Design & Development

Credit Card Processing: Eleven Pointers to Save Money, Part 1

Editor’s Note: This is Part 1 in a two-part series on ideas for ecommerce merchants to save money on credit card processing. The author is Michael Shatz, a veteran of the credit card processing industry. He now owns The Merchant’s Guide, a Massachusetts-based consulting and publishing firm dedicated to helping merchants lower credit card processing fees and improve revenues.

Shatz will soon launch a monthly feature for Practical eCommerce called “Credit Card Report Card,” whereby he’ll grade a merchant’s overall credit card processing set-up and suggest ways for the merchant to reduce costs. To request a “Credit Card Report Card,” email

Most every ecommerce merchant accepts credit cards payments. Here are five ideas for reducing costs. Part 2 of this series will offer six additional ideas.

1. Scrutinize Fixed Percentages for High-Ticket Items

Most merchants are quick to congratulate themselves on securing a “low” percentage discount rate from their payment processor. Unfortunately, these merchants don’t always pay attention to the fundamental mathematics behind the average price of the products they are selling. For instance, 2.1 percent sounds like a great discount rate, and in fact oftentimes it is. If you happen to sell high-ticket items, however, percentages can eat into profits in terms of absolute dollars. Compare two merchants: one selling power adapters for $15.00, and another merchant selling computer for $500.00. At 2.1 percent, the first merchant would pay approximately $0.32 per transaction, while the second merchant would pay about $10.00 per transaction. While it might make sense that a processor is entitled to earn higher fees on a more expensive product, merchants should negotiate to minimize the absolute fees they are paying. Merchants with high average ticket items should therefore scrutinize percentage-based processing fees.

2. Watch Per-Item Transaction Fees for Low Ticket Items

Payment processors frequently add fixed, per-item fees to every credit card transaction. It’s tempting for merchants to overlook these small transaction fees. A per-item fee of $0.15 may not sound like much, but consider the two merchants we discussed above. A per-item fee of $0.15 represents an additional 1percent charge for the merchant selling $15.00 power adapters, bringing its total fee to 3.1 percent. This same $0.15 fee represents a paltry 0.03 percent up-charge for the merchant selling $500.00 computers, bringing its total fee to 2.13 percent. Merchants with low average ticket items should therefore watch per-item-based processing fees.

3. Monitor “Downgrades”

Payment processors often quote discount rates using a tiered model. These tiers are typically called “qualified,” “mid-qualified” and “unqualified.” As you might expect, qualified transactions receive the lowest fees. Mid-qualified and unqualified transactions – also known as “downgrades” – receive higher fees. In most cases, qualification is based on the timeliness and quality of the data passed to the card associations. Regrettably, many merchants receive downgrades on more than one third of their total volume. Some of these downgrades are unavoidable like those from rewards cards and certain international transactions. Merchants can minimize their downgrade rate by insuring that they pass along the correct information (for example, address verification data), and submit settlements in the appropriate time frame. Merchants must therefore work closely with their payment processors to insure that the proper data and settlement standards are incorporated into their sales processes.

4. Evaluate Bundled vs. Pass-through Pricing

In order to accept credit cards, merchants pay a variety of fees to multiple players including the card associations (“assessment” fees), card-issuing banks (“interchange” fees), and payment processors (“processing” fees.) Most merchants’ fees are structured using a bundled model, whereby all of these fees are combined into a single rate which may include a percentage-of-sale fee, a fixed per-item fee, or a combination of both. The problem with this model is that it is virtually impossible to discern exactly what the merchant is paying, and to whom these payments are going to. Over the past five years, another pricing model, commonly known as the “pass-through” method, has emerged as a popular alternative. Under this structure, payment processors report fees in separate sections dedicated to each of the players involved in the transaction. In this manner it easy for the merchant to determine just how much the processor – the merchant’s gatekeeper into the credit card systems – and the other parties are earning. What’s more, itemized Interchange reporting allows the merchant to effectively understand and manage downgrades. Pass-through pricing offers merchants the most transparent form of reporting, providing for easier reconciliation and downgrade remediation.

5. Understand Pricing

Merchant account pricing is often the hottest topic in merchant circles because it can represent one of the greatest cost centers. Fees are typically paid to three parties: the card associations (“assessment” fees), the card-issuing banks (“interchange” fees), and the payment processors (“processing” fees.) Merchants with high average ticket items should scrutinize percentage-based processing fees, while merchants with low ticket items should examine per-item-based processing fees. What pricing really comes down to is the average ticket value of your product, and what the payment processor wishes to earn on each transaction.

Because both Visa and MasterCard (PDF download) publish interchange and assessment fees, and because you know what your average ticket price is, applying a little high school math will let you see what the payment processor is earning. Pricing will also be affected by the size and financial health of your business. Riskier products like pornography and gambling tend to see the highest rates. Regardless of your business, you have the information to determine exactly what you are paying.

Pricing is often presented as combination of percentage-based and fixed per-item fees. Knowing your average ticket price, converting this confusing pricing to a pure percentage or pure fixed fee is a simple matter of multiplication or division. To calculate your “all-in” processing fees simply divide your total aggregate merchant fees (e.g. discounts, interchange, downgrades, authorization, chargebacks, reporting and transmission), by your gross sales volume. Is it a fair number? Well it’s very hard to tell without understanding your business, but suffice it to say that if your ratio is greater than 2.4 percent, you should probably review your payment processes.

Coming up: “Credit Card Processing: Eleven Pointers to Save Money, Part 2”

Michael E. Shatz
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