Three Tier Credit Card Processing

On this site, I want to introduce you to Three Tier Pricing. Up until maybe just five years or so ago, pretty much all merchants were priced this way. At that time, there were a lot fewer card and transactions types so it fit the majority of businesses. However, now there are over 200 different card types or transaction types, all with their own Interchange Rate. Take a look at your current statement. If you are still priced on Three Tier pricing, it may be time for a change. Contact me, if you like, and I'll give you the help you need.

Unfortunately, many processors statements are nearly indecipherable to the untrained eye and many are made this way by design. If you feel that you fully understand your statement, CONGRATULATIONS! If, however, you would like some help, you can email me or fax a copy of your current statement for a FREE ANALYSIS, of course, with no obligation.

As an example for rates below, I'm going to be using a pricing grid from a large processor. We'll be using their published rates for "new" merchants with no previous processing volume.

Here's the contact info for your convenience

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FAX: 888-783-8690

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And, if you'd like to get even a more thorough understanding of how this whole industry works, discover how Interchange Rates affect your costs, and increase your knowledge overall, go to my website. It will introduce you to my eBook that provides a wealth of information for you regarding this ever-increasing cost center in your business. You'll be glad you did!

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This category would be for any generic (in other words, no Rewards or corporate type cards) Visa/MC debit or credit cards that are swiped thru your credit card terminal or POS system. The cards, therefore, are electronically read and viewed by Visa/MC to be the most reliable transactions and "qualified" for the best rate. Using the above referenced rates this level would be at 1.79% $.25. So, a $100 transaction would cost $2.04 in fees commonly known as the Discount Rate.

If your average ticket is less than say, $100, Three Tier pricing may not be the best pricing model for you. Processors know from national averages that based on your SIC code, how you transact business and average transaction size that a certain percentage of your transactions will be debit cards. Debit transactions have a lower Interchange rate (cost, in other words) than credit transactions. Consider the most recent statistics for the possibility of a transaction being a debit based on the size of the saledebitbelow and you'll see what I mean. It will typically differ slightly between retail and restaurants.

Retail Signature Debit
Ticket Range.....Est. % of Sig Debit Trans
<$10.00.....78.72%
$10.01-$25.00.....75.55%
$25.01-$50.00.....51.00%
$50.01-$100.00.....40.20%
$100.01-$500.00.....31.90%
$500.01-$1000.00.....23.10%
>$1000.01.....17.80%

Restaurant Signature Debit
Ticket Range.....Est. % of Sig Debit Trans
<$9.99.....83.50%
$10.00-$24.99.....68.20%
$25.00-$49.99.....55.16%
$50.00-$99.99.....39.14%
>$100.00.....26.84%

Now, let's assume that you are a retail establishment with an average ticket of under $50. Using the national averages above, 51% of your sales would likely be a debit card. Currently (as of October 2008) Interchange (cost), including assessments for a Visa signature debit transaction is 1.1225% + $.15. So, at the rate of 1.79% + $.25 used above, your processor is making out like a bandit on these. The current Interchange for a Visa Signature credit is 1.6325% + $.10. So, the processor is still making some on this sale as well. They know the averages are on their side so it's still a very profitable scenario for them.

The reason this phenomenon takes place with debit cards is quite simple. When the transaction size is smaller, the customer thinks "hmmm, this transaction isn't large enough to earn me many miles or perks on my Visa rewards card so I'll just use what I have in my account currently and utilize my debit card". Also, the larger the purchase, the greater likelihood the customer would use some form of credit card for accounting purposes. And, it gives them the flexibility to just make one payment at the end of the month (most people don't but you know what I mean) and simplify their life somewhat.

For restaurants, the above numbers only take place for pay-at-the-counter type establishments or, where state of the art pay-at-the-table wireless credit card terminals are used.

If you are a retail establishment or restaurant with pay-at-the-counter or pay-at-the-table technology, then you may want to give strong consideration to pinned based debit which has a totally different pricing structure. Take a look at the module below on "Pinned Based Debit" for a more thorough understanding of how this may benefit you.

