Costco is known for its cheap wholesale prices on nearly every product they offer. For members, you’ve likely experienced thousands in savings, especially if you’re buying in bulk for your business.
So if you’ve seen Costco’s promotions for cheap credit card processing rates, it’s natural to think you can get a great deal from Costco.
But here’s the truth. Costco isn’t actually a payment processor, and the “savings” they advertise will disappear once you dig into the fine print. In fact, you’ll likely end up paying more by using Costco for payment processing.
Let’s break down what’s really going on with Costco Merchant Services and why it’s not the great deal it appears to be.
What is Costco Merchant Services?
Costco Merchant Services is a credit card processing program that’s marketed exclusively to Costco members. It’s positioned as a member benefit, supposedly to help businesses save money by leveraging Costco’s purchasing power to negotiate better rates for merchants.
This program has been around for about a decade, and Costco promotes it through its business centers, mailers to members, and through its online marketing materials.
On the surface, it seems like a logical extension of everything else Costco does. Wholesale pricing with savings passed to members.
But that’s not really what’s happening here.
How Costco Payment Processing Works
Costco is not a payment processor, and they’re not providing any credit card processing services to members using Costco Merchant Services. In fact, Costco isn’t even a registered ISO (independent sales organization).
Here’s what happens when you sign up for Costco Merchant Services:
- You’re getting a merchant account with Elavon.
- Costco is simply a middleman who referred you.
- Costco gets paid a commission on your account.
This arrangement is important for several reasons that you need to understand.
First, your merchant account and processing contract are through Elavon (not Costco). Elavon handles all of the underwriting, risk management, support, and backend processing. Costco’s role ends once they’ve made the referral to Elavon and collected their commission.
And here’s the kicker. Since Elavon has to pay Costco a commission on your account, they need to build that into your pricing. So you’re not even getting Elavon’s best rates. You’re getting rates that have been marked up high enough to cover Costco’s cut.
This is standard practice in the payments industry. Resellers and referral partners need to get paid somehow, and it ultimately comes from the merchant.
So while Costco markets its merchant services as a member benefit, what they’re really doing is monetizing their relationship with business members. You’re paying for their commission through higher processing rates.
Costco Payment Processing Rates (Advertised Pricing vs. What You’ll Actually Pay)
At first glance, Costco’s payment processing rates look cheap compared to other processors:
- 1.10% + $0.12 per transaction for in-person and mobile sales
- 1.90% + $0.25 per transaction for online sales
- 0.85% + $0.25 per transaction for debit cards
These rates are notably less expensive than other flat-rate processors that typically start around 2.99% + $0.30 per transaction.
But if you look closely at the marketing materials, you’ll see that Costco’s rates are for tiered pricing, and the advertised rates only apply to qualified transactions.
What Costco doesn’t tell you is that virtually none of your transactions will actually qualify for these rates. 1.10% + $0.12 per transaction is lower than some of the wholesale interchange rates imposed by the card networks. If you actually paid this rate, Elavon would lose money on your account (which will never happen).
The vast majority of your transactions will be assessed at the mid-qualified and non-qualified rates, which will both be significantly higher. That’s one of the reasons why tiered pricing sucks, and it’s not transparent at all for merchants who don’t see how much they’re paying per transaction until the month-end statement comes.
If you don’t want tiered pricing, Costco also advertises all-in pricing at 2.30% per transaction.
This is more expensive than the lowest-tier rates, but it’s a bit more realistic and sounds like a good deal. But this only applies to in-person swipes and chip transactions. Ecommerce transactions cost 2.60% + $0.10, and manually keyed transactions jump all the way to 3.20% + $0.10.
Flat-rate processing is not a good deal for merchants, and Costco’s offering is not an exception to this rule.
Is Costco Merchant Services Actually Cheaper Than Other Payment Processors?
No, Costco is not cheaper than other payment processors.
