Posted by Jeff Shavitz on Tue, Jan 26, 2010 @ 09:04 AM
Figuring out how much a new merchant account will cost your business in credit card processing fees starts with something called the "effective" rate. The term effective rate is used to refer to the collective percentage of gross sales that a business pays in credit card processing fees.
For example, if a business processes $10,000 in gross credit and debit card sales and its total processing expense is $329.00, the effective rate of this business's merchant account is 3.29%. The qualified discount rate on this account may only be 2.25%, but surcharges and other fees bring the total cost over a full percentage point higher. This example illustrate perfectly how focusing on a single rate when examining a merchant account can prove to be a costly oversight.
The effective rate is the single most important cost factor when you're comparing merchant accounts and, not surprisingly, it's also one of the most elusive to calculate. When shopping for a merchant account, the effective rate will show you the cheapest merchant account option. And after you start accepting credit cards it will allow you to calculate and forecast your total credit card processing expenses.
Calculating the effective rate of a merchant account for an existing business is easier and more accurate than calculating the effective rate for a new business because figures are based on real credit card processing history rather than forecasts and estimates.
That's not to say that a new business should ignore the effective rate of a proposed merchant account. It is still the most important cost factor, but in the case of a new business the effective rate should be interpreted as a conservative estimate.
It's pretty simple to calculate the effective rate for an existing merchant account. All you need to do is figure out the percentage of expenses over gross credit and debit card sales. To do this, divide your gross sales by your total processing costs for a given month and then multiply that number by 100. For example:
$10,000 in sales / $329 in fees * 100 = 3.29%
If the effective rate ends up being substantially greater than your qualified discount rate, it's time to examine your account and make money-saving adjustments. Using the example above, let's say the qualified discount rate for this account is 1.69%. That would mean the effective rate of 3.29% is more than double the qualified discount rate. In a situation like this, the chances are very good that there are a lot of mid and non-qualified surcharges being applied.
If you notice a large discrepancy between the qualified rate and the effective rate of your merchant account, call your provider and inquire how the gap can be closed.
To calculate the effective rate for a new merchant account from existing credit card processing history, apply your business's processing statistics such as the percentage of mid and non-qualified transactions, PIN debit transactions versus signature, etc, to the rates and fees of the new account. This will yield a pretty accurate estimate of the cost associated with the new merchant account.
Calculating the effective rate of a merchant account for a new business is a little tougher because of inconsistent buckets, and the lack of credit card processing history from which to judge how a business's transactions will qualify. Nevertheless, making a conservative estimate of an account's effective rate is still vital.
To calculate the effective rate of a merchant account for a business without credit card processing history you will need to estimate a few figures such as the business's average ticket, processing volume, whether a PIN pad will be used to accept online debit transactions and more.
Any merchant account provider that's courting your business should be able to speak with you to gather the information they need to offer you a reasonably accurate effective rate. If they're unable to do this or they don't know what an effective rate is, they're probably not the best candidate for your new merchant account provider.
Article courtesy of: Merchant Council (www.merchantcouncil.org)
To learn more about effective rates or to find out if you are paying the lowest possible rates on your merchant account, click here for a FREE rate analysis.
Posted by Jeff Shavitz on Mon, Dec 21, 2009 @ 03:19 PM
Paying close attention to your credit card processing expenses is a must, but sometimes even the most conscientious merchants miss some not-so-obvious costs. Below are three common processing expenses that you may be paying without even realizing it.
Processing fees aren't returned when you refund a credit card purchase.
When you charge a customer's credit card, you pay a discount rate and transaction fee to your merchant account provider to process the transaction. When you refund a credit card purchase, your provider does not return those fees. Depending on the type of business that you have, lost merchant account fees from credit card refunds can be substantial and you may not have considered it.
Let's use a hypothetical retail store as an example. If our make-believe store has card-present merchant account rates of 1.7%, a transaction fee of $0.25, an average ticket of $50 and an average of ten credit card refunds per month - they'll lose $11 every month in processing fees dues to refunds. That's also assuming that all of those transactions ran at a qualified rate. Common mid and non-qualified surcharges would make the loss even greater.
If you haven't considered how losses due to credit card refunds are affecting your business, sit down and crunch the numbers as soon as possible. You may be surprised at the results.
You're paying mid and non-qualified surcharges.
When credit card transactions downgrade a mid or non-qualified surcharge is added to the regular qualified discount rate. Many processors express surcharges as a separate fee on their merchant account statements and they charge them at different times of the month. Qualified charges are commonly deducted from credit card transactions throughout the month and surcharges are assessed in a lump sum at the end of the month.
The lump sum amount that's deducted for surcharges is expressed as a single large fee on the merchant processing statement. This leaves many merchants thinking that their total processing charges are represented by the surcharge amount that they see on their statement when in fact this is only a portion of total charges.
In order to realize you're total credit card processing expenses, you have to add the fee charged at the end of the month for downgrades and surcharges to the qualified discount charges that are deducted throughout the month.
It's tough to generically explain how to read merchant account statements because each processor and provider has a different layout and charge structure. If you're having trouble reading your merchant processing statement, it's best to call your merchant account provider for assistance.
You're being surcharged for a monthly minimum.
Merchant accounts often have a confusing charge called a merchant account monthly minimum fee. The monthly minimum dictates the amount of fees that a processor must collect from a merchant in a monthly period. For example, if a merchant account has a monthly minimum of $25 and the merchant's processing fees for a given month are only $15, a surcharge of $10 will be assessed to bring total charges up to the $25 monthly minimum amount.
If your business has a slow or seasonal downtime, you may be paying a monthly minimum surcharge without realizing it. Check your merchant processing statement and the schedule of fees for a monthly minimum fee. If you do have a minimum that's affecting your charges, call your provider to see if the fee can be lowered or even waived.
Article courtesy of: MerchantCouncil (www.merchantcouncil.org)
For more information on Credit Card Processing expenses or to find out if you are paying the lowest rates on your merchant account, contact CCS for a no-cost, no-obligation rate analysis.