Are you having trouble understanding your merchant account are you confused about the rates and fees and how you’re being charged, if so this post will explain how it all works you don’t need to know every little detail about credit card processing you just need to know enough to delegate the task to a provider that’ll take care of everything for you.

Also keep in mind that eventually it’s important to understand the fundamentals so that you can properly make a provider selection in the next couple of minutes we’ll discuss the merchant account transaction cycle and how it works, as well as interchange and its role in the process. We’ll also discuss the two main pricing structures and how they compare to each other and at the end I’ll give you a couple ideas on how to best select a provider that fits your needs.

First off, let’s look at the transaction cycle first the customer presents a card to the merchant for purchase of goods or services after the card is swiped are entered into the point of sale software the processor sends out for authorization through the payment processing network the issuing bank approves or declines the transaction based on funds available. At this point, the transaction is then passed through the electronic networks to the processor and the approval code is delivered to the point-of-sale device at the merchant location.

This is where t he issuing Bank then sends the money to the processing company to reimburse them for the purchase that was made- and this whole process is completed in just a matter of seconds!

At the end of the day the merchant will send out all of their transactions (referred to as a batch) to the processor for monies to be deposited into the merchant bank account.

Finally, the issuing bank will send the cardholder a bill for the purchase.

What is interchange and what role does it play?

Interchange is a scheduled fees that determine the price for all credit-card transactions. There are hundreds of interchange levels and each is comprised of a set of qualification requirements that must be met in order for a transaction to fall into a certain category.

The two main qualification requirements are:

Number One: how the payment is accepted, whether it’s face to face or over the phone, for example.

Number Two: the type of card that is used whether it’s a consumer card or a business card.

For example, individual rate categories are set by Visa and MasterCard and the interchange scheduled fees are published and could potentially change two times per year. This is important to remember since those changes can affect the cost of your merchant account.

The s chedule of fees published by Visa and other cards can vary widely, sometimes as many as 13 rates and eight categories can apply to any single transaction.

Just one of these rates are charged based on the qualification of the card that was presented let’s look at two main pricing models and the components of both of them-

Most providers will offer the following price structures:

Number One- tiered pricing also known as bundled or bucket pricing and

Number Two: interchange Plus, also known as cost plus or pass-through pricing.

In order to compare these two pricing models, let’s first look at how the two pricing structures are related. First off, interchange costs are at the core of both pricing models. The fees for any given transaction are broken down into two main categories-1) interchange costs along with dues and assessments and 2)processor costs.

Dues and assessments are paid to the card networks which is Visa and MasterCard and are the same for everyone as our interchange costs. These are absolute and every processing company pays the same amount for interchange dues and assessments, period.

They cannot be changed or discounted for special situations or for any reason, so whether you’re a fortune 500 company processing billions of dollars each year or a hobby business with just a couple thousand dollars in volume, you pay the same fees from now on. When I refer to interchange it is assumed that dues and assessments are included since we understand that they are the same for every one.

The processor cost is the one variable that differs from one processor to the next and is the only area open for negotiation.

In your search for a merchant account provider, here’s both pricing models in detail- your choices are tiered pricing or interchange plus. Tiered pricing takes hundreds of interchange categories and lumps them into bundles or buckets. The three common tiers are qualified, mid qualified, and non-qualified and these rates increase as you move from qualified to non qualified.

Each of these tiers are set and assigned a specific rate by the processing company and can vary from one provider to the next, in fact, they often do what is considered to be a qualified transaction.

With your provider, you might fall into a mid qualified transaction. With provider B, tier pricing sorts the hundreds of interchange categories and each tier is priced high enough to cover the average of all of the rates and fees that fall under that tier.

Interchange plus pricing passes the actual interchange costs through to you and a small provider charge is charged in addition also referred to as provider markup.

This fee varies widely based on a variety of factors and can range from five basis points up to 1.5 percent or even higher.

Network fees and other general business costs relate to administrative expenses associated with accountant servicing, application approval and costs related to licensing the electronic payment networks for each transaction this same calculation is done depending on the pricing model that you’re currently paying.

It’s widely assumed that interchange plus pricing is a better pricing model because it’s said to have a true cost or a transparent pricing model but does not necessarily mean that it’s a lower overall cost variables such as average ticket and the number of transactions processed each month in addition to the pricing structure variables that we discussed already determine whether tear or interchange plus pricing is best for your company merchant account pricing is not one-size-fits-all in the end what matters the most is the total dollar amount and fees paid for accepting a certain dollar amount of credit card volume if you’re interested in more tips advice and ideas on how to best structure your retail or e-commerce merchant account head over to bank card sales comm and look for the definitive merchant account guide it’s a comprehensive solution that gives you everything you’ll need to set yourself up with a merchant account that works for you and remember you don’t need to know everything just enough to make the right decision for you