Merchant account rates too low to be true

An online search for merchant accounts through your favorite search engine will produce countless results from merchant service providers promising retail rates as low as 1.39% and e-commerce rates as low as 1.99%. You know the ads, the ones that "guarantee the lowest rates and fees". Aside from the fact that these rates seem too good to be true, doesn't it seem kind of that every provider can guarantee lowest merchant account rates? The truth of the matter is that there's a little fancy footwork going on behind the scenes.

Whenever you see a provider advertising a single rate it tells you right away that they're using a tiered pricing structure. This type of pricing facilitates an artificially low qualified rate (which is what you see advertised) and additional mid and non-qualified tiers that have higher rates. This tiered structure is what makes it possible for providers to advertise one rate and then deliver another.

Regardless of the provider, all charges start with the interchange rates that are published twice annually by Visa and MasterCard. Interchange rates are the basis for all credit card processing charges, and there are a lot of them. In fact, there are hundreds of different rate categories between the card brands.

All of the interchange categories won't be applicable to a single business. For example, some are specific to grocery stores or to e-commerce operations, but enough categories are relevant to far outnumber to three buckets of a tiered pricing model.

You don't have to be an expert on interchange, just know that each interchange category has its own rate and transaction fee. For example, in a given month your business may run 200 transactions that fall into ten different interchange categories, all with different rates and fees. There aren't enough buckets on a tiered model to accommodate all of the different interchange charges so they have to be divided among the qualified, mid-qualified and non-qualified tiers.

To keep from losing money (and to make a profit) the provider gets to dictate into which tier the interchange categories will be placed. Providers use something called a qualification grids or matrix to dictate into which tier an interchange category is placed. While there are some standard practices, the qualification of interchange categories from one provider to the next is inconsistent. In fact, the industry term for this inconsistent pricing is "inconsistent buckets."

Inconsistent buckets make it possible for merchant service providers to offer a very low qualified rate while still turning a profit because they're able to route interchange categories into the mid and non-qualified pricing tiers.

The tricky part about inconsistent buckets is that rates are manipulated behind the scenes without you (the merchant) knowing which interchange categories are going into which tier. By the time you figure out that you're not actually getting the low rate you were promised, it's too late. The provider has already gotten your money.

Now that we've got background information out of the way, the short answer to how merchant account providers can advertise rates that look too good to be true is because they are. In a situation like this interchange categories are manipulated into higher mid and non-qualified tiers to make up for lower margins on transactions that are routed to the artificially low qualified rate tier.

The best way to get the best merchant account is to compare realistic rates that are based on cost-effective, transparent pricing structures such as interchange plus, which is sometimes referred to as pass-through pricing. Check out Web sites like CardFellow to get quotes based on these pricing structures from multiple processors all in one place.