Editor’s Note: Contributor Phil Hinke is a veteran of the credit card processing industry. He now consults with merchants to help them lower their processing costs, believing the credit card industry is often unfair to them. His latest installment is below.
In “Durbin Amendment May Foster Deceptive Credit, Debit Processing Fees,” my June 2011 article, I predicted an abundance of deceptive sales and marketing tactics by some merchant account providers as a result of the Durbin Amendment, which lowers the interchange rate for many debit card transactions. Well, I have never seen more deception and trickery in the industry than I’m seeing now.
Beware of Teaser Rates
Unknowing merchants are seduced by teaser rates every day. Teaser rates are not new to the card processing industry. They have just become more absurd. I have seen marketing materials promising processing for as low as 0.39 percent. That is not 0.39 percent over interchange and pass-through fees. It’s 0.39 percent in total — plus an accompanying transaction fee, which the providers do not mention. The provider presumably wants to seduce an unknowing merchant into believing he is receiving a great rate when in fact the rate in this case only applies to regulated — i.e. Durbin Amendment — debit cards. (Note: The Durbin Amendment applies only to banks with more than $10 billion in assets. Banks with fewer than $10 billion in assets do not have to follow Durbin’s’ debit-card-rate requirement. Thus, banks with more than $10 billion in assets have “regulated” debit card rates. For other banks, the debit card rates are “unregulated.”) The providers can offer this rate because they know the maximum legal interchange rate — the wholesale cost, essentially — for regulated debit transactions is only 0.05 percent + $0.22 per transaction.
I have also seen marketing materials promising rates as low as 0.99 percent processing costs for credit cards. It’s a similar game. The rate is likely limited to regulated debit cards and basic credit cards. Here they lose money on the basic credit card, but make up most or all of the money on the regulated debit card. However, the real money is made on all the surcharging for the other card types — reward cards, corporate cards — which will typically be the majority of the transactions.
Basic Card-Processing Knowledge Necessary
A basic knowledge of card processing, with a little common sense, is the best defense against teaser rates. Here are a couple key pieces of information to know when confronted with teaser rates or when otherwise discussing rates with a provider.
Understand the “wholesale” rates. Every merchant account provider pays the same “wholesale rate, ” which includes interchange, dues and assessments, access fees, and cross-border fees. If a salesperson tells you that his company receives a better wholesale rate from card companies because of the provider’s size or other reason, that should be a red flag.
Know the interchange rates. Remember these three interchange rates, as they will appear frequently on merchant account statements for ecommerce merchants:
- Regulated debit cards: Maximum of 0.05 percent plus $0.22 per transaction;
- “Visa eCommerce Basic” credit card: 1.80 percent + $0.10 per transaction;
- “Visa Rewards 2” credit card: 1.95 percent + $0.10 per transaction.
Look for a Consistent Mark-up
When discussing rates with salespeople, always have them write down what rate and transaction fee(s) you would be charged for the majority of your transactions. For ecommerce merchants, many transactions will be charged at (a) a regulated Visa debit card, (b) a Visa credit card at the “eCommerce Basic” interchange rate, and (c) a “Visa Rewards 2” credit card. Subtract the appropriate interchange rate — shown above — from the three rates and transaction fees they provide you. Look for consistency in the difference, which is the mark-up.
If the provider knows your business has a high percentage of debit card transactions (say 70 percent of all your transactions) and a low percentage of basic credit card transactions (say 2 percent of all your transactions) then the teaser rate may be applied on the “eCommerce Basic” cards. Here a provider may offer the 0.99 percent rate plus, perhaps, a $0.20 transaction fee. This may look enticing because the eCommerce Basic interchange rate is 1.80 percent + $0.10 per transaction. However, the provider will likely charge the same rate and transaction fee on the regulated debit transactions; 0.99 percent + $0.20 per transaction is a horrible rate considering the interchange rate is only 0.05 percent + $0.22.
Furthermore, the provider may also charge the non-regulated debit card transactions — from banks with less than $10 billion in assets — and all the other credit cards by an extra 1 to 2 percent above interchange. Therefore, you may be paying over 3 percent on the “Visa Rewards 2” transaction. Bottom line, with this teaser rate you may be receiving a great rate on 2 percent of your transactions and a terrible rate on the other 98 percent.
Remember the following points when evaluating credit-card-processing proposals that include teaser rates.
- All merchant account providers pay the same wholesale price — i.e. the “interchange” rate — to the card companies and issuing banks.
- Know the three interchange rates, above.
- Look for mark-up consistency.
- Use common sense.