Small Business Owners: This Is the Biggest Misconception About Merchant Account Pricing

By Frank Kehl

While cash and checks used to be the primary means by which consumers paid for their purchases, today people are increasingly using credit and debit cards when it’s time to check out. For businesses, being able to take “plastic” is more important than ever.

Accepting credit cards has traditionally required having a merchant account, and they can be very expensive. With an assortment of fees, complicated processing rates, and long contracts filled with fine print, it’s challenging to estimate the cost of a merchant account.

Why Processing Rates Aren’t Everything

Selecting a good merchant account provider for your business can be a bewildering experience. Competition is fierce, and there are dozens of providers out there vying for your business. Almost all of them will claim to offer you lower processing rates than their competitors.

Whether you check out an account provider’s website or talk to one of their sales agents, the story is the same: We have the lowest rates in the industry. There are two things that are wrong with this claim. First, it’s usually not true. Processing rates are complex and highly variable; many companies will quote you their lowest possible rate without telling you that the other, more common rates are three or even four times higher. Second, it’s misleading because it ignores the cost of all the fees you’ll also pay to maintain your account.

With so many variables to consider, it’s difficult to estimate the true cost of a merchant account. Bombarded by “lowest rate” promises and pressured by sales agents, many merchants are under the misconception that the company offering the lowest rates will be the least expensive overall. However, processing rates are only one part of the equation. If you don’t also consider your account fees, your merchant account will end up costing you much more than you thought it would.

Processing Rate Plans

The most common rate plans are tiered, interchange-plus, and flat-rate pricing. Tiered pricing consolidates processing rates into three tiers: qualified, mid-qualified, and non-qualified transactions. It’s the most common pricing model offered by merchant account providers, but it’s usually the most expensive as well. While rates for qualified transactions are reasonable, most transactions will actually fall into the mid-qualified or non-qualified tiers, which have much higher rates.

Interchange-plus pricing is more complex than tiered pricing, but it’s also more transparent. Interchange-plus rate quotes allow a merchant to see how much of a processing charge is going to the credit card associations (i.e., Visa or MasterCard), and how much their processor is keeping. Interchange-plus rates are generally lower than tiered rates.

Flat-rate pricing is used by companies like Square to bring processing costs down. Every transaction is processed at the same rate, making it easier to estimate your costs. While flat rates are usually higher than either tiered or interchange-plus rates, they also cover the costs of maintaining your account. This eliminates most monthly and annual fees, creating a fairer “pay as you go” pricing model.

Flat rate pricing generally works best for small or seasonal businesses that only want to pay for their account when they are using it. For large businesses with a high processing volume and for whom fees aren’t a significant expense, interchange-plus is usually the best option. There are no advantages to tiered pricing, regardless of anything a sales agent might tell you.

Fees, Fees, and More Fees

Merchant account providers are notorious for charging a variety of monthly and yearly fees to maintain your account. Besides a monthly fee, you’ll also have to pay for things like PCI DSS compliance, chargebacks, and terminal leases. If your business includes e-commerce, expect to pay extra for a payment gateway. Most providers offer optional services such as POS systems that also come with extra fees.

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