by Ellen Cunningham of CardFellow.com
Credit card processing is expensive, but many businesses end up paying more than they have to. The main thing to avoid when looking for lower cost credit card processing is “non-qualified” rates. Non-qualified rates are an arbitrary classification by processors that use opaque, expensive pricing models called “tiered” or “bundled” pricing.
Understanding “Non-Qualified” Rates
What happens is that the processing company sets up categories or “tiers” with different rates assigned. The “qualified” tier will have the lowest rate while the “non-qualified” tier will have the highest. Processors using this model get you to sign up by telling you the “qualified” rate, which is very low. What they don’t tell you is that they get to choose which of your transactions are charged according to which tier. So they could quote you a low rate for the “qualified” tier, but then only charge a few of your transactions at that rate. The rest of your transactions will be more expensive, because they charge them at the non-qualified rate.
Even worse? They can change the rates or the tiers whenever they want, with or without telling you. There’s a lot of misinformation out there about qualified/non-qualified rates. Here’s the truth: it is NOT set by Visa or MasterCard. It is NOT a required part of processing costs.
Tiered pricing is a very common pricing model, but it’s also the most opaque and expensive. It should be avoided completely.
How to identify it: If you’re already processing, check your monthly statement. Look for “non-qualified”, “nqual” or “nonqual.” If you see them, you’re on a tiered pricing model and are almost certainly overpaying. Consider switching processors.
If you’re not already processing, you can usually identify it by checking the company’s website or pricing list. For tiered pricing, a processor’s website will often list a low rate with an asterisk. The asterisk text (in small print somewhere) will specify that the rate applies to qualified transactions.
The website for a fictitious company called Fuzzy Credit Card Processing shows how it might look on a real processor’s website. Here’s a screenshot from the satirical Fuzzy site, designed to educate about processing pitfalls:
Again, this is not a real processor’s website, but it’s modeled after real sites. In this common example, there is an asterisk at the end of a really low rate. Going to the text at the bottom, we immediately see the words “qualified rate.” From that alone, we know that we’d want to avoid that processor.
Lowering Your Costs
If you’re already processing and are paying too much, you may be shopping for a new processor. While you’re doing that, remember these basics:
- · Avoid “non-qualified” pricing models
- · Compare the real cost, or effective rate, not the starting rate
I covered the first point in the sections above, but the second one is just as important. One of the most difficult parts of finding the right credit card processor is comparing quotes apples to apples. There’s no standardization to processing quotes, which makes it difficult to see which one is truly the lowest.
What you’ll need to do is compare what’s called the “effective rate” or the rate with ALL fees included. When you’re comparing processors, make sure to ask about monthly fees, maintenance fees, and any other fees that they don’t include in the published “rate” so you can compare the all-in effective rate.
If you don’t want to do it yourself, you can google credit card processing comparison site to use free services that will calculate the effective rates from leading processors for you so you can compare and choose easily.
Passing Fees to Customers
In all but 9 states, businesses can pass the costs of credit card processing to their customers by adding a fee, or “surcharging” the transaction. Surcharges can be added to credit card sales (NOT debit cards) to defray the costs of processing.
However, some customers are put off by the practice, and there are several rules from the credit card companies that must be followed if you surcharge cards. This infographic gives some insight into surcharging credit cards.
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