Shopping for the Best Rates

April 13, 2006

	Visited: 177
	Not rated
	Rate:

Shopping for the best merchant account rate is like shopping for anything else: you want the best value at the lowest price. Don't make the mistake of assuming that you'll get the same rate at every bank. Let's look at some of the terms that are important in credit card transactions.

Discount rate. The discount rate is the sum that's deducted and paid to the credit card company and the issuing bank. It usually ranges from 2.5 percent to 5.5 percent of your credit sales, depending upon the volume of your sales and the typical transaction size. The discount rate is comprised of the transaction charges, the interchange rate, and the transmission costs.

Transaction charge. The transaction charge is essentially the profit that the processing network makes. It's usually included in the discount rate, but it may be charged separately. The transaction charge is really the only element of the discount rate that you can negotiate. Ask each bank you visit about its transaction charge and then compare the numbers. If one bank has a transaction fee higher than another bank, ask the bank why the fee is higher. You should find out if you get any additional services for the higher fee.

Interchange rate. The interchange rate is the cost of processing the charge through the Visa or MasterCard network. The current interchange rate for swiped transactions is 1.30 percent for MasterCard and 1.35 percent for Visa.

Non-swiped surcharges. Federal regulations require an additional charge of about 0.30 percent per transaction to the cost of non-swiped transactions. Thus, the total interchange rate for non-swiped transactions is 1.60 percent for MasterCard and 1.65 percent for Visa.

Transmission costs. The cost of transmitting the sale information through the processing network is expressed as a cost per ticket, and runs about 18 cents to 23 cents per transaction.

To recap, if you add up the transaction charge plus the interchange rate plus the transmission costs, you get the discount rate.

Here's an example of how it might work.

You'll have to estimate your annual credit card charges and the amount of your average sale. Let's suppose that you estimate your annual charges at $40,000 and your average sale at $60. You accept Visa and MasterCard, and all of your transactions are swiped.

We now need to add up the three elements of the discount rate. For the interchange rate, let's use the 1.35-percent Visa rate. We next need to figure out the transmission costs. Let's assume you can only get the 23-cent rate. The transmission cost, converted to a percentage, is 0.46 percent (23 cents, or .23, divided by $60). The total processor's cost, then, is 1.81 percent (1.35% + 0.46%).

Next comes the processor's profit. What's a fair profit? That's hard to determine, but let's say that you can get your bank to agree that $500 is a fair profit on $40,000 of sales. That will add another 1.25 percent (500/40,000). Your cost, therefore, will be 3.06 percent per transaction.