The card brands (Visa, Mastercard, American Express, and Discover) maintain a collection of approximately 1,442 categories and classifications of pricing categories. Each category has specific rules and mapping characteristics.
Weights are crucial when evaluating the effective rate because they accurately reflect the importance of each category.
The Effective Rate (weighted average) is a calculation that takes into account the varying degrees of importance of the numbers in a data set. In calculating the effective rate, each rate in the data set is multiplied by a weight before the final calculation is made.
All card brands (Visa, Mastercard, American Express, and Discover) charge dues and assessments. These fees are the same for every merchant in the United States, regardless of processing volume, transaction count, or average transaction amount. Dues and assessments are very similar to sales tax. They can be charged as separate line items or included in the pricing tiers. For transparency purposes, Velocity Processing shows the dues and assessments charges, by card brand, in the "Payment Network and Associated Fees" section of your merchant statement.
The primary card brands are Visa, Mastercard, American Express, and Discover. Each brand maintains independent rules for card qualifications, downgrades, assessments, and per item fees.
Between the four card brands, there are approximately 1,442 classifications of cards. Prices vary between classifications, and transactions can move in or out of classifications depending upon the processing method and the data accompanying the transaction.
The method in which a payment is processed can impact the cost of a transaction. Methods fall into one of three categories. (1) Card Present, (2) Hand Keyed, and (3) Ecommerce.
With the evolution of electronic payments, Card Present represents all face-to-face transactions in which the card data is read and captured through a chip, a magnetic stripe, or through near field communication (i.e., ApplePay). Hand keyed transactions represent transactions that are manually keyed or electronically stored using tokenization. Ecommerce transactions represent payments made through an online shopping cart or web-based interface in which the customer enters payment details and initiates the payment.
The average transaction amount impacts the effective rate because it represents a fixed cost in a variable cost equation. Consider a business that processes $100,000 in a month over 200 payments (we’ll call this Business “A”). The average transaction amount is $100,000 / 200 = $500. With a $500 average transaction and using a 2% rate plus $0.20 per transaction, the average transaction would incur fees of ($500 * .02) = $10. Add in $0.20 for the transaction fee and the total cost per transaction would average $10 + $0.20 = $10.20. Now take the same example with a company that processes $100,000 in a month over 1000 payments (we’ll call this Business “B”). The average transaction amount is $100,000 / 1,000 = $100. With a $100 average transaction and using the same 2% rate plus $0.20 per transaction, the average transaction would incur fees of ($100 * .02) = $2.00. Add in $0.20 for the transaction fee and the total cost per transaction would average $2.00 + $0.20 = $2.20.
Comparing Business “A” to Business “B” using the identical rate structure, Business “A” ($500 average transaction) pays $10.20 in fees per transaction, making the effective rate equal to 2.04% ($10.20 / $500). Business “B” ($100 average transaction) on the other hand, pays $2.20 in fees per transaction. This makes the effective rate equal to 2.20% ($10.20 / $100).
Empirically, there is a 7.84% increase in the effective rate with all other variables constant. This is entirely attributable to the change in the average transaction amount.
Chargeback frequency impacts the effective rate because it represents a fixed cost in a variable cost equation. Consider a business that processes $100,000 in a month over 200 payments with zero chargebacks (we’ll call this Business “A”). Assume that Business “A” has an effective rate equal to 3%. Compare that to Business “B” that pays $3,000 to process $100,000 (an effective rate of 3%), but incurs $300 in chargeback fees. Total fees paid for Business “B” are $3,300 making the effective rate 3.3% ($3,300 / $100,000).
Empirically, there is a 10% increase in the effective rate with all other variables constant. This is entirely attributable to expenses associated with incurring chargebacks.
International cards carry international conversion fees and assessments. Subsequently, accepting international cards will increase the effective rate as the international fees are included in the cost of acceptance. International card acceptance is common for businesses that accept payments from customers overseas or businesses located in a geographical area where residents / visitors have credit cards issued by foreign banks (i.e., South Florida).
The card brands charge international assessments up to 1%. The result can be a much higher effective rate for a business that deals with customers using credit cards issued by international banks, as opposed to an identical business where customers are not using credit cards issued by international banks.
Think of a stock purchased at two (2) different times during the month. To determine the average cost per share, you would have to calculate the weighted average using the quantity purchased and corresponding purchase price. The same principle is true when determining processing rates due to variations in card costs.
There are a lot of myths in the world of credit card processing. From "My account has no limits" to "Our bank is our processor", we've heard a lot of inaccurate statements. Let's examine the top five (5) myths in the industry and help you separate fact from fiction.
All processors systematically monitor daily activity to identify unusual transactions and evaluate monthly volume. Suspicious or atypical transactions may result in funds being held, while exceeding the monthly volume limit may result in the inability to process or the perpetual holding of funds until the account is reviewed and the parameters are adjusted.
The card brands (Visa, Mastercard, American Express, and Discover) require merchants to be Payment Card Industry Data Security Standard (PCI DSS) compliant. This is accomplished by completing a Self Assessment Questionnaire (SAQ) and running network vulnerability scans. The SAQ is required annually, while scanning intervals vary depending upon the type of account. Failure to maintain compliance may result in a data breach, resulting in possible fines, penalties, or account termination.
With over 1,400 categories within the card brands, businesses do not pay one rate (i.e., flat rate). Those who believe that they pay a single rate actually have a low base rate (i.e., 2.00%) and then pay downgrades & surcharges listed separately on their merchant statement. Sometimes the base rate is taken out before the deposit hits the bank. This gives the appearance of a low rate because only the downgrades and surcharges are outlined on the merchant statement.
Banks do not process credit card transactions. Acquirers, by definition, are financial institutions that processes credit and debit card transactions on behalf of the card issuers. Banks tell their business customers that they provide merchant services, however they simply have a contractual arrangement to subcontract / outsource the merchant services to an acquirer.
The card brands (Visa, Mastercard, American Express, and Discover) have specific rules about settling a chargeback. Understanding the process and knowing the secrets will be the difference between winning and losing. Unnecessarily losing a chargeback can cost a business thousands or dollars, if not tens of thousands of dollars.
Would you trust your personal finances to a person who has little-to-no experience in investing? Of course not! Most people offering "merchant services" bounce around financial departments at banks (i.e., loan processing) and have no practical knowledge or skill with credit card processing.
Anyone can "evaluate" a merchant statement and email a savings graph. The key is implementation. "How are they going to facilitate the savings?"
The internet is replete with customer reviews. Check out the Google reviews and other articles. Velocity Processing maintains a 4.7 rating on Google.
Velocity Processing is a registered Independent Sales Organization (ISO) / Member Service Provider (MSP) of Elavon, Inc. Georgia, a wholly owned subsidiary of U.S. Bancorp, Minneapolis, MN. Elavon has been processing electronic payments for 38 years and maintains an "A+" rating with the Better Business Bureau.