ERR pricing and why its bad for your business:
You are most likely reading this because you currently process credit cards through your bank. Truth be told, the larger banks in America maintain the largest percentage of merchant accounts in the country. What they fail to inform you is that the local service you are accustomed to will most likely be outsourced when it comes to your merchant account. They also usually neglect to inform you how their merchant reps get paid. At Capital Bankcard South, we make no secret and are completely transparent on how we make our money, and as a business owner, you have the right to know how your vendors make their money.
This short article outlines a relatively new pricing model that is being utilized in most of the major banks in America today. In my opinion, it is a sneaky and unethical way to mislead you into believing you are paying one rate, but in reality are paying something much higher.
ERR Pricing is Dishonest. Period.
ERR (Enhanced Recover Reduced) is one of the most convoluted pricing models in the payment card industry. Commonly described as a bait and switch, many processors use this pricing structure to make you believe you have a rate that actually do not.
ERR Overview
When your merchant rep tells you that all of your transactions will be billed at X.XX%, you are being led down the ERR path. While this statement is accurate in it's most basic form, what they are neglecting to tell you is that you will be back-billed the difference in interchanged, and then charged their margin rate on top of that.
To give some background, all merchant processors have rates set by Visa/MasterCard/Discover/American Express that are basically "floor" rates (.05%-2.85%). There are over 300 different classifications (sorted by card type), and we make our money by creating a margin on top of our "floor" rates. What makes this business unique is that every processor, no matter the size, gets the same rates from the card associations. This creates one of the only level playing fields in any American industry.
How does ERR work
Now that we have established how the system is set up, lets take a look at an example of how ERR is put into play.
If a processor quotes you a flat rate of 1.50% + $0.08, and you process a card that actually costs 2.25% + $0.10 on the interchange table, then technically this processor has just taken a loss on this transaction. However with "Recover Reduced" pricing, the processor is allowed to back bill you the difference (0.75% + $0.02) to bring them back to even. At this point, the processor has not created any margin, so this is where "Enhanced" comes into the picture. "Enhanced" is the mark up that is applied on top of the "Reduced Recover" and interchange rate that allows the processor to make their profit. Most of the time, it will not be disclosed what their "Enhanced" rate actually is, without analysis of the merchant statement.
Wrapping This Up
The ERR scheme is deceptive from the gate. When on this platform you will pay the original quoted rate, plus the difference in interchange, plus an extra fee. Terms are not disclosed, and pricing is never transparent. Insiders joke that they call it "Enhanced" because it enhances the profit while leading the merchant to believe something that is not accurate. It is nothing more than a teaser, or a bait and switch, to get their foot in the door.
Any established merchant service provider should recommend Interchange Plus pricing, which is a model that is transparent and fair to all parties involved. At Capital Bankcard South, we pride ourselves on transparency of rates and fees. We want you to understand what you are paying, and why you are paying it.
If you think you are on an ERR platform, we offer complimentary rate analysis. We do this with no strings attach and can offer an alternative and fair pricing model that is easy to understand.
For more information on the merchant services industry, download our E-book, free of charge of course. This E-book gives a detailed overview of the merchant services industry, pricing structures, and breakdowns of fees and charges.
