by Matt Rej
On the surface, I think we can agree that every business should not be paying the same rate on credit card processing. It makes sense that a small coffee truck doing $10k monthly sales won’t have the same rate as a hotel doing $2 million per month, even if they’re using the exact same merchant services provider.
But why?
Volume aside, the way businesses operate can be completely different from a payments perspective. And merchant services fees are affected from multiple angles, from the interchange level all the way through the underwriting process for your merchant account.
Here are some of the main reasons why rates can be so different between business types:
- Interchange rates vary by MCC code, which is based on your industry.
- The types of cards you accept also impact interchange (Ex: commercial cards and debit cards have wildly different interchange rates).
- Businesses with more online or card-on-file transactions will pay different rates than businesses accepting mostly debit cards in person.
- Your risk level is taken into account when processors set your rates during the initial underwriting process.
- Payment integrations with business-specific software (CRM, ERP, practice management software, etc.) typically increase your rates.
This is something I constantly need to remind our clients when we’re negotiating rates with their processors.
They’ll see a statement screenshot that I published from another client using the same processor, getting a completely different rate. And while there’s almost always an opportunity for cost savings, processors won’t always match rates between businesses simply because their industry and payment needs can be so unique.
Certain Components of Interchange Are Out of Your Hands Strictly Because of Your Industry
When you look at the interchange matrix for each card network, there are several things you can’t control based on your business type.
- Categories like Fuel, Government, and Charity have some of the lowest interchange rates.
- But if you’re a restaurant or retailer, you’re never going to qualify for those.
- Regulated debit cards have the lowest interchange rates.
- Interchange rates vary by card network (Visa vs. Mastercard vs. Amex vs. Discover).
- Ecommerce companies operating 100% online won’t ever qualify for card-present interchange rates.
You can’t change your industry or MCC code. That stuff is set in stone.
While it would be amazing if all of your customers paid with a regulated debit card (as low as 0.05% + $0.22 at the interchange level), you can’t control what type of plastic customers pull out when it comes to pay.
This can be vary even for businesses within the same industry.
For example, we have restaurant clients doing 16,000+ transactions per month, with half of those being debit cards. This is more common for lower average tickets ($10-$20 sales) for grab-and-go breakfast.
Whereas our restaurant clients in fine dining that have fewer transactions but higher average tickets ($200 to $500+), tend to get more premium rewards cards and even corporate cards, which carry a higher interchange rate.
And despite Visa and Mastercard proposing to abolish their “honor all cards rules” to give merchants more flexibility, I don’t see a realistic scenario where a business would ever be asking their customers to pay using a different card that’s cheaper for them to process.
Other Aspects of Interchange Can Be Optimized, But It’s Still Somewhat Limited Based on Your Business Type
Within the potential interchange rates you’ll qualify for based on your industry or MCC code, certain categories are lower than others. And in some cases, you do have control here. Either take steps to ensure you get a lower rate or at least avoid getting routed to the most expensive rate.
This is especially true for B2B transactions and companies accepting commercial cards.
For example, submitting level 2 or level 3 data with these transactions can automatically qualify for reduced rates at the interchange level.
There are real savings to be had here, especially with Visa’s Commercial Enhanced Data Program. But you need to be a “verified” merchant and still submit accurate data to get those interchange rates.
Other business types don’t have any chance of getting these simply because they don’t accept those cards.
Another thing to consider is that certain types of businesses are more susceptible to interchange downgrades because of authorization issues or forced transactions. So rather than getting the normal interchange rate, a portion of your sales could fall into the Visa Non-Qualified Consumer Credit bucket, which carries an absurdly high rate of 3.15% + $0.10 per transaction (before your processor markup).
Transaction Environment is Huge Factor Affecting Merchant Fees
In-person payments, online orders, phone sales, and cards saved on file all have different merchant fees. This is something that can be affected at the interchange level and also by your processor (depending on how your contract is structured).
Credit cards processed in person using EMV chips are always going to carry the lowest costs.
As a result, you’re going to see different fees simply because of the way your business operates. For example:
- Barbershops, salons, laundromats, cafes, and local book stores will all mostly have in-person transactions.
