A basic guide to understanding merchant processing

If you find yourself easily frustrated by merchant processing, you’re not alone. It has to be one of the most confusing parts of managing a retail business. In this post I’ll do my best to explain what it is and how it works in a way that we all can better understand it. 

What is merchant processing?

Simply put, it’s the fees you pay to be able to accept credit card transactions at your business. So unless you’re a cash-only business you’re going to need it.

Let’s start by understanding who’s involved besides you and your customer.

• Credit card associations: These are the top dogs. They control what credit cards are available, determine how credit fees will work, and authorize payments.

• The banks: In most cases, these are the entities distributing the credit cards for consumers.

• Card processors: The systems that pass information back and forth between the merchant (your business) and the credit card associations.
  
  
• Merchant account providers: These are the companies managing the card processors, and who you’ll be working with as a merchant. They make sure all the correct information is going where it needs to be.

How does merchant processing work?

For most of us the process appears simple–swipe the card, sign our name, move on with our day. But what’s really happening there? Let’s take a look.

1. The customer wants to pay for a product or service with their credit card
2. The merchant (you!) swipes the card
3. The transaction request is sent to the credit card processor, possibly through a payment gateway (this is a just a portal to get the info where it needs to be)
4. The credit card processor passes the transaction request to the credit card association and adds their own markup fees
5. The credit card association approves or denies the transaction, and sends that information to the bank that manages the customer’s account.
   

It might be easier to see it like this:

Ok, that doesn’t seem that complicated. But then why does each monthly statement look like it’s been written in another language? Most of the confusion comes between steps 3 and 4, when the credit card processors begin adding markup fees. 

Understanding the basic types of fees

There are a lot of different fees, many more than I’ll cover in this post. You can check here for a full breakdown of everything you might see, but here are the main types of fees you should know.

• Transactional fees: This is where you’ll be spending most of your money. They’re the fees you pay each time your run a transaction.
  
  
• Flat fees: These come in varying forms and names, but the cost will be the same each month. 

• Incidental fees: These fees won’t appear on your monthly statement unless a specific incident occurs. Incidents included here are batch fees, chargeback fees, address verification fees, etc.
  
  

All of these types of fees can be categorized as either wholesale or markup. Wholesale fees are set by the credit card associations and are non-negotiable and consistent across providers. Markup fees are added by your merchant processor and are where you might be overcharged. 

How does tiered pricing fit in?

This is where credit card processors make their money. Tiered pricing, or bundled pricing, is the most common form of pricing and is probably how your business is being charged. The three tiers you’ll see are qualified, mid-qualified, and non-qualified. The tiers represent the markup fees that are set by the credit card processor. 

• Qualified: The lowest price (and usually the one advertised). This tier is usually for non-reward credit cards and debit cards.  

• Mid-qualified: This tier is often used for ecommerce and card-not-present transactions, and costs a bit more.

• Non-qualified: This tier is used for commercial and upper-level reward credit cards, and has the highest cost associated with it.

These tiers will appear on your monthly statement as “QUAL DISC,” “MQUAL DISC,” and “NQUAL DISC” for each type of credit card. If you’re seeing a lot of non-qualified transactions on your monthly statement then you’re likely losing money you don’t need to be. In that case it’s time to start shopping for a more straightforward processor.

Why does it have to be so damn confusing? 

Because the system is looking to make a profit and they don’t want you to understand it. It is in the best interest of credit card processors to use tiers and markup fees to charge you more for each transaction. They succeed by making the monthly statement so confusing that you aren’t sure what everything means.

That’s just not right…

We don’t think so either. That’s why Pike13 partners with TransNational and EVO to offer our customers a low flat rate for all credit card transactions, no matter which tier they might otherwise fall into. We’ve also removed all hidden fees, so you always know exactly what you’re paying for. With Pike13, you can manage your business with the peace of mind that comes with knowing that your merchant processor will never take advantage of your business. That’s how it should be.