By Robert Day, Managing Partner at weAudit. A version of this article was first published by the Forbes Business Council.
As a merchant you have probably taken calls from companies promising to lower your credit card fees. What should surprise you is that they make that promise without having seen a single one of your statements. How is that possible?
Because processing fees are made up of many components across several categories, and there are a lot of ways to inflate and hide the pieces. Someone can promise you a saving without knowing anything about your account, because they are not really promising to lower your costs. They are promising to change one number you already look at.
Discount fees are charged by the processor, usually as a percentage of the transaction (for example 0.05%) or as a flat amount per transaction (for example five cents). Occasionally, though rarely, both apply. The useful thing about these is that they are often negotiable.
Dues and assessments are charged by the card networks themselves, Visa, Mastercard, Discover and American Express. These are not negotiable and they vary between networks. Anyone promising to cut them is not being straight with you.
If you want the full anatomy of a processing bill, credit card processing fees explained goes through it layer by layer.
The answer lies in how your transactions are processed. Interchange is typically the largest component, so lowering the rate at which your transactions settle is where the savings are.
A level three gateway passes more data with each transaction. The more data that travels, the lower the interchange.
The size of that difference surprises people. A transaction clearing above 3.5% may be able to clear below 2%. Even a single point matters: if your effective rate is 3% and you get it to 2%, that is a 33% cut in your processing costs.
One caveat. If your business mostly takes consumer cards, this will not move the needle much. If you accept business, corporate or purchasing cards, it can be a game changer.
A level three gateway does not create data. It passes along what your system gives it, and qualifying for the lowest interchange takes an average of around thirty fields. If your system is not populating them, the gateway cannot help you.
That is what data-enhanced gateways are for. They populate the required fields automatically, so you can reach the lower rates without the manual entry a plain level three setup demands. The same territory is covered in more depth on Visa’s Commercial Enhanced Data Program.
1. Request a detailed interchange downgrade report. Ask your processor for the transactions that did not qualify for the lowest rate, and what those downgrades cost you. That number tells you what an upgrade is actually worth before you pay anyone for one.
2. Compare the cost of the solutions properly. Many processors offer a data enhancement service, and in my experience they take between 50% and 80% of the interchange savings. A data-enhanced gateway often comes at little or no extra cost and lets you keep most of it. Those two options can look identical on a sales call and are not remotely the same deal.
Take a $500 purchasing card transaction. The data gets enhanced, meaning the missing fields are added so the transaction clears at the lowest rate, and interchange drops by 0.85%, which is about the average I have observed. That is a saving of $4.25 on that one sale.
Option B, a data-enhanced gateway. Often around 0.05% of the transaction plus 15 cents. On $500 that is 40 cents, so you keep $3.85.
That is the whole argument for reading the pricing rather than the promise. Both options deliver the identical interchange saving. Only one of them lets you keep it.
Several companies, mine included, specialise in helping merchants lower processing fees and in auditing what they are already paying. Be careful though. Many will try to lock you into a contract, which makes it hard to leave if the service does not deliver what was promised. Look for no-contract, transparent arrangements. A search will find you firms in this space, but do the research before you choose.
If you want to know what your statement is telling you before you speak to anyone, the statement decoder covers what the individual line items mean.
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