Choosing a Credit Card Processor

Recently I did some research for a client on selecting a credit card processor. I knew this was a complicated topic but found out that it is even more complex than I thought. 

If you just start googling “Credit Card Processors”, you will find a lot of pages that compare discount rates. The comparisons usually start with a “Qualified” rate. The “Qualified” rate is the lowest rate available, but it’s not the one you should use to compare rates! It’s likely that the bulk of your transactions will not fall into this category.

To get the “qualified” rate, depending on your processor, a lot of things have to be in place. You will probably need to be swiping the card. The card is most likely a bare-bones-basic type of card that is not a business card, not a rewards card, and the transaction is not international.

The other 2 types of rates are the “non-qualified” (the highest rate) and the “mid-qualified” rates. The processor can decide which cards or transactions will fall into either of these categories. Rewards cards will often be mid-qualified, as will keyed-in transactions. “Non-qualified” cards or transactions will often be corporate or certain types of rewards cards, or the transaction may be international. Other things that can push you into this rate are not using the Address Verification System (AVS), a mismatch between the billing address and the address associated with the card, or not batching out the transaction within 48 hours.

Because the definition of which transactions fall into each of these categories can vary, it’s important to understand how your processor is defining the categories.

Using these 3 types of discount rates is considered to be a “tiered” plan. Alternatively, you may be offered an “Interchange-Plus” rate. There are standard, fixed rates associated with all cards, the most basic of which is the “Interchange” rate. An “Interchange-Plus” rate will add a certain percent to the base rates for each card (this can include the interchange rate, plus any other assessments associated with that particular card such as rewards programs). 

Which plan is most beneficial depends largely on how your processor defines the 3 tiers in the Tiered plan. When I was shopping, I was told that the Interchange-Plus plan would always be the best, but when I checked back with the bank, I found that my client would actually be getting the bulk of the rewards cards transactions classified as “Qualified”, making it a much better deal, considering how many rewards cards are being used.

Besides the discount rate, other fees to look out for are monthly or annual fees, early termination fees if you are in a contract, Gateway fees if you process cards online (and PCI Compliance fees as well--PCI Compliance is a topic for another day) and the per-transaction fee. If you will be swiping cards, will you be buying or leasing the equipment (buying generally works out better, and you don’t need to buy from your processor).

Be sure to have a list of questions prepared when shopping and ask a LOT of questions, particularly about the fees and how transactions are classified in the Tiered System. I found when talking to some of the broker companies that the sales people really didn’t know some of the answers about those fees and how the particular transactions would be classified.

Also, find out how they get paid. Some processors deduct the fee each month from your checking account. Others deduct the fee from each settlement. You may get a better rate if the fee is deducted from each settlement, but be sure you factor in the extra time it may take for data entry to your accounting software and to reconcile your bank statement. I use QuickBooks a lot to do client work, and adjusting each deposit for the fee takes additional time that I charge the clients for. I do have a workaround, but it adds an extra step and that takes time for reconciliation. In any event, if you are paying for bookkeeping, you could wipe out savings in the credit card processing fee by paying for extra bookkeeping time.

The best fit will probably depend on how you process transactions (swiped, keyed-in, online, etc), the number of transactions you will process, the average dollar amount, whether you have international transactions, etc. If you have a lot of activity, a monthly fee may be offset by lower discount rates. If you only have occasional activity, you may want to avoid the monthly fee and pay a higher rate.

Good luck and happy shopping!