Merchant accounts are accounts that allow businesses to process credit and debit card payments. These accounts and their affiliated services act as a go-between for the retailer, and the credit and debit card companies’ customers use to make payments. These accounts allow retailers to bring in revenue that would be lost if they accepted cash only, and as such, are extremely valuable to businesses.
Their value to retailers means that they come with a price. There are a number of ways that merchant accounts might be priced. Let’s go over the various pricing models you may encounter as a business owner and break them down for you.
When the merchant account charges you a flat rate, it simply means that you are charged a certain percentage of every credit card transaction that you accept. This percentage doesn’t change based on how little or how great the transaction amount is; you’ll always be charged the same basic, flat percentage rate.
An average percentage rate ranges from 2.75-3.00%. So if your merchant account charges you a flat rate of 3% on every transaction, you’ll pay them $0.03 for every dollar the customer pays you via credit card. A $100 credit card transaction would net $97 for you and $3 for the merchant account supplier. This mode of processing is best for smaller businesses that don’t process a large number of credit card transactions, as it’s a bit pricey.
This mode of pricing breaks down all associated fees involved in processing the transaction (the interchange) and tacks on a fraction of a percentile of fees. For example, “interchange plus 50” means that you will be paying the interchange fees, plus 0.50% of the total exchange. This is a bit more complicated than flat-rate pricing, but is actually cheaper, as the average interchange percentage is under 2%. So while pricing is a bit more nuanced and complicated, the rate you pay is still lower than the 2.75-3.00% charged by a flat-rate fee.
This can be a great way to save money over time, and this method of pricing is better for those who expect to do a good deal of business with customers using credit cards.
Tiered pricing is the least cost-effective pricing method for the business owner, but is the most popular method of pricing used by merchant account suppliers. In essence, this system allows the merchant account holder to charge you a different rate per transaction based on which “tier” or category the transaction falls into. “Qualified transactions” will cost you the least amount of money, “Mid-Qualified transactions” will be moderately costly for you, and “Non-Qualified transactions” can have rates as high as 3.35% or higher. This system of pricing is not very transparent and tends to cost the retailer quite a bit more money. *How* your transactions are categorized is left up to the discretion of the merchant account supplier itself. This is the priciest system for the business owner and is often eschewed in favor of interchange-plus pricing if possible. Please note, that this is only some basic information on merchant account pricing models. For more information, Please call us at 310.826.7000.