Introduction

Merchant accounts and credit card processing systems can be very confusing for business owners seeking new solutions. There is an awful lot of information to wade through when you begin shopping for a credit card solution and without some basic information about what exactly you’re looking (which many credit card companies leave out intentionally) it can become a frustrating experience and you may either give up or just ” go with that one” because you’re really not sure what would be the best. I’d like to provide that basic information in this article so that you can be prepared when faced with such decisions.

Interchange Rates (Interchange Plus Merchant Accounts)

You may have seen this term thrown around and never really thought much about it, however, it is a very important piece of information to know and understand while shopping for merchant accounts.

Credit card companies (Visa, MasterCard, Discover) have joined to follow some standards when it comes to the rates involved with processing credit cards. The Interchange Rate is the rate at which these credit card companies charge business owners for processing different types of credit cards.

Transaction rates can vary drastically depending on the type of card that was used during checkout and the environment within which that card processed as well, but will generally fall somewhere between 1% and 3%.  Variables that can result in different rates include but are not limited to:

• Card Present vs. Card Not Present (Internet, Phone, Fax, etc.)
  • If the card is physically present at the time of checkout a lower rate is charged because there is a lower risk of fraud on such a transaction.
• AVS (Address Verification) Match of Mismatch.
  • If the address entered during checkout (if any) matches the billing address that the card issuing bank has on file the merchant will receive a lower rate. Again, this is because of a lower risk of fraud. This is reason you might notice many retail stores requesting a zip code when you use your credit card.
• PIN Entered Transactions
  • The use of debit cards to make purchases is a very popular practice in use today. When these cards are used there is no credit involved…it’s actually just like a check or cash. This can only be recognized by merchant account systems, though, if the user enters their 4 digit PIN to validate the debit transaction. If a PIN is not entered the card will be processed as a standard credit card and will receive such rates.
• Company / Corporate Cards
  • Business credit cards are generally charged higher rates than personal credit cards.
• American Express Cards
  • American Express does not follow the same standards as Visa, MasterCard, and Discover. They set their own rates and are often quite a bit higher than what the standard Interchange Rates offer.

These are just a few of the things that can effect the rate you will receive as a merchant processing credit cards.  In reality there are over 100 categories that credit cards can fall in to and each would receive a different rate.

This Interchange Rate is the rate that an ISO (Independent Sales Operator) will receive.  These are the companies that offer merchant account services to the majority of the business owners out.  They make their money by adding a mark-up on to the Interchange Rate they receive, hence the term Interchange Plus.  Your job while shopping is to find the merchant provider that has the lowest mark-up.

Interchange Plus Advantages

These types of merchant accounts can be an excellent choice for business owners for many reasons.  They can provide the lowest possible rate for card-present transactions like point of sale credit card swipes, and the same account can be used online with your website to process cards at card-not-present rates.  Quite simply, you’ll get the lowest rate possible no matter what type of card was used.  If you’re accepting lots of cards via credit card readers or if you know you’ll be accepting a bunch of debit cards, for example, you’ll most likely want to go with Interchange Plus.

Interchange Plus Disadvantages

These merchant accounts can be rather confusing because of the wide variety of transaction rates you will receive.  Also, the statement you’ll receive from Interchange Plus merchant accounts will look littered with various “nickel and dime” type fees.  These fees all originate with the Interchange Rate and are often times an area where ISO’s will take advantage of mark-ups to make their profit.  This is one area you want to be careful with Interchange Plus accounts.  DON’T BE FOOLED BY LOW TEASTER RATES!

Another potential problem with these types of merchant accounts is that the possibility does exist that you could pay higher transaction rates for your transactions than you would with a flat-rate account (discussed below).  If you happen to get a large majority of high-rate cards you could be paying around 3% or more for all of your transactions.  This is rare, but possible.

Flat-Rate Merchant Accounts

Another type of merchant account you’ll come across (though not nearly as many) is a Flat-Rate merchant account.  These types of accounts generally offer a single rate across the board no matter what type of card is used (accept for Amex, of course, because again, they don’t follow the standard rate practices.)  Your rate is typically based on your monthly volume of sales and will be somewhere around 2.2% – 2.9% in most cases.

Flat-Rate Merchant Account Advantages

This type of account can be far less confusing for business owners.  The statement is very clean and simple.  You know exactly what you’ll be charged on every transaction no matter what type of card is used.  The peace of mind that comes with these types of accounts is often enough to seal the deal for business owners shopping for merchant accounts.

Flat-Rate Merchant Account Disadvantages

The lowest rate I have ever seen given for a flat-rate is account is with PayPal.  They offer 2.2% flat-rate, but only if you’re a high volume seller ($10k/mo).  As such, you could end up paying quite a bit in transaction fees through-out the course of a year if you’re paying 2.2%, 2.5% or more vs. the 1.5% you could typically be getting with an Interchange Plus account if you’re doing point of sale card swipes.  Depending on the volume of card present vs. card not present transactions you make through-out the year you could end up paying quite a bit more with a flat-rate merchant account.

Conclusion

This quick overview of Interchange Plus and Flat Rate merchant accounts was intended to provide a quick lesson on what to look for while shopping for a credit card processor.  Armed with this knowledge you’ll surely find the best merchant account for your business!