Which is better: a higher discount rate and lower transaction fee–or a lower discount rate, but a higher transaction fee? The answer to this question is: it depends on your business.
If you have a small number of high-dollar credit card transactions each month, then it’s probably better to have a lower discount rate/higher transaction fee.
If you have a large number of low-dollar amount credit card transactions each month, then the transaction fee is really critical to you. You want that transaction fee as low as possible, and can sacrifice a little on the discount rate.
No matter where your business falls in the spectrum of credit card processing scenarios, you should calculate a few typical monthly scenarios for your business to see what the total cost of any deal would add up to in a typical month. Sometimes just knowing how it affects your bottom line can help you negotiate a better deal with your sales agent.
Credit card transaction fees
Transaction fees are charged by the number of transactions you process. If you only process a few transactions each month, a higher transaction fee isn’t going to make much difference to you, but if you process a lot of transactions, the transaction fee starts to make a big difference.
Let’s look at three example scenarios. All three stores are making the same total credit card sales in a month ($10,000), but they each process a different number of transactions with a different average ticket.
Example merchant A: 10 transactions of $1,000 each.
The difference between a 25-cent and a 50-cent transaction fee isn’t really going to make much difference if you only process 10 transactions in a month with $1,000 average ticket:
- 10 x $0.25 = $2.50
- 10 x $0.50 = $5.00
- Difference = $2.50
Example merchant B: 1,000 transactions of $10.00 each.
But if you process 1,000 transactions each month with an average ticket of $10.00, the higher transaction fee would really eat into your profits:
- 1,000 x $0.25 = $250.00
- 1,000 x $0.50 = $500.00
- Difference = $250.00
Example merchant C: 200 transactions of $50.00 each.
Now let’s say you’re somewhere in between the other two scenarios. Say you have 200 transactions in a month with a $50 average ticket.
- 200 x $0.25 = $50.00
- 200 x $0.50 = $100.00
- Difference = $50.00
Discount rates on credit card transactions
Discount rates are charged as a percentage of total dollar volume, so the discount rate is going to be the same across all three examples.
Let’s compare two hypothetical merchant account offers: (these numbers are completely hypothetical and may or may not be anywhere close to the types of offers you may encounter for your business)
- Offer X has a 2.0% discount rate and a $0.50 transaction fee
- Offer Y has a 2.5% discount rate and a $0.25 transaction fee
Example merchant A: 10 transactions of $1,000 each
- Offer X: (10 x $0.50) + (2.0% x $10,000) = $205.00
- Offer Y: (10 x $0.25) + (2.5% x $10,000) = $252.00
- Offer X is better by $47.00
Example merchant B: 1,000 transactions of $10.00 each
- Offer X: (1,000 x $0.50) + (2.0% x $10,000) = $700.00
- Offer Y: (1,000 x $0.25) + (2.5% x $10,000) = $450.00
- Offer Y is better by $250.00
Example merchant C: 200 transactions of $50.00 each
- Offer X: (200 x $0.50) + (2.0% x $10,000) = $250.00
- Offer Y: (200 x $0.25) + (2.5% x $10,000) = $290.00
- Offer Y is better by $10.00
Notice for example merchant A who has a high average ticket amount, the higher transaction fee/lower discount rate wins out, but for example merchant B who has a low ticket amount, the lower transaction fee is critical. For example merchant C, the two offers are very close–and it may vary from month to month which one turn out to be better.
How much would these merchant account fees cost you?
It can really pay to know how many transactions you process each month (high and low) and what your average, low and high tickets are. The sales agent should run the numbers for you and show you a typical month’s fees for any proposed merchant account agreement. If not, have a calculator handy and run the numbers yourself. Don’t be afraid to do a little comparison shopping.
Why don’t you get started by getting a quote from ApprovedPayments? Apply now for a no-obligation quote.
The payment processing world has its own language and unless you have worked in the payments industry, it can be a little difficult to understand what all the rates and fees mean and how they will affect your business.
Common merchant account fees
Here are some of the more common fees you might see in a merchant agreement:
- Address verification service fee – a fee charged for using the address verification service (AVS), which compares the billing address supplied at the time of sale with the billing address on file with the card issuing bank. AVS is an important measure for combating fraud, especially in e-commerce situations, so unless you’re in a low-risk business, this fee might actually be saving you money.
- Batch fee – a fee charged for submitting your batch of transactions for settlement. Typically you will send your batch of transactions once per day for settlement–a lot of times it happens automatically, without your involvement. The fee may be different for credit card vs. debit card batches.
