One Size Does Not Fit All
Tired of Smoke and Mirrors?
There's No Such Thing As a Free Lunch
If you’ve ever been sold on the benefits of freebies, then you probably know the reality of finding out down the line that you ended up paying for it anyway. But even without questionable tactics, merchant account pricing can be a bit enigmatic.
We don’t believe trickery to be a good business model, so here’s everything you need to know-
Just like any business, the cost of a product or service being offered is comprised of the business’ cost to acquire the product or perform a service, plus a markup which is kept as profit. In merchant processing, the base cost to provide processing services is referred to as interchange, and markup is then added in a number of different ways depending on your pricing model.
The main thing to remember is that while interchange costs are often non-negotiable, there should be flexibility with just about anything else.
Make Sure You Read The Fine Print
Here are a few things to watch for when shopping for a merchant account:
- The real story on that too-good-to-be-true promotional rate. How long is that rate valid for? If only for a short period of time, then what rate kicks in after this? What exactly does that rate cover? Are there any exclusions?
- The term length of your service agreement. Often hidden in the legalese are a contract term and early termination-fee; make sure you understand both before signing anything.
- Keep an eye out for auto-renewing contracts. There are plenty of horror stories out there of merchants who dutifully fulfilled their initial term, never re-signed a contract, and they were surprised to find that that the fine print allowed for the provider to automatically renew the contract for another term, and hold the merchant to an exorbitant “early-term fee”
- Be leary of tiered programs that only promote a qualified rate. Tiered structures often have three rate tiers; qualified, mid-qual, and non-qual. A 0.89% qualified rate doesn’t mean much if the majority of your volume falls into a 3%+ non-qual tier.
Companies recoup the cost of “free” terminals by tacking on unnecessary service charges and monthly fees, and promotional rates are used to lure merchants in, only have much higher rates hidden in the fine print that will quietly kick in down the line.
The Different Pricing Models
There are endless possibilities, but almost all merchant accounts are priced based on one of these three core models. Here’s what they mean, pros, cons, and the bottom line:
How Does It Work?
2.9% and $0.30 is a commonly promoted flat rate, and typically, it’s contract-free and as simple as it sounds; a predetermined percentage rate and per item fee on every transaction. So a $100 charge would cost $3.10 ($2.90 Percentage Rate, plus $0.30 Per Item fee)
- Simple to understand and remember
- Offers predictability of processing fees
- Great for small businesses and seasonal merchants
- Typically very flexible terms
- Ineligible for lower rates on check cards (can be as low as 0.05%)
- Usually offered to merchants who only need essentials, meaning customer support and collaboration could be lacking
Although ClearGate does not offer this model, such programs are great for merchants who are just starting out or seasonal merchants looking for simplicity and flexibility.
How Does It Work?
A little more flexible, this model sorts all your transactions into one of three rate tiers, typically Qualified, Mid-Qual, and Non-Qual. Cheaper check cards tend to fall into the qualified tier, and more expensive rewards credit cards may be classified as non-qual.
- Increased cost efficiency compared to flat-rate
- Card fees linked to actual cost of processing
- Still predictable and simple to understand
- No benefit of the lowest interchange rates as low at 0.05%
- May not be efficient if your card acceptance includes primarily more expensive card types which will fall to the non-qual rate tier.
A very common model targeted at medium to large scale merchants, a tiered structure offers middle of the road flexibility and cost efficiency but requires a bit more involvement than a flat rate.
How Does It Work?
Card fees are calculated by attaching a percentage, 0.90% for example, to the wholesale cost of processing that card which is passed through as-is. A charge with a wholesale cost of 1.50% would be billed at 2.40%, whereas a 0.05% rate would become 0.95%.
- Most efficient pricing; tied directly to the provider’s actual cost of processing
- Able to benefit from the extremely inexpensive card categories
- Increased control and visibility into costs
- Can be hard to find a provider offering this program
- Not insulated from extraordinarily high rates on high-end card categories
- Potentially confusing for novices
With thousands of potential rates, ranging from 0.05% to more than 30% in some cases, this model can be unpredictable, intricate, and perhaps even intimidating. But with the right program and a skilled advisor, it can be the most efficient and fair model available.