We all understand that merchant accounts are beneficial for small businesses. But do you know how to take advantage of those benefits? Here are a few easy ways to see if you’re getting the most out of your merchant account.
Effective Rate
Understanding your effective rate is a quick and simple way to see how much you are paying for accepting credit cards. Identifying your effective rate is simply, take your total monthly fees divide them by your total gross income multiplied by 100.
For example:
Total credit card sales in May: $98,511
Total fees for May: $5,907
5907 / 98511 x 100 = 5.99%
Use this to analyze several monthly statements. Does your rate remain relatively consistent? This helps you see the “bigger picture” of what you are paying.
Types of Fees
Let’s start out with the basics. There are two different types of fees: wholesale and markup. Wholesale is the card (VISA, MC, AMEX, etc.) and the banks who issue those cards. These fees are pretty standard and you don’t have much control over them. Markup includes the processor, Merchant Service Provider (MSP) and additional service providers which include gateway fees or equipment.
Markup is what will vary between Merchant Service Providers. They either offer a low percentage and higher fees, or just the opposite, a high percentage and lower fees. Effective markup is the interchange fee separated from the markup fees from your Merchant Service Provider.
There are two models for this. Interchange plus pricing OR a membership. Membership is a monthly fee that is assessed instead of a markup over the interchange fee. Interchange blended with markup pricing is a flat rate model offered by merchant aggregators like PayPal, Square and Stripe. This is simple to understand but you generally pay more for this.
As you review your monthly statement, you can get into much more depth but understanding these basic concepts will help you quickly assess if you are getting the best rate for your credit card processing. Most retailers will benefit from a cost-plus model from a reliable Merchant Service Provider. Just like it is important to have a good relationship with your regular vendors, developing that same relationship with your Merchant Service Provider is important.