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The Green Sheet Online Edition

April 26, 2010 • Issue 10:04:02

The cost of credit card processing - past and present

By Jared Isaacman
United Bank Card Inc.

In my position, I field countless questions and concerns regarding the direction of the credit card processing industry. An increasingly prevalent theme in these conversations is that our industry has become plagued with fees and has resulted in a frustrated merchant community.

At first glance, it does seem like the cost of processing has significantly increased over the years with the advent of Payment Card Industry (PCI) Data Security Standard compliance fees and the rise of rewards cards, as well as the ever increasing cost of debit and interchange.

However, in actuality, this couldn't be further from the truth. I believe the cost of accepting credit cards has decreased substantially over the past decade.

Disappearing terminal costs

When I entered the industry in 1999, terminals were sold at two to three times over cost and occasionally much more than that. If the terminal was leased, the price was higher yet.

Additionally, merchants would pay between $100 and $150 in application and/or setup fees. This would often lead to over a thousand dollars in startup costs before merchants ever processed their first credit card sales.

Now merchants are able to receive free credit card terminals, and some even receive free integrated electronic cash registers when they sign up to process credit cards. This has completely removed any financial barrier for accepting electronic payments.

In addition, since most processors become invested in their new merchants via free credit card terminals, they often provide some form of a replacement program to ensure ongoing processing relationships with merchants.

Tumbling startup costs

These programs, along with the elimination of application and setup fees, have essentially created a stimulus package for small and mid-sized businesses that wish to accept credit cards.

I am willing to bet that various free equipment offerings have saved merchants in the neighborhood of $50 million to $100 million in startup costs over the last few years alone.

I'm sure many of you are thinking that maybe initial costs are lower, but merchants are still paying much more in rates and fees. I disagree and believe the actual processing costs have also decreased substantially over the last 10 to 15 years.

In the early 1990s, it was not uncommon for merchants to pay more than 3.5 percent for electronic processing services. When I entered the industry, merchants were paying an average of 1.75 percent for qualified rates.

While that number may seem similar to the qualified rates we charge today, it is important to remember the corresponding interchange rate at the time was 1.38 percent and $0.05. The spread was nearly 40 basis points on the qualified rate alone.

Shrinking spreads

In our present environment, merchants are paying within a few basis points of interchange. It should also be noted that the entire spread on offline debit was retained as margin in those days.

Today, it is not uncommon for merchants to pay by four-tier pricing methods that discount the offline debit (check card) rate to near cost.

Furthermore, interchange-plus pricing was typically reserved for extremely large merchants with dozens of locations and processing millions of dollars in volume. Now, approximately 40 percent of all new merchant applications are priced at interchange plus. The reality is that merchants are now paying closer to actual processing costs than ever before.

Despite all the bad publicity regarding rate increases, PCI fees and new fees, the cost of accepting credit cards has never been lower. Maybe there are a few new fees, but these are insignificant when compared to the reduced margins being charged for processing.

Combine that with the elimination of upfront costs, and you can see why the current environment represents the lowest overall merchant cost for processing credit cards in the history of this industry. The Green Sheet, Inc.

Jared Isaacman is the founder and CEO of United Bank Card Inc., a premier payment processing organization based out of Hampton, N.J. UBC is ranked by the Nilson Report as one of the largest payment processors in the nation, providing merchant services to over 110,000 business locations and processing in excess of $9 billion in credit card volume annually. Isaacman is actively involved in the industry and also serves on The Green Sheet Advisory Board. Call him at 800-201-0461, ext. 120, or e-mail him at jared@unitedbankcard.com.

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