80% + $0.10 to 2.30% + $0.10 – a 0.50% increase in cost.

This is due to what is called a downgraded transaction. Downgrades are expensive, and may occur for one or more of the following reasons:

• A batch of transactions in the business’s POS system or credit card terminal is not settled within 24 hours of the transaction date/time

  • Ex: Ran sale on Monday, not settled out until Wednesday

• *Did not capture the billing ZIP code of the customer’s card during the transaction

• *Did not capture the card security code (i.e. CSC, CVC, CVV, etc.) during the transaction

* - Indicates that these downgrades can stack on top of each other, causing an even higher downgraded rate to occur

The additional costs generated by downgrades go directly to the card brands like Visa and Mastercard rather than the processing company. A processor should keep a business’ best interest in mind to make sure that these unnecessary costs are identified and prevented.

Processing Volume and Average Ticket Size

Another major factor in determining the overall processing rate is how much credit card volume a business submits per month, and the average dollar amount per transaction. Regarding average ticket size, if a restaurant accepts a Visa Classic card at 1.54% + $0.10 like I mentioned above, the $0.10 fee can either count as 1% on a $10 sale or .10% on a $100 sale. On that note, a coffee shop with an average ticket of $10-15 will pay a much higher rate than a restaurant with a higher average ticket.

Also, when considering overall processing volume, a small business that does $2,000 per month in credit card volume will likely have a much higher rate than a business doing $100,000 per month. For example, if a processor bills $20 of monthly fees, that would be 1% added to the overall rate of the small business compared to .02% for the other business.

When PolyPay is asked what rate we can provide, we like to give the following example: We have worked with an e-commerce company whose rate was at 3%, which was relatively good and we made minor improvements. On the other hand, a car dealership that was previously at 1.80% had considerable room for improvement, and we were able to save them over $500 per month.

Give us a call or send us an email and we will be happy to carve out the right rate for you.