The most direct comparison is going straight to Elavon instead of using Costco as a middleman. If you’re working with Costco Merchant Services, you’re working with Elavon anyway. You’re just paying an extra layer of markup to cover Costco’s commission.
Going to Elavon directly eliminates that middleman and gets you better rates.
For example, if you look at our Elavon review, you’ll see we have clients paying as low as 0.07% + $0.25 per transaction over the interchange rate, and others paying a 0.10% + $0.20 per transaction markup. This is significantly cheaper than what you’d get from Costco.
Costco does say that if you process over $1 million annually, you can get custom pricing from Elavon (aka interchange-plus). But Elavon can’t give you its rock-bottom rates here because they still have to pay Costco. Going through a middleman (Costco) is never going to be cheaper for payment processing.
Even if we take Elavon out of the picture, there are plenty of other processors on the market that can offer better rates. Especially if you’re a low-risk business with a decent processing volume.
“Benefits” of Costco Payment Processing
Costco markets several “benefits” that come with its merchant services program. But let me break down what these actually mean, and why they’re not really benefits at all:
- No annual fee: You shouldn’t be paying this anywhere. And remember, your Executive membership already costs $130 per year.
- No statement fee for Executive Members: Again, statement fees are junk charges that you shouldn’t pay anyway.
- No reporting fee: Same story. This fee is bogus no matter who’s charging it.
- No additional authorization fees: That’s because they’ve already inflated your base rates to cover authorization costs.
- Terminal rentals starting at $8 per month: That’s lower than some competitors, but buying your terminal outright is always cheaper in the long run.
- Free terminal offers: Don’t let a $300 freebie distract you from the fact that you’ll end up overpaying thousands per year in processing fees.
- No early termination fees: Thanks Costco, for not charging businesses for canceling their accounts.
In short, none of these “benefits” really add any value, and they certainly don’t justify or offset the higher rates you’re going to pay on every transaction.
And it’s also worth noting that non-Executive members will have to pay a $25 application fee and $4.95 monthly statement fee. Really? $4.95 per month just to generate a statement on your account?
Oh yeah, and there’s a $20 monthly minimum fee that applies to all accounts.
Costco’s payment processing “benefits” are just marketing ploys to make it seem like you’re getting a good deal. But you’re not.
How to Save More Money Without Switching to Costco Merchant Services
If you’re considering Costco Merchant Services, I’m assuming it’s because you want to lower your payment processing costs. But there’s a much simpler approach:
Just negotiate better rates with your current processor.
Most merchants don’t realize how much room they have to negotiate their credit card processing terms. Your processor already has a significant margin built into their rates, and they’d rather reduce your rates than lose your account altogether.
The key to success here is knowing what to ask for and be willing to put up a fight.
If you call your processor and ask for a rate reduction, they’re likely going to say no and slam the door in your face. But if you identify all the bogus fees on your statement and do your homework to tell them what they should be paying, they’ll be much more receptive (again, they don’t want to lose your business).
You could always get a quote from Costco’s payment processing and ask your processor to match it. But I honestly think that whatever Costco quotes you will be higher.
Our team here at MCC is happy to audit your statements for free. We can identify any cost-saving opportunities and negotiate better terms directly with your current provider.
You’ll end up saving more money than you would by switching to Costco, and you won’t have to deal with any of the headaches associated with changing processors.
Final Thoughts on Costco’s Credit Card Processing Services
Costco’s payment processing service is just a reseller/affiliate program for Elavon.
The only thing Costco does is advertise the program to millions of its business members. If you sign up, they get a commission, and that’s where their role ends.
This arrangement makes it impossible for Costco’s credit card processing to be cheaper than other providers.
You’re better off sticking with your current processing and negotiating better terms.
I’ve personally audited thousands of credit card processing statements over my career for merchants in basically every industry. And I can’t think of a single time I looked at a statement and thought that switching to Costco would be a better deal for the business. It just simply isn’t the case.
Costco is great for a lot of things. But payment processing isn’t one of them.