Eliot Garza recently asked me, “How can you credit card Processors all claim to have the lowest rate? You don’t know what I’m paying; yet you claim you can beat my rate”. In another conversation at a business expo a man told me, “I thought I found the lowest rate. But the statement is so confusing I don’t even bother opening it. It just puts me in a bad mood.”

This is all too common among businesses accepting credit cards. As a business owner, you are bombarded by Processors claiming to have the “Lowest Rate”. When you finally agree to listen, terminology and fine print throw you for a loop. And often times the fees discussed are not what appear on your merchant statement.

Fortunately, there are ethical Processors out there. But unless you have access to a lie detector machine, it is difficult to know. So how can you get a fair shake from a Processor? The answer is do not get lured by the Lowest Rate. Instead find a Processor that offers Cost Plus pricing.

To explain why Cost Plus pricing is failsafe, I must first explain the more common Lowest Rate pricing model. Let’s start with where your merchant fees are distributed.

There are several entities generating income from the fees charged to the merchant: Visa or MasterCard, the Issuing bank that provided the card to the consumer, and the Processor or service provider to the merchant. The Issuing bank gets the largest cut; Visa and MasterCard get the smallest cut. Their cuts are known as “Cost” to the Processor. The Processor’s cut is anything charged above Cost.

All Processors pay the same Cost which varies by card type, transaction type, and merchant industry. To keep it simple, let’s focus on the most common Visa Cost types for a retail merchant. And let’s assume a $100 transaction.

Again, all Processors pay this Cost to Visa and the Issuing bank of the consumer’s card.

Visa Cost is available at usa.visa.com.

Now, let’s look at the fees and margin of a Lowest Rate Processor marketing on the internet.

1.09% and $.20 per transaction

Sounds good? In reading the fine print, only debit or check cards qualify for that lowest rate. Hefty surcharges apply on the other card types. Now, it’s not so good. See below.

Notice the deviation in margin between card types. Lowest Rate Processors are willing to make very little on some transactions while making much more on others. Why? Because there will be plenty of transactions in the higher margin categories, especially Rewards cards.

Now, let’s look at the fees a merchant might pay under a Cost Plus pricing model.

The margin stays the same no matter what the card type. The merchant can see how much it is paying for the Processor’s service. In poker terms, the Processor’s cards are on the table for the merchant to see. The exact opposite is true in the Lowest Rate pricing model.

Lowest Rate Processors also increase their margins over time.

Visa and MasterCard increase or decrease various Cost types once or twice a year. Lowest Rate Processors pass on the increases plus a little more to boost their margins. And if Cost is adjusted down, they don’t lower their rates, they pocket the extra margin. Cost Plus merchants receive the exact increases or decreases.

Lowest Rate Processors boost their margins by adding rate increases to the third or fourth rates. Since most merchants only keep an eye on the first or second rates, these increases go undetected. A merchant would easily detect a rate increase from a Cost Plus Processor.

As always consider the normal qualities that you value in any service provider. But to ensure you are paying a fair price, avoid the Lowest Rate Processors. Find a reputable Cost Plus Processor.