What has a chip on its shoulder, is three-hundredths of an inch thick, and spends all day spooning your driver’s license? That would be the all-mighty payment card, of course. As a restaurant operator you might swipe it, tap it, or never see it at all, thanks to the astronomical rise of online ordering. Millennials don’t cling to cash the way their parents did. Fast crypto transactions are still a twinkle in a laser-red Twitter avatar somewhere. Unless you’re running a C.W. Swappigan’s franchise, chances are the bulk of your income rests on your ability to process card orders efficiently and securely.
But if you’ve ever received a credit card processing statement (or peered over the slumped shoulder of someone who has), you know fast money has hidden costs. Your diners may think the finance industry makes all its loot off of interest payments and card fees. Merchants know better. When a customer uses a card to pay for a purchase, a not-insignificant percentage of that transaction goes poof and winds up … elsewhere.
We’re about to dive into the where, the why, and the how behind that missing chunk of every transaction. And we’ll tell you how to offset that cut, if you feel like credit card payment fees are a fact of life that’s dragging you down. The details may seem dull until you realize this entire piece is about your money. That’s a bit more exciting, right?
So you run the card. Maybe that’s a physical swipe or a tap on your POS, or the authorization of an online order. Each has its own associated fee structure, but in every case the payment goes next to the aptly named payment processor. The processor essentially serves as the middleman between you, your customer, and the other players involved in the transaction — specifically, the credit card network (Visa, Mastercard, Discover, American Express) and the issuing bank (Chase, Wells Fargo, etc.). Each of those parties takes a portion of the transaction.
It’s the job of the processor to make sure everybody gets their cut. And there are, as you know, lots of little cuts. One in particular is worth doting on.
The most significant (and most notorious) of the fees is called interchange. Interchange is the rate, adjusted periodically, that the processor pays to the bank that issued the customer’s card. It exists to ensure the issuing bank has a neat little cushion in the unlikely event that all their cardholders pay their bills on time (and therefore pay the bank 0% interest for the temporary loan). The banks lock in money on the front end by passing along a cost to the merchant.
Not all interchange rates are created equal. There are about 300 different interchange rates, each corresponding to different circumstances around a given transaction. The three major factors that determine the interchange rate for a particular purchase: the type of business you run, the kind of payment card the customer uses, and the manner in which they use that card.
That first variable — your business category — means card brands and banks treat different industries differently. Visa, Mastercard, Discover, and AmEx use a shared set of four-digit merchant category codes to classify businesses, and then draw up rate tables specific to each industry. Is your workplace a Fast Food Restaurant? That’s MCC 5814 to you, buddy. Or you own an Eating Place or Restaurant otherwise unspecified? MCC 5812’s your game. In between you’ll find MCC 5813, which houses your Bars, Cocktail Lounges, Discotheques, Nightclubs and Taverns–Drinking Places (Alcoholic Beverages). Or maybe you’ve stumbled upon this website by pure accident, and you’re visiting from MCC 3389, which means you work for Avis. (Yes, each of the national car rental brands has its very own MCC all to itself).
The second factor — type of card — also weighs on your costs. The card brands don’t just look to see whether you’re running a fast food joint or a swanktastic Zagat-rated bistro and call it a day. Interchange can also vary across every single card. If you’re like most gridded Americans, chances are you’ve encountered your share of envelopes from Visa or Mastercard congratulating you on pre-qualifying for cards with names like Triple Extra Platinum Diners’ Special or Travel Select Gold Rewards Plus. You may even have some of those kinds of cards rolling around in your wallet, their EMV chips seeming to shine just a little brighter than the one on the Plain Jane debit card your bank issued you when you opened your checking account.
There are many, many flavors of cards floating around, and their differences stretch beyond debit vs. credit to encompass business class cards and rewards cards and cash back cards. If your customer pays with that boring Chase Visa Debit, you’re in luck. The average interchange rate for your standard debit card — which doesn’t cost the issuing bank more than the plastic it’s worth — is about 0.5%. Is that a Mastercard World Elite you see your customer slipping into the check holder? Brace yourself for a 2.2% interchange. A general rule of thumb is: The more the card rewards the consumer for using it, the more it’s going to cost you to accept it. It goes back to the un-freeness of free money. Somebody is paying for those perks, and sadly, that somebody is either you, dear merchant, or the non-fancy-card-using customers who absorb some of your costs through higher overall prices.
The last interchange factor — manner of card use — has everything to do with security. Mostly it comes down to whether the physical card is present as you take payment. Traditionally, “card present” transactions ruled the restaurant industry. Until recently CNP (card not present) purchases were limited to orders placed and paid for over the phone, or during the occasional purchase keyed in manually after a mag stripe malfunction. Those transactions are more likely to be fraudulent than their card-present counterparts, and therefore potentially subject to chargebacks, so banks cover themselves on the back end with higher interchange fees. If you’ve joined us in the 21st century, online and mobile orders probably make up most of your CNP transactions.
