What Is It and What Do I Need to Know?
Our blog last month discussed the three different types of rate structures: Fixed, Tiered and Interchange Pass Through Plus… but of these three structures, which produces the best effective rate? Over the past 20+ years analyzing merchant accounts, we’ve found that the Interchange Pass Through Plus model performs best and produces the lowest effective rate.
So what is Interchange Pass Through Plus? What do you need to know about it?
Interchange is the association that sets the rates processors pay… and in this model, no matter what card you accept, you are charged the cost of that card. The only downside to Interchange Pass Through Plus is that it requires a little more knowledge on the part of the merchant to ensure there is no “fee creep”.
The term “effective rate” refers to the total cost of processing. It’s the only percentage that actually matters because it’s what you’re really paying for your merchant account(s). Uninformed merchants always ask, “what’s your rate?”, but the truth is, there are so many more questions that should be asked and “rate” is only a small piece of the puzzle.
To figure out how much all the other fees amount to, don’t trust the so-called “sales professionals”—do the calculation yourself! It’s actually quite simple and you’ll never be duped again:
Take your total processing cost (exclusive of AMEX if any, leaving in the transaction fees) and divide it by your total processing (exclusive of AMEX).
For example, we just reviewed a small plumbing company doing $22,875.18 in monthly Visa/MC sales. Their total fees came to $1,725.12. The sales person that set this up told them their rate would be 1.9%. Does this look like 1.9% to you? Possibly the base rate might be, but the real effective rate is 6.23% and this poor merchant didn’t even know it! We put him on our monitored platform and his effective rate is now 3.5%, with a new monthly cost of $800.65. That’s $924.47 in savings every month!
This new effective rate might still seem high to you but smaller merchants, especially the ones that manually key most of their transactions, will always have something close to this. However, it’s important to regularly calculate and monitor the effective rate. For larger clients, the difference in effective rate is not as significant but the monthly savings in fees will make a difference.
A few years ago, we worked with a single location business hotel doing approximately $8 million in annual sales. By applying our process, we were able to put over $40,000 towards the hotel’s annual bottom line. How many room nights would be required to generate this much gross profit?
So don’t be fooled by the “what is your rate” presentation or think you are saving money by “lowering your rate”. There are many other factors associated with your merchant account rate.
The better informed you become, the better off you and your company will be. Start by learning how to calculate your effective rate. If your retail or restaurant has a rate of over 2.5%, or you’re primarily in a business where most of your transactions are non-card present and over 3.2%, you need to give us a call at 321-800-6533. We can help you.