Is Your Credit Card Processor Secretly Costing You a Fortune?

By Robert Day, Managing Partner at weAudit. A version of this article was first published by Entrepreneur.

The lack of transparency in credit card processing can quietly eat your profit margin. Here are five things to look for when you are deciding whether it is time to leave your processor.

Processors are essential partners. They make transactions work, and most merchants never think about them again after the account is boarded. But not all processors are the same, and some are costing you considerably more than they should while your statements stay just complicated enough that nobody checks.

These five checks take an afternoon. Run them in order, because the first two will tell you whether the other three are worth your time.

1. Your discount rate is above five basis points, or is not disclosed at all

The discount rate is the percentage charged on each transaction, and it is one of the few numbers in your pricing that should be simple to see. If yours is above five basis points (0.05%), or you cannot find it on the statement at all, that is a red flag on its own.

Not being able to find it matters as much as the number. A rate you cannot locate is a rate nobody is checking.

2. Your overall effective rate is above 2.5%

Your effective rate is the total fees you pay divided by your total processing volume. It is the most honest number available to you, because it does not care what any individual line item is called. If your effective rate is above 2.5%, you are very likely overpaying.

This is the check that gets around padded and invented fees. Processors can add line items and rename them, but they cannot hide from the total.

3. Your interchange fees are not fully disclosed

Interchange is set by the card networks and is not negotiable. Your processor’s job is to pass it through without adding a markup on top. If they are padding it, the tell is usually that they will not give you the data you would need to check.

To validate interchange you need three things on the statement: the interchange categories, such as Data Rate II; the processing volume in each category; and the fees charged per category. Anything less and you cannot verify what you are paying.

4. Your fees have risen more than ten basis points in the past year

Interchange has been relatively stable for fifteen years. In 2009 Visa’s highest rate was 2.95%, against 3.15% today. According to a Government Accountability Office report, Mastercard’s highest rate moved from 3.25% to 3.3% over the same period.

So if your overall processing cost has risen more than ten basis points (0.10%) in a year, that increase is almost certainly coming from your processor rather than from the networks. Processors raise fees and blame network increases, relying on statement complexity to keep the claim unchecked, even though the underlying rates have barely moved.

5. You get no reporting on interchange downgrades

A downgrade happens when a transaction does not meet the criteria for the lowest rate it could have qualified for, and you pay more as a result. Downgrades are usually fixable, and they are usually invisible unless somebody reports them to you.

A processor that does not tell you how many transactions downgraded, what that cost you, and what to do about it, is leaving you to operate blind. A good one raises it before you have to ask.

If several of these are true

One red flag is worth a phone call. Three or more is a pattern, and a pattern usually means the pricing was built to be difficult rather than built to be fair.

Before you switch, get the current account measured properly, because a new processor quoting against numbers you cannot verify is how merchants end up making the same mistake twice. Our statement decoder explains the line items, and credit card processing fees explained covers how the pricing is assembled in the first place.

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