Your small business involves many complex moving parts. Among the most potentially confusing is the system that enables you to receive credit and debit card payments from your customers. Considering that cash and checks are fading in popularity, it is a virtual certainty that you will need to sign up for a merchant account, if you haven’t already. Having said that, before you rashly scribble your name on the dotted line of the first contract presented to you, it is in your best interests to understand the fees that you may or may not be charged by your merchant account provider. While some of these are fixed and non-negotiable, others are not. In this arena, knowledge truly is power, as it can save you thousands of dollars over time.
Meet the player involved in credit card processing.
There are a number of entities involved in the processing of credit and debit card payments. Not surprisingly, each of them wants to make a profit as much as you do. The cast of characters in your payment landscape include the following:
- Credit card associations. These are companies such as Visa, Mastercard, and American Express that create the cards that consumers use. They encrypt hardware and software and come up with industry-specific processing rates.
- Issuing banks. These institutions issue cards to consumers after determining that they are credit-worthy. Common examples are Chase and Wells Fargo, among others.
- Credit card acquirers/acquiring banks. These financial institutions assist business owners who want to sign up for a merchant account, which is a specialized account that is used to receive and temporarily store the card payments that issuing banks send to you before they are transmitted to your business account.
- Credit card processors. Before you can accept credit or debit cards, you need card-reading and/or NFC contactless payment hardware, along with the software necessary to run it. It is the credit card processor who helps you to compile all of the components necessary to accept credit and debit card transactions. Often, they will bundle everything into one package and bill you accordingly. Many of these companies also offer the payment gateway software and other infrastructure essential to setting up an online shopping cart for your ecommerce platform. This includes a secure vault to store tokenized customer credit card information, as well as everything you will need to accept mobile payments.
All of these middlemen work together to make it possible for you to accept payments online or in-person. The progression works like this:
- The customer inputs their card information via a payment gateway or by swiping, dipping, or tapping their credit or debit card. The data is transmitted to the processor, who determines which card network they should send the information to. The card network then sends the request to the issuing bank, which verifies that the customer has sufficient credit to process the transaction. If they do, confirmation of payment approval is relayed to the merchant.
- The confirmed transaction is submitted for actual payment, either at that time or at the end of the day or week as part of a batch. The submission moves from the processor, who forwards it to the right card network and then to the issuing bank, who ultimately furnishes the payment.
- The payment moves through the system via inter-bank transfer methods back to the merchant account, with all of the other players taking their portion of the associated fees. Only then is the payment settled.
In some cases, disputes occur in which the funds are reversed due to defective merchandise or fraud. Should this happen, a situation is known as a chargeback, additional costs may be incurred.
General information about the fees involved.
Now that you have an idea of who is involved in the payment process, it’s time to dive into a discussion of the fees you will see on your bill. In general, they fall into two categories: wholesale and markup. Wholesale fees go to the issuing banks in the form of interchange fees and to the credit card associations as card association fees. These fees are fixed and non-negotiable. Conversely, markup fees are charged by your payment processor (along with anyone you pay to furnish you with supplementary services such as a payment gateway). Markup fees vary from processor to processor. Because of the variability associated with these markup fees, the importance of selecting a legitimate payment processor that is committed to helping you grow your business cannot be overstated.
Every time you make a debit or credit card transaction, there are fees involved, which represent the lion’s share of the costs involved with accepting credit cards. These fees can be percentages of the transaction amount or a set dollar amount. Types of transactional fees include:
- Wholesale fees. Included in this category are interchange fees (a flat per-transaction fee and a percentage of the transaction amount whose cost depends on the type of card used and the manner in which the card is processed, i.e. swiped, dipped, etc). Then there are the assessment fees charged by the credit card associations, which are based on a percentage of your total monthly transaction volume. Assessment fees vary according to the particular credit card company involved.
- Markup transaction fees. All processors add additional fees to the wholesale interchange rates you will pay. Examples include the interchange-plus model, in which the processor adds a percentage markup above the interchange rates. Plus, a tiered pricing structure that changes the markup rates according to whether the transaction is considered to be qualified, mid-qualified, or non-qualified.
Each month, you’re likely to see several predictable flat fees on your statement. These include but are not limited to the following a:
- Mastercard merchant location fee.
- PIN debit network fee.
- Online reporting fee.
- Monthly minimum fee.
- POS software fee.
- Payment gateway fee.
- Terminal/equipment fee.
- PCI compliance fee.
- IRS reporting fee.
- Visa fixed acquirer network fee.
- Statement fee.
- Online reporting fee.
You also may see occasional, unscheduled fees for setup, early termination, account closure, address verification service (AVS), chargebacks, retrieval request, non-sufficient funds, batches, PCI noncompliance, and processing integrity. In many cases, you can avoid these fees by making sure that they do not appear in any contract that you sign at the outset.
The reality is, paying the fees associated with accepting credit and debit cards can simply be considered the cost of doing business — a cost you should be able to more than offset given the increase in sales accepting non-cash payments should trigger. These days, you really can’t afford to prevent customers from paying using their method of choice. However, that does not mean that you are at the mercy of predatory payments partners. You have options. A savvy merchant is one who can save thousands of dollars in unnecessary charges over time by doing their research before they sign a merchant agreement. Be sure that you understand the charges where there is wiggle room, as well as those that are non-negotiable. In the end, taking the time to educate yourself will be an investment worth its weight in gold.