Payment Processing Pricing: What to Look For and What to Avoid

The payment processing industry is confusing and unfortunately, the pricing of payment processing is no exception. For business owners who are unfamiliar, processing pricing structures are a muddled mess of percentages, “basis points”, per transaction charges, monthly costs, recurring fees, and more.

That said, having even just a basic understanding of the most common pricing structures most commonly used by processing companies can help merchants make a more informed decision for their business.Before we delve into the various pricing structures used by processing companies, it’s important to make sure that we have a clear grasp of two extremely important concepts in the payments industry:Interchange is simply the cost of completing a transaction. Banks and credit card companies come together to determine these costs, so they are universal, no matter which processor you choose. Interchange rates charged to merchants are dependent on the type of card being used by the customer and the method in which the card information is being collected. That means that your costs may vary depending on whether your customer’s credit card information is being collected through a chip, a swipe, or simply punching in the numbers manually.Fees refer to any costs that are being charged above interchange rates. Remember that fees refers not just the rates quoted by processors, but can also refer to additional fees such as PCI compliance fees, batching fees, gateway fees, membership fees, and more. Since every processing company assesses these fees differently, it’s difficult for business owners to distinguish between general rates and additional fees. When evaluating pricing provided by a payment processor, business owners should clarify whether additional fees will be added to get a more complete picture of the total cost to their business.Now that we’ve covered some of the basic terminologies you need to know, let’s move on to the different pricing structures that you’re likely to come across while shopping for a payment processor.

Interchange-plus pricing

Like many other aspects of the payment processing industry, interchange plus pricing can seem both confusing and intimidating to merchants. However, this pricing structure is actually the most transparent pricing structure out there. In this structure, rates charged by the processor are clearly separated from the interchange costs so you know exactly what covers cost and what’s going into the processor’s pocket. Typically the processor’s margin is represented by a percentage of the transaction total plus a static amount.It’s here that you might come across the term “basis points”. A basis point is a percentage-based measurement that represents one-one hundredth of a percent. So, if a processor quotes “5 basis points and 12 cents per transaction,” that means that the merchant is paying regular interchange rates plus .05% of each transaction and 12 cents per transaction.Some companies using this pricing structure will charge a monthly membership fee in addition to their quoted rates. While it might seem counterintuitive, membership fees are typically a sign of a transparent processor. In exchange for these monthly amounts, membership processors will typically reduce fees (and, in turn, increase predictability) for their customers.An interchange-plus pricing structure is ideal for most merchants because of its transparency and adaptability. Since you are aware from the get-go of exactly how much money in a transaction is going directly to your payment processing company, it is easier to stay on top of whether you’re paying fair rates (and to spot when you’re being charged unnecessary fees).Because banks and credit card companies control interchange rates, neither you nor your processing company can guarantee that those rates will stay the same. However, if your processor uses an interchange-plus pricing structure, the amount of money that you are paying your processor will adapt to fit the interchange rate.

Pure percentage pricing

With a pure percentage pricing model, interchange costs are not separated from processor fees. Instead, processors charge a flat percentage of every single transaction. While this pricing structure may sound straightforward and simple, many processors who use pure percentage pricing will charge much higher percentages to ensure that they’re covering all possible interchange rates (regardless of card type or collection method) while also keeping some margin for themselves.While this pricing structure might be competitive for high-interchange transactions, it forces merchants to massively overpay for low-interchange transactions. Business owners should only consider a pure-percentage pricing model if their customers use high-reward (high-interchange) credit cards on a regular basis.Otherwise, the unnecessarily high fees will be devastating to a smaller business owner who needs to make every penny count.

Tiered pricing

Tiered pricing is a wolf in sheep’s clothing. While it looks just like an interchange-plus model from the outside, it has some traits that can prove very costly for your business. Tiered pricing structures have thresholds built in that allow for the processing company to drastically increase your rates whenever they are crossed. This means that you might pay an effective rate of 2% on one transaction and 9% on the next. It’s unpredictable, non-transparent, and expensive. When negotiating with a payment processor, make absolutely sure that tiered pricing is not a part of your contract.Although learning about payment processing pricing can be a tedious and confusing endeavor, it’s in the best interest of business owners to make sure that they understand how their current or future payment processor will be charging them. Having this knowledge under your belt can save you hundreds and hundreds of dollars annually as well as prevent you from doing business with shady processing companies that seek to take advantage of their customers.