Did you know that state and local governments qualify for lower interchange rates?
In fact, government MCC codes have some of the cheapest interchange rates, starting as low as 1.55% + $0.10 per transaction. But just because the card networks process your transactions at a lower cost, it doesn’t mean that your processor is automatically giving you the best possible deal.
Whether it’s for tax collections, vehicle registration, government-owned lotteries, permits and licenses, or any other payment collected by an organization in the public sector, there’s a good chance you’re overpaying on credit card processing.
Despite what your sales rep tells you or how they market themselves, government entities aren’t immune from the deceptive tactics used by payment processors.
I’ll explain how you can lower your government payment processing costs based on my first-hand experience negotiating better terms for governments nationwide.
Don’t Switch Processors Just Based on a Lower Rate Quote
Once you’ve identified that you’re overpaying to accept credit cards, it’s reasonable to assume that switching providers can get you a better deal. This is often the first thought that comes to mind after an internal controller or accountant audits rising processing costs.
But switching providers rarely makes sense for governments and public sector entities. Here’s why.
First, every processor will quote you at a lower rate than what you’re currently paying. They want your business, so they’ll incentivize you to switch. Unfortunately, those savings will be short-lived. In a year or two, your new processor will raise your rates—likely exceeding what you’re currently paying.
You’ll also need to factor in the logistical nightmare of changing all of your systems. This can mean considerable downtime for both in-person and online payments, potentially tens of thousands spent on new equipment, and then having to re-train everyone on how to use the new system.
This is even more challenging and sometimes near impossible if you’re using an integrated processor that’s intertwined within other systems and software you’re using.
It’s always in your best interest to negotiate better terms with your current processor instead of switching to a new one. Don’t be fooled by a lower-than-normal quote.
Make Sure You’re on an Interchange-Plus Pricing Contract
Payment processors have no moral or legal obligation to treat government entities differently than any other organization they work with. When they’re onboarding and setting up your account, all they see is dollar signs and high commissions based on your processing volume.
So they’ll use every trick in the book to try and get you on a contract that puts more money in their pocket (at your expense).
Interchange-plus pricing is the only pricing structure you should consider. You’ll pay the wholesale rate set by the card networks (Visa, Mastercard, Amex, Discover), plus a small markup to your processor.
The best part about interchange-plus pricing for governments is that government MCC codes are typically the cheapest rates.
Visa’s government interchange rates typically range from 1.55% + $0.10 to $1.65% + $0.04 per transaction on credit cards. Public utilities are even cheaper, billed as low as $0.75 regardless of the amount. Mastercard charges just $0.10 per transaction for government-owned lottery tickets paid via debit cards.
So if you’re on an interchange-plus pricing plan, your organization should just be paying an additional 5-10 basis points over the interchange rate. Whereas if you’re on a flat-rate contract or tiered plan, your processor could be charging you upwards of 3%, meaning they’re profiting nearly 150 basis points on every transaction.
Find Out Who’s Actually Processing Your Transactions on the Backend
This is a big one that many public sector entities overlook. If you got your payment processing through a third-party government software, then you may not even realize who your processor is.
For example, we work with lots of government and public sector clients using Tyler Technologies ERP software. And while Tyler Technologies offers integrated payment processing to help streamline operations, they aren’t necessarily your payment processor.
TylerTech does have its own in-house processing solution, TylerPay. But they also support payment integrations via Global Payments.
In this type of scenario, the ERP software provider (Tyler) has nothing to do with your payment processing rates. All they do is support the integration. Global Payments is the one setting your rates and handling all of your processing needs on the backend.
And Global is notorious for high rates, bogus fees, and overcharging for credit card processing. We’ve caught them doing this specifically to government entities while hiding behind the Tyler Technologies integration.
Read More: Tyler Technologies Review | Global Payments Review | Global Payments Outrageous Fees Exposed
Calculate Your Effective Rate to Determine Your True Processing Costs
Another common mistake that we see is solely relying on the per-transaction rate that you’ve been quoted to estimate your processing costs.
Depending on your processor and arrangement, they might tell you that you’re paying 20 basis points over the interchange rate on every transaction. While this isn’t the lowest rate we’ve seen, it’s far from the worst. So you might see this in your contract, see the 20-basis-point markup on your statement, and then move on.
But your effective rate calculates your total processing costs against your total volume. It’s one of the fastest and easiest ways to determine if you have extra charges on your account.