- E-commerce stores don’t have this option, so they’ll pay CNP (card-not-present) rates.
- Hotels need to put authorization holds on cards, which carry unique fees.
- Restaurants may authorize an online order but then still allow in-person payments at pickup.
- B2B wholesale orders are paid with a credit card either made online or over the phone.
- Subscription-based businesses need to keep cards on file out of billing necessity, and may also be subject to automatic updater fees in addition to CNP rates.
These are obviously just a handful of examples, but you can see how the nature of your business will impact your transaction environment.
Not every business has the luxury of accepting cards face-to-face with every transaction. And there’s really not much you can do about that.
There are certain scenarios where you have to weigh the cost of your merchant fees against the opportunity cost of your business model to determine the right approach.
For example, let’s say you own a car wash.
We’ve already established that it’s cheaper to accept credit card payments in-person. But you may also offer monthly membership plans for unlimited washes with cards stored on file and billed automatically. While the latter may be more expensive to process, you could still end up with more net revenue from the memberships.
Certain Businesses and Industries Carry More Risk For Processors, Which Results in Higher Rates
Risk is typically the largest factor during your underwriting process with a merchant services provider. If they think your business is inherently risky, they’re going to set higher rates.
- Some industries are automatically flagged as “high risk” (CBD, gambling, travel, etc.).
- Cross-border transactions and international cards also carry a higher risk (in addition to the conversion costs).
- Your processor will set higher rates if you’re selling products or services with a high chargeback rate.
- Large-ticket online transactions can also be risky for processors.
Here’s what you need to understand about this.
A consumer buying something from you today may not get a statement from their credit card issuer for another 20 days. But the funds still hit your account tomorrow.
If that customer decides to dispute the charge, your processor needs to pay the issuing bank immediately before they recover the funds from you. This obviously carries some costs on their end, as they’re covering what you owe for a short period of time.
The underwriting process attempts to determine the frequency in which they think this will happen and how long it will take to get the money back from you when it does.
And the majority of this is based on historical data based on your business type.
A coffee shop likely has very few chargebacks, whereas an ecommerce site selling electronics overseas is far more risky for payment processors.
Businesses That Need Integrated Payments Will Also Pay a Premium
Payment integrations are more prevalent in certain industries compared to others. We tend to see them the most in:
- Dental and orthodontic practice management software
- Field service management software
- Veterinary practice management software
- Self-storage management software
- ERP software for government and municipalities
- CRMs, accounting software, and lead management tools
- Hotel management software
In these types of scenarios, having the credit card processing integrated within the software streamlines operations and eliminates manual work. You also get cool features like payments automatically posting to customer accounts and personalization tools for loyalty.
But it comes at a premium for several reasons.
First, the integration itself needs to be set up between the software provider and payment processor. This is extra work on both ends when you’re creating and maintaining the APIs, and each party wants to charge accordingly for it.
Second, the software will typically only support a handful of merchant services providers. And this lack of competition allows processors to charge higher rates.
There are a ton of savings opportunities here, even if you have an integrated setup. But any business that requires this for mission-critical operations can expect their rates to be higher than what it would cost to keep the software and processing completely siloed.
Rates Can Still Vary For Similar Business Types Using the Same Processor
It’s also worth noting that, in addition to everything I covered above, you could have two nearly identical businesses using the same processor paying completely different rates.
Sometimes it’s due to volume (higher volume businesses should be entitled to better discounts), but more often than not, it’s a case of a processor trying to do whatever they can to maximize profits.
This can come in many forms:
- Rate increases
- Extra “service” charges you don’t actually need
- Inflated or padded assessments
- Bogus fees that are pure processor markups
- Pricing structure differences (IC+ vs. flat-rate vs. tiered)
The businesses that just blindly accept these terms from their processor end up paying more than they should be.
So even if your business type or payment operations would normally require higher-than-average rates, it doesn’t give your processor an excuse to charge you whatever they want to.
Take out your statements. Audit them each month, and see if you’re paying more to accept credit cards now than you were six months ago or last year. If you haven’t been diligent or had a professional audit, there’s a strong probability that you’re overpaying.