by Matt Rej
Merchants who negotiate a cheap discount rate on credit card processing aren’t always getting a good deal. Because the discount rate (your processor’s base markup) is only a portion of your total costs.
I see this all the time, practically on a daily basis.
A business feels good about the 0.10% markup they were quoted by their processor. But when they crunch the numbers, their effective rate is exceeding 3% or potentially pushing 4%.
That gap is frustrating. Not only are your processing costs higher than you expected, but pinpointing where those extra dollars are coming from isn’t always easy.
It’s often at least one or a combination of the factors below:
Your Processor is Overcharging You Elsewhere
There’s a strong probability that your discount rate isn’t the only processor-imposed fee on your merchant statement. While some extra fees are justified and tied to legitimate services you’re receiving, many are excessive and can even be disguised as network fees.
Nearly every processor has their own bag of tricks when it comes to padding their markup. So there’s no standard industry-wide fee that you should be looking for.
The key to identifying these is auditing your statement line-by-line and verifying each charge against published network fees.
Anything not tied to an interchange category or assessment is coming from your processor. Even if the network( Visa, Mastercard, Amex, Discover) is part of the fee name. Just because “Amex” is in the line item it doesn’t actually mean the fee is coming from American Express (and the Amex Support Fee is a perfect example of this).
You may have a 10 bps discount rate. But your processor’s true markup could easily be in the 50 bps to 100 bps range when you factor in all of the extra fees they’re charging you.
And they’re all negotiable.
Per-Transaction Fees on Small Tickets
In addition to the percentage-based markup on every card you accept, it’s common for processors to charge per-item or per-authorization fees on a flat rate per transaction.
0.20% + $0.20 per transaction is a common example you might see.
That $0.20 component doesn’t move the needle much on a $600 transaction. But on a $5 sale, it’s 4% on its own, before interchange fees and your discount rate even enter the picture.
This is often the culprit of a higher-than-expected effective rate for coffee shops, quick-service restaurants, parking lots, car washes, vending machines, and other merchants with a high volume of small-dollar transactions.
If your average ticket is consistently under $15, a low discount rate isn’t as important as the per-item fee that’s driving your effective rate higher.
You Accept Lots of Commercial, Rewards, and International Cards
While your discount rate is the same on every card, the underlying interchange rate is not.
A regulated consumer debit card carries one of the lowest interchange rates available (just 0.05% + $0.022 per transaction). Whereas premium rewards credit cards processed (card-not-present) online can jump into the 2.40% to 2.70% range.
International assessment fees can add to that number.
None of this is your processor’s fault. As interchange and assessments are passed through at cost and aren’t something they can control.
There are some interchange optimization programs that can help you save some money here (like CEDP for commercial cards or DCAP for online consumer cards). But if an expensive card mix is the reason why your effective rate is high, it’s even more important for you to identify any excessive processor markups that can be negotiated. Because you can’t negotiate the network fees.
Interchange Downgrades
A downgrade happens when a transaction fails to qualify for the interchange rate it would have received. This pushes you into the most expensive interchange category.
For more cost context, Visa’s non-qualified consumer credit rate is 3.15% + $0.10 per transaction. That’s just the downgraded interchange rate before your processor discount rate gets added on top.
And unlike the card mix that you can’t control, lots of interchange downgrades are something you can actually fix.
Common causes include:
- Keying in card numbers instead of swiping, dipping, or tapping
- Swiping a chip-enabled card that could be tapped or dipped
- Missing AVS or CVV data on card-not-present transactions
- Missing Level 2 or Level 3 data on commercial cards
- Authorization and settlement amounts that don’t match
- Delayed settlement
Downgrades can show up on interchange-plus statements as “EIRF” or “standard” or similar labels. Having a handful is normal. But if they make up a meaningful portion of your volume, it’s money that you can easily recover by changing your processors.
Your Discount Rate Went Up Without You Noticing
You may have initially agreed to a 0.10% or 0.15% discount rate when you signed your merchant agreement. But over time, your processor may have increased your rate without you realizing it.
Processors are typically obligated to notify you at least 30 days prior to an increase.
But those notices aren’t always transparent. We often see them buried in statement attachments or mentioned as a single sentence within a large block of text. Sometimes the new rate isn’t even spelled out. It’s just a message saying that your discount rate is one of the many fees that “may” be “changed” while hiding behind an interchange update.
Small increase every few years is normal, and can be justified if it’s a bump from 12 bps to 15 bps or something like that.
But we’ve seen extreme examples of processors increasing discount rates anywhere from 1% to 2.25%, which is absolutely ridiculous.
Add-On Fees and Value-Added Services (VAS) That Grow With Your Volume
Small, fixed monthly charges aren’t usually a huge problem when it comes to your effective rate.
Is it annoying if your processor imposes something like $15 or $25 for some type of PCI compliance-related charge? Sure. But it’s nothing to lose sleep over.
The ones that really move the needle are the add-ons tied to your volume or charged as a percentage. That’s effectively just a way to pad your discount rate on another line item.
For example, Elavon charges an extra 0.08% on your entire volume if you opt for monthly billing instead of daily billing.
Worldpay has been enrolling merchants into a free trial of its FraudSight service, which automatically converts into a paid service that includes a monthly fee and extra $0.05 per transaction.
These are just two of the literally hundreds of different add-ons being pushed by processors industry-wide right now. And as value-added services continue getting rolled out, these costs are only going to multiply exponentially if you’re not cautious about which services you really need.
Tiered Pricing Disguised as a Low Rate
Some merchants think they have a low 0.05% or 0.10% discount rate. But they’re actually on a tiered pricing contract, and that low number is the “qualified” rate.
With a tiered setup, transactions typically fall into one of three buckets: qualified, mid-qualified, and non-qualified.
The processor decides which transactions land in each one. And the qualification criteria is often titled in their favor more than you might realize. Only basic consumer credit cards and debit cards accepted in-person may qualify for the cheapest rate.
Whereas the majority of your cards will land into one of the more expensive tiers, where the rate could easily be 4-5x more.
And tiered pricing isn’t always obvious. Some processors have come up with creative ways to push this model (Shift4’s simple changing pricing is one of them).
Padded Assessments
Assessment fees charged by the card networks are supposed to be passed through to merchants at cost if you’re on an IC+ setup.
But some processors unethically add a markup to these fees when adding them to your monthly statement, passing the entire cost off as something that looks like it’s being charged by the network.
These are extremely difficult to catch unless you know the actual rate of each assessment.
Fortunately, this isn’t as common as it used to be. But we still catch processors doing this more often than you’d expect. And the excuse is almost always that it was a billing error, which I honestly find hard to believe when this shows up repeatedly from the same usual suspects.
I have a separate guide on how to spot padded assessments that’s worth checking if you think your processor might be doing something sketchy on your account.
Final Thoughts
So what can you do about all of this?
The common answer for every single problem listed above is identifying it first. You need to figure out where those extra charges are coming from before you can address a fix.
And that means that every line item on your merchant statement needs to be audited, scrutinized, and compared against published rates. Every single month.
It’s a lot of work but it’s the only way to do it.
From there, every cost will fall into one of two categories:
- A network fee that can’t be negotiated but can potentially be optimized
- Processor markups that are negotiable
The latter is likely where most of your savings are hiding. It’s where we see processors sell you on a really “good” discount rate that’s genuinely low and competitive, but make up the difference elsewhere through a range of other creative fees hiding in plain sight.
If you need help identifying those savings opportunities and negotiating with your processor, our team here at MCC can help. Just reach out for a free audit.