Why Government Contractors and Resellers Are Overpaying on Payment Processing: What to Do About It
Government contracting is a discipline built on precision. Proposals are priced to the line item. Compliance requirements are tracked meticulously. Contract vehicles are selected strategically. Yet when it comes to how money actually moves through the business, specifically how payments from federal agencies, prime contractors, and government-adjacent buyers are processed and what those transactions cost, most GovCon companies are operating on whatever payment setup was in place when they started. That default setup is costing them.
The payment processing industry is not a flat market. Different merchant categories, different card types, and different transaction structures carry different interchange rates. Government contractors and resellers occupy a distinct category in that market, and the businesses that understand this and structure their payment program accordingly pay materially less than those that do not.
Who This Applies To
Resellers are companies that procure and resell hardware, software, and technology services to government agencies through established contract vehicles like the GSA Multiple Award Schedule (MAS). These businesses process government purchasing card (P-card) transactions regularly, often at significant volume.
Prime contractors and subcontractors performing labor and services for federal, state, or local agencies also fall within this category, particularly those billing government entities directly or accepting payment through agency-issued purchase cards.
This extends beyond technology and defense. Janitorial and facilities services companies, professional services firms, logistics providers, and specialty suppliers that hold GSA schedules or work within government supply chains all operate in this payment environment, and all are subject to the same rate structures if they know how to access them.
The Problem: Standard Rates Applied to Non-Standard Transactions
When a government agency purchasing manager uses a government-issued purchase card to buy hardware, software, or services from a contractor, that transaction does not behave like a standard commercial credit card transaction. Government purchase cards are a distinct card type processed through their own interchange category.
Most processors default to treating every card transaction through a generic merchant category setup. Unless your processing configuration is specifically built to recognize and classify government card transactions correctly, you are likely being billed at standard commercial interchange rates rather than the rates that actually apply to your transaction type.
The difference is not trivial. For a GovCon reseller processing hundreds of thousands or even millions of dollars in annual government card volume, the gap between what they are paying and what they should be paying represents a significant and recurring cost. This is not a matter of negotiating a better deal. It is a matter of configuring your payment program correctly so that transactions are classified and routed at the rates that already exist for your transaction type.
What a Properly Structured GovCon Payment Program Looks Like
Getting the payment setup right involves several elements working together.
- Correct merchant category classification. Your merchant category code (MCC) determines how your transactions are classified by the card networks. An MCC that does not reflect the actual nature of your business can result in transactions being routed through higher interchange tiers than appropriate.
- Government purchase card recognition. The processing platform must be configured to identify government-issued purchase cards at the transaction level and apply the appropriate interchange category. Without this, every government card transaction defaults to a generic commercial rate.
- Level III data transmission. Government purchase card transactions are eligible for reduced interchange rates when additional line-item data is passed with each transaction: purchase order numbers, item descriptions, quantities, and tax amounts. Many processors either do not support Level 3 data transmission or do not prompt their merchants to enable it. For a GovCon business, this is a direct and measurable cost.
- Transaction size and volume alignment. Government contract transactions are often larger than standard commercial purchases. Payment programs need to be structured to handle high-average-ticket transactions without triggering fee structures designed for consumer-level commerce.
The Compounding Cost of Getting This Wrong
For a GovCon reseller processing government purchase card transactions at standard commercial interchange rates, the cost differential compounds quickly. If standard commercial interchange on a given card type runs at 2.5% and the applicable government purchase card rate, correctly classified and with Level 3 data, runs materially lower, every transaction processed at the wrong rate is a direct margin loss. Multiply that across a year of contract volume and the number becomes significant.
Beyond the direct processing cost, there is the indirect cost of a reconciliation process that does not reflect the correct transaction structure. Government contractors operating under cost-reimbursable contracts or detailed cost accounting requirements need clean, accurate transaction data. A payment setup that does not correctly classify government transactions creates downstream complexity in financial reporting, contract-level profitability analysis, and audit preparation.
The businesses that identify and correct this gap do not just reduce a line-item expense. They clean up a piece of financial infrastructure that was quietly introducing inaccuracy into their cost picture.
CASE STUDY
From Standard Rates to GSA Rates: A Janitorial Supply Company Cuts Processing Costs in Half
Teddy runs a janitorial supply company that holds a GSA schedule and sells cleaning products, equipment, and consumables to federal agencies and government facilities managers. His business had been processing government purchase card transactions for years while paying standard commercial processing rates for every one of them.
When District Bankcard reviewed Grant's payment setup, the issue was straightforward. His processor had never configured his account to reflect his merchant category correctly, had not enabled Level 3 data transmission, and had not structured his program to recognize government purchase card transactions at the appropriate interchange tier. Every government card transaction his business processed was running through a generic commercial rate structure.
The fix required reconfiguring his payment program: correct merchant category classification, Level 3 data enablement, and account structure aligned to his actual transaction type. No new contract vehicles. No renegotiated terms with his agency customers. Just a payment setup that reflected the nature of his business accurately.
The result was a reduction in processing fees of more than 50%.
Teddy's experience is not an outlier. It is a representative example of what happens when a GovCon business runs on a default payment setup that was never built for the work it actually does. The rates were always available. The configuration just was not there.
Where to Start
For a GovCon reseller or contractor that has not reviewed its payment processing setup through the lens of government transaction classification, the starting point is a payment program assessment. That assessment should answer:
- Is the merchant category code accurate for the type of transactions being processed?
- Are government purchase card transactions being correctly identified and routed at the appropriate interchange tier?
- Is Level 2 and Level 3 data being transmitted on eligible transactions?
- Are there compliance requirements tied to active contract vehicles that the current setup does not address?
The answers define the gap between what a GovCon business is paying today and what it should be paying. For most businesses that have not gone through this process, the gap is meaningful.
Is Your GovCon Payment Setup Built for the Work You Actually Do?
District Bankcard works with government contractors, GSA schedule holders, and federal resellers to build payment programs that reflect how their businesses actually operate, with correct merchant category classification, Level 3 data capability, government purchase card recognition, and transaction structures aligned to contract-based revenue.
If your payment processing setup has never been reviewed through the lens of your contract vehicles and transaction types, there is a strong likelihood you are leaving money on the table with every transaction you process.
Schedule a complimentary GovCon payment assessment today!