Credit Card Processing Vendors Can Cost Thousands in Lost Revenues (Part 2)

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In Part 1 of this series I discussed how we were ripped off  by our former credit card processing vendor   – to the tune of about $30,000 over a few years.

In this second of my 5 part series on credit card processing vendors (not to be confused with the credit card vendors themselves or the banks behind them), I will discuss why online retailers pay higher credit card processing fees than traditional businesses.

As a B2B services business, most of our clients pay by check or, more commonly these days, by wire transfer, so NuRelm’s 30,000 in lost revenues could have been a lot higher if our clients paid exclusively with credit cards  – even more so if all of our clients paid with credit cards remotely (over the Web or by phone).

Those of you who run high-traffic e-commerce businesses that rely solely on electronic credit card transactions should pay close attention to our findings:

  1. The most expensive kind of credit card transaction is an electronic (Web) or “over the phone” transaction, as these are where the most fraud occurs. So, as an online retailer you are paying a significantly higher processing fee than a brick and mortar store.
  2. The most expensive type of card to accept is a business credit card (higher incidence of fraud/nonpayment than a consumer credit card ) so if you are a B2C online retailer you get a break here. However, if you are a B2B online retailer you are in the highest risk category, and your cc processing vendor is charging you a premium for processing businesses credit cards electronically.
  3. American Express charges about twice the amount of the other credit cards, so anytime a customer pays with an American Express card, you are paying a premium. If you are selling high ticket goods or services, then you should consider charging a 1% surcharge to offset this extremely high processing cost. This is a pass-through charge that goes directly to the credit card vendors (American Express, VISA, etc) and the banks backing the cards, so there is no possibility of negotiating a lower Amex rate with your cc processing vendor.

In Part 3 I will discuss the three pricing schemes most commonly used by credit card processing vendors (flat rate, tiered, cost plus) and why cost plus pricing  is the best way to go.

If anyone has specific questions,  is researching credit card processing vendors and wants recommendations, or wants to offer up stories/advice, please leave a comment.

Comments

  1. Hi Mona,

    It’s great that you’re shedding light on the opaque world of credit card processing, but I wanted to chime in to elaborate on several points you made. If you’d like, you’re welcome to shoot me an email so that we can arrange a time to talk so I provide the details/fundamentals of processing fees that you can use in future articles.

    Regarding your first point:
    A card-not-present transaction is not necessarily more expensive than a card-present transaction. In fact, the two types of transactions have the exact same cost for a regulated signature debit card.

    It’s important to understand that “cost” is involved at three different levels of the processing scheme. The processor’s markup is typically what is responsible for significant cost increases when going from a card-present to a card-not-present transaction. The cost increase at interchange (the processor’s cost) is actually only about 0.30% on average.

    Regarding your second point:
    A credit card issued to a business actually has the potential to cost less to transaction than a credit card issued to a consumer. It’s a matter of securing the optimal pricing model that allows a business to pay interchange and assessments at cost, and then to meet interchange’s enhanced data requirements. To put it in numbers, a level III corporate card has an interchange rate of only 1.95%. This is exactly the same as a card-not-present Visa consumer reward card.

    Additionally, there are special categories of interchange that apply specifically to business-to-business transactions, and these interchange categories reduce costs quite a bit (about 0.65%) over traditional card-not-present commercial interchange.

    Regarding your third point:
    American Express has recently introduced a new pricing model called Opt Blue that has the potential to bring its pricing in line with that of Visa and MasterCard. Processors have gamed the system a bit, but if you know what to look for, Amex is actually not much more expensive than other card brands.

  2. Hi Ben,

    Thank you for your response.

    I maintain (as several of your counterparts at a number of cc processing vendors have confirmed) that the vast majority of “card not present” cc transactions are more expensive than “card present” ones, whether at the B2B or B2C level.

    I did not research (and had never heard of) a “regulated signature debit card”. For anyone who’s interested, a regulated signature debit card means that the bank issuing the consumer’s debit or prepaid card has over $10 billion in assets. If your customer happens to possess and use one of these regulated signature debit cards when he/she initiates an electronic purchase, then you may get a small price break on the processing fee, depending on the pricing structure of your specific cc processing vendor.

    Regulated debit card transactions have a maximum rate cap as outlined in the Durbin Amendment. To read more on the Durbin Amendment, go to https://en.wikipedia.org/wiki/Durbin_Amendment.

    Your point 2: Yes, there are many cc processors out there that charge widely varying rates to perform the same service. Part of the reason that I decided to write this series.

    Point 3: I know that the cc processing vendors have no sway in the interchange rates that the banks charge, so, while I’m glad to hear that there is some special category of interchange for B2B transactions that reduces the cost, B2B merchants still pay, on average, a higher rate than B2C.

    Would love to know more about the Amex Opt Blue pricing model and how merchants can tap into that savings.

    Thanks,

    Mona

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