Let’s start off by saying that no business is really excited about accepting credit cards.  Despite the convenience it allows for transactions, I’ve yet to meet anyone who is happy to pay a percentage of their income for this convenience.


However, I don’t think paying a percentage would be such a problem if it wasn’t so convoluted.  It’s fairly common opinion that the merchant services industry is made up of a bunch of crooks.  The reason for this opinion is because most commonly the merchant services companies can not actually give you REAL answers to where the fees, rates, pricing, is all coming from.  The industry is well versed in providing answers that seem plausible to common folk, however any seasoned veteran would know they are not getting the whole truth, typically the “canned response” truth.  You may even find answers that are mixed in half truths in order to make the answer seem even more plausible.  The merchant services industry has done an excellent job of making it impossible for anyone to understand their rates without someone who is well educated in this field.

Tied up in a Knot of Complexity

The complexity in pricing causes great mistrust between the merchant and merchant services companies.  To make matters worse the industry itself is actually quite complex.  What this means is there are a large percentage of people who work in the industry that they themselves do not actually know how exactly everything works.  Do the rates, fees, and cost structures need to be this complex?  I don’t think so, but most often times they are.

With the complexity in mind, I’ll do my best to try to explain to you a basic cost structure.  The two most common structures you’ll see are Tiered and Interchange.

What’s Interchange?  

According to Wikipedia:

Interchange fee is a term used in the payment card industry to describe a fee paid between banks for the acceptance of card based transactions. Usually it is a fee that a merchant’s bank (the “acquiring bank”) pays a customer’s bank (the “issuing bank”); however there are instances where the interchange fee is paid from the issuer to acquirer, often called reverse interchange.

If you understood that you don’t need to read the rest of this article.

To simplify, let’s just say that interchange is the WHOLESALE cost to process a particular credit card.  The complexity with interchange is in the actual wholesale cost.  The reason for this is that every single credit card has a DIFFERENT interchange fee.  This is due to the complex nature of the cost structure that you just read about from wikipedia.


(Click to Enlarge Diagram)
This diagram shows the percentage hike when you have a tiered rate.  The red area is the profit margin of the merchant services company.  The blue is the interchange (wholesale).
Tiered Rates vs Interchange Plus Rates

The tiered rate system is the rate system that most people are familiar with.  Please be aware of how complex tiered rates can be.  They can be even more complex than interchange plus rates.  Merchants are often unaware of the complexity of tiered rates because of how it’s commonly sold.  The salesman typically sells the services by showing the lowest tier. (i.e. 1.65%)  However, you should know that there is often more than one tier.  This is where it can get complex.  The requirements for the tiers(what type of credit card falls under each tier), the number of tiers, and the percentage that is associated with each of the tiers is all different from contract to contract and from merchant services company to merchant services company.  Commonly the lowest percentage tier doesn’t cover the majority of the cards that are processed.  The majority of the cards that are processed will typically fall under the higher tiers (higher percentages).  This can easily explain why a merchant who signed up for 1.65% is paying much more in reality.

The way the interchange plus system works is fairly simple.  A set percentage (let’s say one percent) is added to the interchange rate.  So for our example, whatever the wholesale cost, the merchant will never pay more than 1% above that.  So, if the wholesale cost was .5% then the merchant would pay 1.5%.  In the diagram below you can see that the cost margin is typically far less than a tiered system.

Most major companies are on an interchange plus system.  Be aware that some merchant services companies have been known to add their own “interchange” rate on top of the ACTUAL interchange, making the wholesale seem higher than it actually is.  This tactic is done to make the merchants rates seem lower than they actually are.  This scenario is a bit harder to catch and may require a professional to help you figure this out.

(Click to Enlarge Diagram)
This diagram shows the same percentage rate above the interchange.  The green area is the profit margin of the merchant services company.  The blue is the interchange (wholesale).
Rates are only part of your fees

Most merchant services companies have a plethora of fees and costs to pass along to you.  Please know that many of these fees and costs are made up by the merchant services company for one thing or another and have nothing to do with interchange (wholesale).  One actual cost that you will need to pay is the PCI compliance fee.  Unfortunately, the industry has made this fee convoluted as well by tacking on their own fees onto the compliance fee or increasing the fee significantly more if they are non-compliant.

One fee that you can easily save on is the statement fee.  These days you should be able to receive email statements or login to your account online.  You shouldn’t have to pay for a statement fee, unless you want paper statements.

NO Leases please

NEVER EVER sign a lease for a credit card terminal.  This is probably one of the biggest tricks of the industry.  Merchant services companies will actually give you the lowest rates and fees (for real) and then get you to sign a costly lease.  The thing you should know about leases is that legally they are iron clad.  You can’t break them as easily as a merchant services contract.  Typically (sometimes people sign contracts with very unfair termination clauses) a merchant services contract will cost a few hundred dollars to terminate.  Leases are typically an additional contract on top of the merchant services agreement.  Breaking a lease may also hit your credit report.  Do not commit to a lease for credit card terminals.  Credit card terminals are not expensive and many merchant services companies will lend/rent them to you for FREE if you negotiate.

Read the fine print.  Before you sign ANYTHING please have an attorney or someone else that is knowledgeable explain to you what you’re committing to.  Make sure you can easily get out of the Merchant Services contract and that all the penalties and fees are clearly stated and understood.

If you signed a lease and a merchant services contract and you want to get out of it.  Don’t use the equipment or services and return before 30 days.  Even if on the contract it says you can’t return it, as long as everything was UNUSED and cancelled within 30 days they are obligated to cancel your contract without penalty.  Beyond this method you have very little recourse.

Spoken Words Hold No Value

Don’t listen to anything the salesperson says.  Why?  Because none of it is legally binding, it even says so on many contracts.  So if they tell you something it’s 100% worthless unless it’s officially written into the contract.  Nothing they say to you is going to help you.  Whatever you’re agreeing to it must be in writing or walk away.

Ask questions, research, and compare

Knowledge is your power to get the best rates and the least amount of fees.  You should get as many quotes as possible and always show the last guy the lower quotes that you received.  Know who you’re working with.  Check to see if the company is reputable.  They should be on the PCI-SSC website.



Relationships can help you get past the complex web of red tape.  Despite the industry as a whole there are still good people out there that want to help you.  It’s annoyingly complex, but with the right help you should be able to find the right merchant services company that will be able to show you transparency in fees, rates, and cost structure.  Find a company with people you can trust.

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