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In the world of merchant services there are basically three common methods used to process credit cards.  This post is meant to quickly define those methods and hopefully come to some conclusions about which one will be most effective for your business.

1.  The most commonly used system for payment processing is known as the Tiered, or, Bucket pricing structure.  This system is widely and almost ubiquitously used by the largest credit card processing companies and the major nationwide banks.  It is so popular among these Goliath's because it means potential for their highest revenues.  Remember, those revenues come from your sales at your counter.  With this system, the processor seperates every credit card that comes across your counter into 3 to 4 categories; hence tiers, or, buckets.  They then assign those categories a rate, i.e. [ Tier 3:  2.75%, plus 15 cents per swipe ] and will process every card in that category at that rate, even if the true cost to them is 1%. The remaining 1.75% is taken directly from your pockets, without you every having a true way of knowing how much profit they are really collecting from your businesses account at the end of the day.  This system is absurdly unfair to business owners and is completely outdated, due mostly to its lack of transparency and ruthless price gouging.  Unfortunately, choosing a tiered pricing sturcture is the most common mistake business owners make when signing up for credit card processing.  If you are currently doing business under this system, get out of it now.  You are undoubtedly paying far to much for this simple service.

2.  The slightly modified version of the Tiered System is the Flat Rate pricing structure.  This is the same famous pricing structure that the company, SquareUp, uses in its business model. They, like many other processors, offer one flat rate of 2.75%, for example, and lump all of the aforementioned tiers into this one rate.  Of course these rates vary from on processor to another, but the idea is to stay slightly above the processing rate curve as dictated by the major card issuers like Visa and Master Card.  Sure, they may actually lose money on high cost corporate credit cards, or American Express cards that may run as high as 4% per transaction, but they are banking on making their money on the inflated rate on cards of lesser cost such as personal credit cards and debit cards, typically processing from .68% - 1.29% at cost.  The best thing about Flat Rate processing is that you as a business owner know exactly what you are paying for every card that comes across your counter.  However, that doesn't mean you could still be losing big from your bottom line.  With Flat Rate processing transparency is still problematic.

3.  We keep talking about the COST of credit card processing; how can you get a piece of that action?  When you hear, cost, you think of paying bare bones for a product. Like any of the other overhead in your business, wouldn't it be great if you could pay straight cost for a good or service? This brings us to the newest and least utilized method of payment processing available: Cost Plus Pricing.  The reason Cost Plus pricing is so largely under utilized is because it means less profits for the credit card processor; market demand is changing that.  Business owners are fed up with paying literally thousands of dollars a month to process credit cards when they could be paying a fraction.  Cost Plus pricing puts them in the driver seat to do just that.  With the Cost Plus method, the processor passes the cost, which is the same for everyone across the board, directly to you, the business owner.  The "Plus" is the processors profit margin. The "Plus" could be in the form of another rate, added onto the back end of the cost, or it could be in the form of a Flat Fee.  Either way, Cost Plus Pricing, will always give you the best bang for your buck.  It also gives you the best opportunity to stay fully informed about your merchant service account, which allows you more control to negotiate what the actual "Plus" will be with your processor because of the inherent transparency.  

Credit card processing is a confusing world, when it really doesn't need to be.  A good rule of thumb is this: the more convoluted a pricing structure is, the more money you're going to lose. Guaranteed.  When it comes time for you to make the decision to sign up for merchant services, just remember, the more you know, the more you'll save.  Happy shopping.


 


JonTBone
07/05/2013 08:58

This was very helpful, thanks!

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09/09/2013 22:28

I appreciate this blog owner and must say good job. keep posting and sharing your knowledge.

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09/25/2014 02:26

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