Fees, fees, fees: who is in control of all these fees?
You need to know what you are paying for. Just like purchasing any service, credit card processing is a service with a price. All merchant processors have their own way of presenting fees and transaction charges. So, it is often difficult to make apples to apples comparisons between companies competing for your business.
- Purpose of this article: To provide a high-level breakdown of the costs associated with card transactions and determine which are negotiable.
Take a look at this scenario:
If a business were to run a $1,000 transaction on a debit card, the Interchange Rate (the amount paid to the card issuer as compensation for expenses incurred in providing lines of credit to card holders) without markup would be 0.05% plus $0.21. The wholesale cost for that transaction would be $0.71. Alternatively, PayPal would charge 2.9% for the same transaction for a total fee of $29.
Obviously, the cost for cards is dramatically determined by your payments processing strategy. If you are willing and able to take on some of the channel functions (risk, underwriting, reporting, etc.) you may create a processing cost reduction.
Before you can begin to understand processing fees, you need to know who the players are and what their roles are. Think of them as financial “middlemen” between a customer and merchant.
Who does what:
Credit Card Associations (or networks):
- Create the credit card brands, like Visa, MasterCard, and American Express
- Set the rules for the industry
Credit Card Issuing Banks:
- Financial institutions that issue the credit cards, like Chase, Citi, and Wells Fargo
Credit Card Processors (also known as Acquiring Banks/Acquirers):
- Institutions act as messengers between merchants and credit card associations. They pass batch information and authorization requests along so that merchants can complete transactions in their businesses.
- Take legal responsibility for funds by directing them from buyers to sellers
- Underwritten by an Acquirer
- May store funds within the Payment Facilitator’s account
- Connects them to networks and financial institutions with APIs
- Aggregates multiple users on a platform (typically a Business to Business environment)
- One shared merchant account
Merchant Account Providers or Merchant Service Providers:
- With the help of an acquirer, these companies manage credit card processing (e.g. sales, support, reporting, etc). They could be financial institutions, independent sales organizations (ISOs), or acquirers who offer a merchant program.
- Middlemen between the merchant and the credit issuer. For a fee, they will handle processing of all credit card payments for your business – everything from collecting interchange fees (detailed below) to managing the transfer of funds between the merchant’s bank and the credit issuing bank.
- These are special portals that route transactions to an acquirer, typically used with online shopping carts.
Think of payment transaction fees in two categories: base fees and markups. The base fees are not negotiable. The markup fees need to be well understood in order to be negotiated.
These fees are determined by the credit card issuing bank and the credit card associations (Visa, Mastercard, Discover). These fees are consistent regardless of which processor you choose. In other words, don’t try to shop around for lower base fees or rates from various credit card processors. This is the non-negotiable part.
Like any markup, these are how your credit card processor is planning to make a profit from your business. This is where you want to understand what you will be paying. To make things difficult, some processors use confusing terms and most pricing models are difficult to understand. Markup fees are different from processor to processor and are what you should be comparing when preparing to open a new merchant account.
These fees are assessed every time you run a transaction. They represent the biggest cost of operating a merchant account.
In addition to transactional fees, you may be charged some flat fees as well. They vary by name, value, and applicability, but at least some of them will show up on your monthly statements.
Incidental fees only appear per incidence. For example, when a chargeback occurs, you are charged a chargeback fee.
If you want a more detailed look at the three fee categories above, click here.
In conclusion, payment facilitators are good for enterprises that aggregate multiple users on a platform. Typically, small businesses will end up paying higher fees for lower transaction volumes and don’t need extensive service and support. Merchant Account Providers are better for high-volume businesses seeking a better transaction cost structure and one-on-one customer support.
See a more detailed description and breakdown of how each of the types of fees are compiled.