How to Identify the Most Common Hidden, Inflated, or Dubious Processing Rates and Fees – Part 2
Part Two
The purpose of this 3-part article is to educate readers on the most common dubious fees charged by certain credit card providers. Keep in mind, there is a lack of enforced standards in the card processing industry and all providers do not play by the same rules. Therefore, it is possible for two providers to offer the same rates and fees but still have significantly different processing costs to you.
Refund Processing Fee
All merchants need to understand how the provider handles refunds before they sign the processing agreement. This is especially important for ecommerce merchants because they may have more refunds than the average card-present merchant.
Understand that when a merchant refunds the customer for a returned item, Visa and MasterCard return the interchange for the original sale to the provider. The interchange rate generally makes up the majority of the entire processing fee. The amount returned by Visa and MasterCard may not be the exact interchange charged for the sale because of the tiered interchange refund schedule they use. Nonetheless, at least the vast majority of the interchange is returned to the provider. However, there are no enforced industry standards that require the provider to give the interchange back to the merchant. Even worse, some providers not only pocket the returned interchange but they also charge the full processing fee on the refund transaction. This dubious fee costs many merchants $100s or even 1,000s each year.
Providers generally handle refunds in one of four ways.
- Return the entire processing fee -Some processors not only return the interchange but also return the whole processing fee. They may charge a transaction fee (say 10 cents) for the sale and the refund.
- Return the interchange – Some processors properly return the interchange to the merchant. They charge their processing mark-up (say 0.10%) and a transaction fee on the sale and a transaction fee on the refund.
- Keep the interchange – Some processors keep the interchange. In fact, they keep the entire processing fee change on the sale and charge a transaction fee on the refund.
- Keep the interchange and charge another processing fee on the refund – Some processors keep the entire processing fee, including the interchange, charged on the sale then charge another processing fee on the refund.
The cost difference between Provider #1 and #4 can be huge even if they both offer the same rates and fees. For example, say a merchant had 50 refunds totaling $10,000 and say the effective rate was 2.5% + $0.10 per transaction. Provider #1 would only charge (50) transaction fees for the sales and (50) transaction fees for the refunds for a total of $10. Provider #4 would charge 2.5% + $0.10 on the $10,000 in sales then charge 2.5% + $0.10 on $10,000 in refunds totaling $510. There is a significant difference between Provider #1’s $10 cost and Provider #2’s $510 cost especially when you consider the merchant’s net sales were $0.00 for those transactions.
AVS (Address Verification Service) Fee
AVS is a fraud reduction tool provided by credit card associations and issuing banks to check the submitted billing address against their records. Unfortunately, the AVS fee is one the most hidden and misleading fees used by some providers to generate revenue at the merchant’s expense. This fee can have a significant impact on Card-Not-Present merchants especially those with a low average ticket or a very high transaction volume. Understand that many salespeople and customer service personal do not know the true fees charged by the card companies so they may tell you that the AVS fee charged by the provider is a card company fee and not their fee.
The fact is that MasterCard charges a $0.0075 (0.75 cents) per transaction AVS fee for ecommerce and other card-not-present merchants when address verification service is used to validate a cardholder’s address. They also charge a $0.005 (0.5 cents) per transaction AVS fee for card-present merchants when the service is used. Nonetheless, some providers will try to charge their own AVS fee on all debit and credit card transactions. Generally, these providers will charge $0.05 to $0.15 per transaction. For these providers, the AVS may be used to make their rate of say 0.10% + $0.05 look better than the competitor’s rate of 0.10% + $0.10 when in fact they are charging a $0.10 AVS fee on top of the rate and the competitor doesn’t charge an AVS fee.
American Express Transaction Fee
If you accept American Express, it wouldn’t be surprising to find you are paying a higher per transaction fee for Amex than you are for Visa, MasterCard, and Discover. When auditing statements, it isn’t unusual for me to see the Amex transaction fee charged by the provider to be 2 to 4 times more than the provider’s transaction fee for the other card brands. There is no justification for the huge difference in these transaction fees other than the provider knows the merchant isn’t concerned with the fee so it can be another dubious revenue generator for the provider.
I’ll continue with more hidden, inflated, and dubious fees in the next article