- Chargeback - a chargeback happens when a customer disputes one of your transactions. The chargeback fee is significant, and it can affect your merchant account, so you’ll want to take steps to keep chargebacks to a minimum.
- Discount Rate – a fee charged as a percentage of each transaction’s dollar amount. Discount rates can vary depending on the type of business and how you process your transactions. There are different “œqualification levels” for transactions:
- Qualified transactions (or “qual” for short) are the lowest cost transactions and usually apply to retail (face to face) transactions where the credit card is swiped through a terminal or card-swipe device. Discount rates for qualified transactions are lower because the risk of fraud is lower.
- Whenever you type in the card number”“or if you are doing business online, you will typically pay a higher discount rate, referred to as a mid-qualified or non-qualified (a.k.a., “non-qual”) rate. The discount rate is higher in this situation because the processor and the card associations are taking on a higher level of risk.
- Monthly Minimum – what you will be charged regardless of the level of sales each month. If all your total fees for the month are less than the monthly minimum, you’ll be charged the monthly minimum.
- Statement fee: - the charge for getting your monthly merchant account statements.
- Setup fee – a fee charged for setting up your account. This is usually a one-time fee charged when you first begin processing with a new payment solutions provider. There may sometimes be multiple setup fees.
- Transaction fee – a flat rate you pay for each transaction you process. The more transactions you process, the more transaction fees you will pay.
- Voice authorization fee – a fee charged whenever you go to process a payment and the response is “call voice center”, so you have to call in to get an authorization code to complete the transaction.
There are more fees that you might see on your merchant agreement. If you want to research this further, we’ve provided some more free merchant account resources below.
Other resources on merchant account fees
ApprovedPayments offers merchant accounts at very competitive rates. Apply for a no-obligation, no-cost quote and see how much we can save your business!
What can you do to help ensure your payments are getting processed, your cashflow is steady, and your merchant fees are lower? We’ve got a few tips for you:
Automated payments with retry logic. When you need to break up a payment into several smaller payments, or set up a subscription, use automated recurring payments to take care of the payments for you. By breaking down your accounts receiveable into manageable chunks for the payee, you’re more likely to collect the money that’s owed you. Recurring payments can automate the collection of outstanding debt and improve your cash flow. Tips for success with recurring payments:
- Watch your account for declined recurring payments. Recurring payments typically retry if a decline occurs, which is a good thing, but it can cost extra transaction fees if you don’t stay on top of it. Determine how many retries you want to allow, then contact the customer to see if they changed their credit card number or the expiration date changed. If so, make the change to the recurring payment immediately to avoid additional declines. If not, ask for a new form of payment. Depending on your payment processor, you may need to cancel the current recurring schedule and set up a new one.
- If you choose to employ recurring payments and your payment provider offers an account updater service (which updates credit card numbers and/or expiration dates with information from the issuing banks), you may want to consider subscribing to that service to reduce the number of declines.
- Reduce your overhead: minimize transaction downgrades. Use all the tools available to you to reduce transaction downgrades. When your transaction downgrades, you are charged a higher discount rate, which is a percentage of your transaction volume, and it can make a big difference in your merchant fees.
- Retail payments should be swiped cards as much as possible, only keying in card numbers when absolutely necessary. Also, collecting the customer’s zip code and using the address verification service (AVS) can sometimes help reduce fees.
- When processing mail or telephone order or e-commerce payments, take advantage of AVS and the card code. There is typically a cost for AVS, but the cost of the service is usually much less than what you’d pay in extra fees for downgraded transactions.
- Capture funds quickly. If you’re using two-part payments where you first authorize the amount, then later go and capture the funds after you’ve shipped the goods, make sure you don’t wait too long. An authorization checks for funds on the card and reserves the funds for you, but it expires over time and the amount available on the card changes as the customer uses their card. If it’s been more than two days, re-run the authorization before you capture the funds.
- Choose a reliable payments provider with backup data center. Know what to do if payment processing is unavailable.
- Challenge chargebacks. Chargebacks are costly, so if you can prove you did provide the product/service and made efforts to satisfy the customer, you can avoid having to pay for the cost of the order plus the chargeback fees.
- Know the credit card processing rules. Not knowing the rules is a good way to inadvertently break some, which can cost you in processing fees and may even jeapordize your merchant account. All the major card associations post their merchant processing regulations: Visa®, MasterCard®, American Express®, Discover®.
Also, see this article on Credit Card Best Practices from Shift4 for more good tips on things to do to manage your payments smarter.
And since you’re being smart about managing payments, get yourself an intelligent payment solutions provider as well! Apply now for a free, no-obligation quote from ApprovedPayments.
