Enhanced Recover Reduced

September 20, 2008

September 20, 2008

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46 Seconds to Discover Thousands of Wasted Dollars in your Business.

82% of companies find $12,000 wasted annually. How much are you losing?

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In the past I have written about the various ways of charging for credit card processing, such as Tiered Pricing and Interchange Plus (the most business-owner friendly way of pricing – why you want interchange plus).

The least business-owner-friendly way of pricing is called Enhanced Recover Reduced.Below is a copy of a selling document that a major credit card processor used to educate its partners on this method of pricing.  The whole point of the document is that it will allow them to sneak through extra fees without business owners noticing.Look on the second page for some examples of how, the same $300 transaction can cost the business owner anywhere between $1.50 (interchange plus) and anywhere between $4.79 and $8.54 using Enhanced Recover Reduced.Check out the document, and scroll down for an explanation if you are interested.
View more documents from ccfees.
So the issue here is that the biggest cost that your credit card processor has is Interchange Fees, which is the amount that it has to pass on to Visa and Mastercard.  Interchange accounts for 80-95% of your credit card processing costs, with the remaining 5 to 20% kept by the processor.Interchange rates vary depending on the circumstances of the transaction, for example, a transaction where the card’s magnetic stripe is read costs less than a transaction where the stripe is not read.  For example, a standard visa card costs 1.54% + 0.10 for each transaction when the card is swiped and 1.80% + 0.10 when the card number is keyed in.Therefore, if the processor quotes you a fixed rate, say 1.75%, and you end up processing many more transactions where the card is not swiped they could end up actually losing money on each transaction.  They assumed they were going to make 0.21% on those transactions and they instead end up losing 0.05%.With “Recover Reduced” pricing, the processor will still charge you the agreed upon fee 1.75% for all the swiped transactions but will charge you the difference the agreed upon rate PLUS the difference in the interchange rate for the non-swiped transactions (1.75% + 1.80% – 1.54%) = 2.01% so that it can maintain the 0.21% markup it was counting on across ALL transactions.  That actually isn’t particularly unfair.  It’s confusing, but the processor can very reasonably make an argument that they priced the deal with an expectation of a certain transaction mix and they shouldn’t be expected to lose money if your mix turns out different.However, “Enhanced Recover Reduced” charges you the original rate, plus the difference in the interchange rate PLUS an extra fee.  That’s why they call it “Enhanced”, because it enhances the processor’s profit.The extra fee can easily be between 0.50% and 2.0% and often isn’t disclosed very well on the statement.Do yourself a favor and STEER CLEAR of Enhanced Recover Reduced pricing.  Instead, get an interchange-plus contract which is completely fair to all parties.

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