CREDIT CARD PROCESSING EXPLAINED

By / Tom Bremner

On the topic of credit card processing, the most common complaint I hear from merchants is just how difficult it is to understand what they’re paying. I’ve found that the simplest way to make sense of these fees is to understand who’s profiting and what they charge.

There are three bodies who profit from credit card transactions: the networks, the banks that issue credit cards, and the processors who complete the transactions. Networks like Visa and MasterCard charge what’s called an assessment fee on any transaction that involves one of their cards. As of January 2020, Visa charges 0.1017% and MasterCard sets their rate at 0.1106%.

Banks that issue credit cards collect money whenever a consumer makes a purchase. The processor who completes the transaction pays them a prearranged percentage called the card’s interchange rate. There are a few different factors that go into where a card’s Interchange rate is set, but the two most important ones are the transaction type and the card’s reward system. A credit card’s reward system has the largest effect on a merchant’s rates. The better the card, the higher the interchange rate.

Transaction type refers to how a purchase is processed, which has a significant effect on fraud rates. Rates are reduced on lower risk transactions like repeat charges to the same credit card because this pattern indicates a relationship between buyer and seller. It benefits all of us when steps are taken to minimize fraud and that includes reduced rates for the merchant. Savings can be substantial in this area because Interchange rates run from 1.10% to 2.79% at present.

Now we’re left with the processor who completes the transaction. In Canada there are now six major processors. Unlike the networks and card-issuing banks, processors have no limits on what they can charge, other than what competition and good sense impose. I’ve seen fair profit margins, ridiculously low margins and ridiculously high margins. Collective bargaining is a great way to minimize this cost. BCWCA members receive a group rate that keeps the processor’s mark-up at a very low level.

On most processing statements you’ll find an estimated discount rate. This is the average overall rate you paid for that month. Take this number, subtract the interchange rates and assessment fees, and you’ll have your processor’s mark-up.

Once you’ve determined your processor’s profit-margin you’ll be in a far better position to go out and collect competitive bids. Just be sure that you look beyond the rates and take into account non-financial benefits like access to local account management,

sound data security advice, and technological expertise. These are often more important than cost savings. ▪

Baseline has an excellent track record of working with construction and building supply organizations. Association Sales Director and Certified Payments Professional Tom Bremner brings extensive experience in minimizing the cost of collections through a deep understanding of credit card processing.