Once you’ve paid the interchange — i.e., the wholesale cost rate the issuing banks take out of every transaction — you still owe the credit card brands. The portion that goes to Visa, Mastercard, or the like is known as the assessment fee. It’s made up of a bunch of smaller fees that are non-negotiable and often amorphous and opaque (a thrilling combination!). The card networks change (and usually increase) these ambiguously named fees all the time, and there’s really no way to know what FANF or NABU you’re going to weather this month until you get your statement. And even then, you may have been hit with some fees that didn’t even make the print-out, as card networks can and do combine multiple fees into one line item.
It’s crazy-making. Also, you have absolutely no control over assessment fees. But just to recap: Interchange and assessment fees make up the wholesale cost of accepting a payment card. These fees are fixed industry-wide. They’re literally the cost of doing business. Don’t beat yourself up trying to solve them.
As we said earlier, in order to accept card payments, you have to get in bed with a payment processor, which also expects to make a buck. Also called a merchant services provider, your processor provides the Software as a Service — and sometimes, as in the case of industry faves like Toast and Square among others, the hardware — that fuels the electronic transfer of funds between your account and the account tied to your customer’s card. It also handles the fees hitherto discussed. For accomplishing all of that accurately, efficiently, and PCI-compliantly, your processor takes its cut, what is sometimes known as the “discount rate.” You can think of it as the amount by which the processor marks up the fixed costs predetermined by banks and the credit card networks.
Now for a spot of good news: You can, to some degree, shop or bargain for the best processor fees. Every credit card processor has its own fee structure and rates. So take a moment to seek out the best processor for your operation.
“A lot of the time, business owners end up going with whatever processor their banker recommends,” says Science on Call’s Luisa Castellanos. As a restaurant IT guru, she sees the ripple effects of not doing more homework on processors. If your processor works only with a particular POS, you might not be able to integrate with any other softwares. “Don’t fall into the trap of thinking your bank knows best on this,” she continues. “You should really consider all your options. Talk to a few different processors, and do your research on how they structure their fees.”
Before you reach out to processors, though, get hip to those fee structures. This is where you can save yourself a heap of dough.
As you shop, you’ll want to be fluent in three basic pricing models. Those are flat rate, interchange plus, and tiered pricing.
If you use Square or Toast, you already know about flat rate processing. Those payment processors take a fixed percentage of your transactions, regardless of the type of card used, the riskiness of the transaction, or fluctuations in interchange rates. The allure of this model lies in its predictability. It’s easier to keep your books if you know ahead of time what cut of your sales are bound for your processor’s purse. The downside of flat-rate processing is that your statements won’t reveal what the processor’s actual markup is in any given month, since interchange rates and the discount rate are lumped into the fixed rate you’re charged. Theoretically, if the only cards you processed all month were Visa debit cards; if every single card were present; there were no chargebacks; and everything was beautiful and nothing hurt, your interchange rate would be low. Yet Square or Toast would still claim the same relatively sizable cut they take every month. (Current pricing for Square and Toast, respectively, can be found here and here.)
For businesses with high monthly processing volumes, interchange plus processing is a viable alternative. In this model, interchange rates are passed through at cost, and they’re listed on your monthly statement separate from the processor’s markup. Because interchange rates are different for every transaction, though, the amount you pay every month is going to be different. Assuming that your processor’s markup is reasonable to begin with, you’re going to be paying the lowest possible price every month, but it will complicate your accounting somewhat to keep track of what you’re paying month-to-month.
The third model, tiered processing, is generally considered the most opaque and expensive. Basically, processors that use this model adopt the concept of differing interchange rates and set up their own riskiness “tiers,” each of which corresponds to a particular markup. Every month, the processor sorts your transactions into these tiers – dependent on ambiguous criteria – and charges you accordingly.
“Knowledge is power,” said Francis Bacon, and though he probably didn’t have the payment card industry in mind, the wisdom holds. If you’re currently processing cards, a smart thing to do is to calculate your effective rate. Gather up a few recent statements, add up all your processing fees, divide that sum by your total sales volume, then convert to a percentage. “You can use that figure in negotiations with processing companies,” Castellanos says. “If your current processor is only charging you interchange plus another 1%, but you want to work with a processor that has better POS integrations, you might be able to use that information to get a lower flat rate from them.”
If your processing rates are flat-out breaking the bank, a common hack involves surcharging, or cash discounting. In many states, Castellanos says, it’s not legal to tell customers you’re tacking on, say, a 3% surcharge to cover fees. What is legal, though, is raising your prices gently and giving customers a discount for paying with cash or debit. “A lot of business owners are in the position where they really don’t want to be swallowing those fees on card transactions themselves, but they’re really hesitant to raise prices,” Castellanos says. “But, trust me, your customer would much rather pay slightly more for a dish than not be able to use a credit card at your restaurant at all.”
If your restaurant partners with third-party delivery systems, keep in mind that sales go through those platforms’ payment gateways — and that those orders are going to rack up whatever processing fees those companies have worked out with their processors. Let’s say you’ve negotiated a 2.1% flat rate processing fee with your merchant services provider. Great. But when you work with, say, GrubHub, its provider takes 3% or even 4% — a fee that GrubHub in turn passes onto you, thus increasing your effective processing rate. You can usually find the platform’s processing fee on the monthly statement the platform gives you, listed along with all the assorted commission and marketing fees they charge.