For example:
- Let’s say you qualify for interchange rates around 1.60% + $0.10.
- When you factor in the processor markup, it’s closer to 1.85%.
- You process $500,000 per month and your total processing costs $15,000.
- This means you’re paying a 3% effective rate.
- Where did the other 1.15% in additional charges come from?
It’s usually a sign of hidden fees and charges from your processor that warrant closer investigation. Whenever there’s a major discrepancy between the effective rate and your average interchange plus markup, it means your processor is finding other creative ways to inflate your rates.
Don’t Rely on Surcharging to Offset Your Costs
Local surcharge laws don’t typically apply to government entities.
In fact, even in states where surcharging is banned, state legislation often excludes government payments. So you don’t have to deal with the same red tape as other businesses that want to set up a surcharge program.
That said, surcharging citizens for card payments just gives your processor a license to charge you whatever they want. This is not an effective use of government funds, and your citizens end up paying the price.
Surcharging may feel like an easy way out since you technically aren’t paying the processing fees.
But it adds complexity to your accounting systems and just burdens citizens with higher costs. Do you really want people to pay an extra 3% on taxes or vehicle registration? 3% that doesn’t even go toward your entity, it’s just sent straight to the processor.
Get Rid of Old Hardware and Update Your Software
This is a common problem for smaller government and public sector entities that haven’t updated their systems in a while.
Using old terminals may seem like a way to save money on new equipment, but this can actually backfire. If your hardware or software is old and outdated, it may not be compliant with PCI standards or card network regulations.
As a result, your transactions could automatically downgrade to the most expensive possible interchange category.
So instead of paying 1.55% + $0.10 per transaction, you could be paying a whopping 3.15% + $0.10, which is more than double the cost before you even factor in the processor markup.
Cutting your processing rates in half is typically well worth the cost of new equipment, especially at scale. You could literally save millions of dollars in processing fees if you’re currently processing downgraded transactions and eliminate this problem.
Audit Your Statements to Identify New Fees and Rate Increases
Credit card processing statements are notoriously difficult to read and understand, even for government agencies that have sophisticated financial knowledge on their teams.
You’re looking at hundreds of different line items with transaction categories, card types, fees, and abbreviations, with no real way of knowing what’s legitimate and what’s a junk fee.
Remember, the payment processing industry is unregulated. The fact that you’re a government entity doesn’t change that. Processors are still going to add junk fees to your statements because they’re hoping you don’t find them and they can legally get away with it.
To prevent this from happening, you need to take time every month to review your statements.
Compare this month against the previous month. Are the rates the same for every fee? Do you notice any new charges that weren’t there before?
Any inconsistencies need to be investigated.
Negotiate Directly With Your Current Provider
The only rate that’s set in stone and non-negotiable is the interchange rate set by the card networks. Again, this is typically around 1.55% to 1.65% for government entities on credit card payments.
Everything else is 100% negotiable.
Obviously, your processor needs to earn some type of markup for the service they’re providing. But they shouldn’t be charging you much more than 5-10 basis points.
Governments and public sector entities should be paying a maximum 2% effective rate because of the low interchange rates. And your markup should be low because the transactions are normally less risky and because you’re processing a high volume.
If you’re paying more than 2%, pick up the phone and call your processor.
Demand a better rate and tell them to remove all of the bogus fees you’ve identified on your statement. Don’t take no for an answer. It may take a couple of phone calls and speaking to a few different people, but it’s well worth your time.
Your processor doesn’t want to lose your account because I can guarantee it’s extremely profitable for them. So they have some room to work with where you can save money, and they’ll still make enough margin.
Work With a Merchant Consultant
Merchant consultants can simplify this entire process on your behalf.
Our team here at MCC can audit your statements for free and identify any cost-saving opportunities for your entity. We know exactly which fees are legit, which ones are junk, and how much your processor should be charging you based on your MCC code.
We’ll also negotiate directly with your current provider, so there’s no need to switch. And since we’ve worked with all major processors, we know exactly what their rock-bottom number is.
When you pick up the phone and ask for a lower rate, they might tell you that you’re already getting the best possible deal. But they can’t tell us that, because we have statements from other governments using that same processor as proof that they’ll charge less.
In addition to the initial cost savings, we’ll also monitor your statements moving forward as part of our service. So if your processor increases your rates or adds new fees, we’ll work to get them removed or stop the increase before it goes into effect.