Here's where it can be a bit tricky and how many merchants are taken advantage of regarding rates and card types. Each processor can independently decide what types of transactions, or card types, fall into this category (or "bucket" as some refer to it). The rates for these types of transactions will carry a "surcharge" to the Qualified Rate. Using the above referenced processors grid, the surcharge for Low Risk merchants would be .75%. So, you would be paying a total of 2.54% $.25 (1.79% Qualified plus the surcharge of .75%) for these transactions. This could be some Rewards cards, hand-keyed (or card-not-present) transactions, some business type cards and possibly others. Again, all providers can put whatever they want into this category and tack on any amount of surcharge they think they can get away with. It would be important to ask your provider what your surcharge is for Mid-Qualified and what types of transactions will fall into that category. Typically, your statement won't have it spelled out clearly for you as far as what types of cards are in this category.

Let's take this Mid-Qualified area a bit further. While a Low Risk type merchant, in this example, has a .75% surcharge, a Medium Risk merchant could see 1.00% or higher surcharges. And, if you're in a High Risk category, the surcharge could be 1.40% to over 2.00%. Current Interchange rates for "typical" Mid-Qualified types of transactions range from 1.65%-2.05%. Risk level is determined by merchant type and how transactions are processed. Each processor makes their own determination as to which "risk" level you represent to them..

I know of a processor that used to treat Visa Rewards 2 cards as Mid-Qualifed. In October 2008, there were no Interchange increases for Visa Rewards 2 cards but the provider informed their merchants they were now going to be classifying these cards as Non-Qualified. The reason they decided to do this is simply because they are seeing an increased usage of these types of cards across the country so it represents increased profits for them.

Here again is where it can be a bit tricky keeping in mind that each processor can independently decide what types of transactions fall into this category. Surcharges in this category can range from 1.00% for Low Risk merchants to over 2.00% for High Risk. Most of what you would find in this category would be corporate type cards. But, there also some Rewards, T & E cards and World cards that could get thrown in here as well. Be sure to ask your provider.

In actual practice, most merchants will see that this Non-Qualified category will see typically fewer transactions than the others. If, however, you are the type of business that deals with a lot of commercial accounts, or, on-line, you may see numerous transactions in this category.

SIMPLY....GET EDUCATED

I hear it all the time when I'm in a store shopping. I walk up to the cash register to pay for my purchase and after the clerk looks at my card asks, "debit or credit"? If you're the owner of the business, you need to retrain your employees. Here's what you do that will make a difference in your processing costs. Of course, for this to work for you, you must be first set up with a pin pad (or a terminal with an internal pin pad) in order to accept pin based debits.

When a customer hands over their card, take a look at it carefully. If it is a debit card, it will have the word "debit" or "cash card" or "check card" printed on the face of the card. Most, if not all, debit cards these days are also branded with either a Visa or MasterCard logo. This DOES NOT MAKE IT A CREDIT CARD!!! If your customer is handing over their debit card, they are not going to be extended credit for their purchase. They know that they have enough money in their account to cover the transaction. So, when you recognize the card as a debit, and you have a pin pad, simply say "I'll need you to enter your pin number in a second" and pause for a second or two. If they don't object in some way, you hit the "debit" button on your terminal and the pin pad prompts them to enter their number. To the customer, the only difference is that if you run it as a credit, they have to sign. If you run it as a debit, they have to enter their pin number. To them, there is no difference in costs but to you, there is.

Using the rate quoted above, in the section on Qualifed transactions, of 1.79% + $.25, a swiped signature debit for $50 would cost you $1.15 in fees. If, on the other hand, you had the customer enter their pin number, and the card ran thru the NYCE network (take a look at the back of the card and it will show the different networks) for example, the cost to you would be about $.62 (NYCE currently is .65% + $.14 plus a typical processor fee of $.15). Those kinds of savings can really add up over the long haul. The larger the transaction, the larger the savings. So, whenever you see "debit" get them to enter the pin number.

For a while there were some banks that issued Visa/MC branded debit cards that were charging their customers a fee whenever they used their pin number. You see, they don't want you to use your pin number because when you do, they don't make any money off the transaction. When you sign for a debit transaction, the issuing bank makes the Interchange rate. It's all about fees to the banks.

BOTTOM LINE..CAPTURE PINS WHENEVER POSSIBLE

Now the last thing I want to do is appear like all those other merchant services reps out there trying to get your business. I know from years of experience in the field how vaguery and outright misrepresentation, unfortunately, seems to prevail in this industry. If for any reason, you think you're not getting the straigt scoop from your current provider, or from those that are courting you, please don't hesitate to contact me. No matter where you are in the country, I can be of service so don't let my location in beautiful western Michigan be a deterent for you. I'd welcome the opportunity to be of service.

FAX: 888-783-8690
PHONE: 231-329-4400
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