Many merchants think card processing is pretty simple, not realizing how interchange rates (issuer and card association fees, dues and assessments) drastically affect their bottom line. They think the customer’s card information, obtained during an on-line purchase, is sent to one of the card associations — Visa, MasterCard, Discover, American Express. They think the card association then authorizes the transaction, puts money in the merchant’s bank account, and takes a percentage out of the merchant’s account to pay for the processing fees. All of this is wrong, however.
Know the Key Players
In reality, the card associations/companies have very little to do with the actual transaction processing and funding of the merchant’s account. Further, the card associations/companies are not the ones to blame if you are paying a higher processing rate than your competitor. Card processing is a complex industry with several layers of middlemen each performing a function and each charging a fee for their service. Here are the key players to know for now.
- Card Associations/Companies. Visa, MasterCard, Discover, and American Express. The card associations/companies set the overall rules and guidelines for their individual brands and market their brands to both merchants and consumers.
- Issuing Bank. The financial institution that issues the Visa or MasterCard credit or debit card to the cardholder — your customer. Discover and American Express act as both the card association and the card issuer.
Issuing banks and the Card association/company set “Interchange rates” and “pass-through” fees for each type of card. Think of interchange rates and pass-through fees as the wholesale price for processing a specific card type. The card associations/companies have many card types — debit cards, basic credit cards, reward cards, business cards, purchasing cards, and more — each with their own interchange rate. Every merchant account provider pays the same wholesale price.
- Merchant Account Provider. This is a general term used to describe the company you signed up with to handle your card processing. This could be a processor/acquirer, or a financial institution, or an independent sales organization — called an “ISO” — that uses a processor/acquirer. Generally, the merchant account provider is the company whose name is on the merchant agreement you signed.
- Payment Gateway. All eCommerce merchants need a gateway, but also many brick & mortar merchants need gateways for their Point of Sale system or mobile device. The gateway routes the transaction to the Merchant Account Provider. There are fixed costs involved with driving transactions through a gateway. Ultimately, the merchant account provider or the gateway itself may charge you a monthly fee and a per-transaction fee. Many gateways do not charge the per-transaction fee for the first 250 to 500 transaction per month.
There are even more layers of middlemen involved with your processing. However, these are the players I want you to understand for now.
Merchants are charged more than just Interchange Rates and Fees
- PCI Fees. The first fee you should look for in your statement is a “PCI Noncompliant Fee,” or words to that effect. Not all merchant account providers isolate this fee in their statements. If your merchant account provider does, you will probably find it at or near the bottom of the last page of fees. If you see this fee, you have a severe issue. PCI — Payment Card Industry — compliance is critical. Noncompliance could end up costing you your job or your company if you are breached and card holder information is stolen. Your merchant account provider should insist that your company become compliant. Unfortunately, some merchant account providers use noncompliance as just another income stream by charging merchants a higher monthly fee — say $25 — versus the more common monthly PCI rate of $5 to $10.
You may see a monthly — or yearly — “PCI Fee” on your statement. Some merchant account providers have not started charging a PCI fee, yet. Those that do typically charge $5 to $10 per month — or up to $99 per year. This fee covers the cost of conducting certain functions to help them ensure you are compliant. Merchants should ask their merchant account provider specifically what it is doing for the amount it charges you.
- Annual Membership Fee. Many merchant account providers charge an “annual fee” or “membership fee.” This is typically around $100, and it’s usually charged to smaller merchants who process less than $250,000 per year in card volume. However, I have seen much larger merchants charged this fee. What is the purpose of the “annual fee” or “membership fee”? In my view, it’s simply to increase profits of the merchant account providers. Merchants should view this fee as a red flag about how the merchant account provider views its business relationships.
- Supply; Merchant Club; Terminal Support Fee. These fees all apply to physical merchants. No eCommerce company should be paying them.
- Monthly Minimum Fee. Very small merchants — those processing less than $50,000 a year in card volume — need to be aware of the monthly minimum fee. Moreover, merchants with fluctuating monthly card volume should pay attention to this fee. Some merchant account providers may quote very low discount rates to small merchants because they know the merchants will end up paying the much higher monthly minimum fee. I have seen these monthly minimum fees as high as $75.
- Monthly Gateway Fees. eCommerce merchants may be charged both a monthly gateway fee and a per-item (per-transaction) gateway fee. Every eCommerce merchant needs a payment gateway, which links the shopping cart to the merchant account. However, remember that the monthly gateway fee is negotiable.
- Monthly Fee or Service Fee. I laugh at this fee. I remember listening to eCommerce merchant calls at the service center when I worked for a merchant account provider. It seemed most of the merchant calls were to clarify incorrect or ambiguous information provided by the merchant account provider. So in a sense, merchant account providers charge merchants this fee to handle servicing issues caused by the merchant account provider. There is a real cost to handle merchant calls. However, the amount of the fee is negotiable.
- Monthly Statement Fee. Paper statements cost as little as $1.00 to print and mail. But the merchant account provider may charge up to $15 per month for a “statement fee.” If you do not receive a paper statement and access your statements online, your merchant account provider may still charge you a monthly statement fee. Some processors do include monthly support costs in their “statement fee,” versus billing you a monthly “service fee.” If this is the case, a $5 to $10 monthly statement fee may be justified. However, you should not be charged an additional “monthly fee,” or “monthly service fee.”
- Online Access Fee. Many merchants prefer to view their monthly statements online, versus waiting for them to arrive in the physical mail. Some merchant account providers charge for this convenience, while others offer it for free. If your provider charges an online fee, be cautious about how they view your relationship.
- Regulatory/Report Fee. This is a recent fee imposed by merchant account providers, who now have to report your processing information to the U.S. government. Some providers are charging $2 to $5 per month to give the government this data. Every merchant account agreement I have seen allows for a fee increase should there be a change in card association regulations or rates, state and federal laws, sales volume, or equipment.
Merchants should understand the following points.
- Every Merchant Account Provider pays the same Interchange Rates and pass-through fees. Don’t like a salesperson tell you his company pays less.
- Fee income is important to providers. Merchant account providers can make higher profits on the monthly and annual fees than on the actual card processing. Therefore, you should view these fees as negotiable.
- Watch for excessive fees. Overuse and overcharging of these fees should be a red flag to the merchant regarding how the merchant account provider views its relationship with your company.
- Fees can change anytime. A merchant account provider’s “terms and conditions” allow the provider to change existing fees or impose new one.
- Interchange Rates and Pass-through Fees make up- the wholesale cost for the Merchant Account Provider.