Merchant account pricing: Paying for volume

When it comes to credit card processing and paying interchange fees - the more you make, the more you pay. But when it comes to the rates and fees that you pay to your merchant account provider, this is not always the case. Tiered, enhanced recover reduced (ERR) and interchange plus pricing are all volume based pricing models, but flat fee merchant account pricing is not.

Interchange fees are most easily described as wholesale credit card processing rates that are influenced by issuing banks and stakeholders of the major card brands Visa, MasterCard and Discover. Interchange fees are expressed as a percentage with a flat transaction fee. For example, 1.54% plus $0.10 is an interchange fee associated with a category for retail merchants.

When you process a credit card transaction, you pay something called the merchant discount fee. This fee is made up of a number of different charges from the card brand (Visa, MasterCard, etc.), your acquiring organization (the company where you have your merchant account) and other fees. But interchange expenses account for the bulk of the numerous charges that comprise the merchant discount fee.

The interchange fees that you pay to process credit cards are based on a percentage of your gross credit card sales volume. The greater your credit card processing volume, the greater the interchange costs your will incur. The pricing models used by many merchant account providers function in much the same way.

Let's look at interchange plus pricing, for example. On an interchange plus pricing model a merchant pays a fixed markup over interchange expressed as a percentage. For example, let's say that you're processing credit cards on an interchange plus pricing model at 30 basis points. This means that you're paying 3 tenths of percent over actual interchange on each transaction that you process – the larger the transaction, the more you pay.

The majority of this markup goes to the merchant service provider. Just like the underlying interchange costs, any type of markup based on a percentage of sales is going to be a volume-based expense. The more you make, the more your merchant account provider makes. Tiered merchant account pricing, enhanced recover reduced (ERR) and interchange plus pricing are all volume-based pricing models.

There is a solution if paying more to your merchant account provider when you work hard to earn more doesn't appeal to you. An up and coming, extremely transparent form of merchant account pricing is gaining in popularity. Flat rate merchant account pricing operates by passing true interchange costs directly through to the merchant. The only charge from the merchant service provider is, as the name implies, a flat monthly maintenance fee.

Flat rate merchant account pricing is still hard to come by, although CardFellow is a good resource from getting interchange plus and flat rate pricing quotes in one spot. The largest benefit to flat rate pricing is that it's not based on volume like other pricing models. The fee that you pay to the merchant service provider remains consistent regardless of how much volume you process.