One reality that all business owners must confront is narrow profit margins. One cost that eats into those margins is the thousands of dollars owners find themselves paying each year, solely for the purpose of accepting credit cards.
Thankfully, recent technological innovations and changes in laws have made credit card processing considerably more affordable for merchants. However, to find the most cost-effective option for their companies, business owners and executives alike need to understand what differentiates one processor from another — and why JetPay’s JetX Cash Discount Program may be the best solution on the market.
Understanding Credit Card Processing
Before looking at how payment processors differ, owners need to understand how credit card processing works. All merchant credit card transactions go through a process that involves paying fees imposed by three different entities. Those entities are the issuing bank, the card brand and the card processor.
Issuing banks, such as Capital One and Citibank, provide consumers with a payment card so that they can use their funds to make purchases on the go as well as online. Card brands, such as Visa and MasterCard, oversee the computer networks that connect issuing banks, retailers and their merchant accounts. Finally, card processors provide merchants with the equipment, software and support they need to accept credit card payments.
Say you’re the owner of a coffee shop. If a patron wants to pay for their latte with a credit card, you swipe their card and ping the patron’s issuing bank via the card brand network. If the transaction is approved, the issuing bank transfers funds to your establishment’s account and the sale can be closed out. In order to perform this transaction, the issuing bank, card brands and card processor all charge you their own fees.
Interchange, Assessment and Processor Fees
The fee an issuing bank charges to process a payment card transaction is called an interchange fee. Interchange fees are non-negotiable and are the same regardless of the issuing bank. However, the interchange rates will vary depending on a few different factors including what kind of card is processed, how it is processed and the merchant’s industry.
Assessment fees are fees the card brands, like MasterCard, charge for merchants to use their network. Like interchange fees, assessment fees are non-negotiable.
Lastly, payment processors assess a per transaction fee to facilitate the transfer of funds from the customer to the merchant. Processor fees are not standardized, meaning they are negotiable. As such, by carefully vetting and selecting the right processor, businesses can save money and better protect their bottom line.
Comparing Payment Processing Pricing Models
Although there are hundreds of different companies that provide payment card processing, their pricing models tend to fall into one of four categories.
One of the most popular pricing models is called tiered pricing. In this instance, processors charge a different percentage-based fee depending on how a transaction qualifies. The first tier, known as qualified, encompasses a business’ standard transactions. For the coffee shop in our previous example, these would be in-person transactions that involve a regular credit card that is swiped or dipped at the point of checkout.
A second category might be mid-qualified, which covers transactions where a card number is keyed in and/or a specialty card, such as a cash back rewards card, is used. The last category is non-qualified. Non-qualified transactions are those in which information capture, such as address verification, is not performed or which were not settled in a timely fashion.
In addition to being somewhat confusing in its implementation, tiered pricing is not ideal for budget planning. Owners can’t always anticipate what kind of transactions they’ll need to perform, meaning their processing costs will never be fixed.
Moreover, less than ethical providers boasting of low rates may neglect to mention that the advertised qualified rate may not align with a business’s most common card transaction type.
Another popular processing pricing model is interchange plus. In this system, a provider will charge a business for the cost of the interchange plus a flat authorization fee and/or a fixed percentage to cover specific customer service needs that may arise.
Because interchange rates are standardized, this pricing model is much more transparent than tiered pricing. For most merchants, it’s a much more cost-effective payment card processing solution.
The biggest drawback of interchange plus is the amount of connections between the merchant and the processor. The greater the distance between the processor and the merchant, the less control the merchant will have over their final price. Each of these connections will need to take a piece of profits—making the total amount of fees much higher. . Therefore, it can be beneficial to connect directly with a processor, cutting down the amount of middlemen in this transaction.
Using one of the newest models of credit card processing, flat-rate providers offer to process all of a company’s credit card transactions for a fixed rate. For example, Square charges a flat rate of 2.75 percent per transaction for all swiped or tapped sales and 3.5 percent plus $0.15 for keyed-in transactions.
The benefits of the flat-rate model are that pricing is transparent, simple and essentially fixed. Its main drawback, however, is that its fee structure is designed for simplicity, not competitiveness.
Additionally, the flat rate a company signs on for can change for various reasons, such as if its transaction volume increases past a certain point. Consequently, businesses that partner with flat rate providers may be penalized for having an unexpectedly successful quarter.
Saving the best for last, cash discount providers are the ideal option for businesses. Why? Because this model shifts the burden of credit card processing fees from the merchant to the customer.
JetPay’s JetX Cash Discount Program provides businesses with unlimited credit card transaction processing for a flat monthly fee.That fee does not go toward covering interchange and assessment costs. Instead, those nominal fees are factored into the retail price of a company’s products. However, when customers pay with cash, they receive a point-of-sale discount in the form of waived processing fees.
Understandably, some owners may be concerned about driving customers away by raising prices. However, successfully launching a cash discount system is largely a matter of messaging.
For one thing, a company that has partnered with a non-discount provider may need to raise prices anyway because of fluctuating processing rates. With the JetX Cash Discount program, merchants can accept credit cards without significantly increasing their overhead. Moreover, studies have shown that discount programs can actually bring in new customers — and in significant numbers.
JetPay also offers a range of user-friendly point-of-sale equipment that can apply this cash discount automatically. All owners then have to do is put up new signage and affix new price tags.
Additionally, JetPay offers innovative payment processing for desktop and mobile transactions as well as well as payroll and human resources. Simply put, JetPay has vertically integrated solutions for companies of all sizes.
Are you interested in slashing your company’s credit card processing fees? Contact JetPay and let us get you started with a free quote.