Credit card handling costs are substantial, challenging, and rather frustrating. However, you have to pay them if you want to process credit cards through your business. Rather than paying these charges blindly, you may as well make an initiative to understand them. That way, you can challenge any expenses you believe are unfair or get a far better knowledge of what your real expenses is. With any luck, this quick guide will help you do just that.
Prior to you can start to understand processing costs, you need to know about the parties entailed with them. Think about these the financial “middlemen” in between a customer and merchant. They consist of the following parties.
These are undoubtedly the firms that produce the credit cards, like Visa, MasterCard, and American Express. These kinds of players are the guys that set the policies. There are other credit cards such as UnionPay from China, JCB from Japan and Carte Bleu from France. If you’re selling mainly in the US then Visa, MasterCard should be sufficient to collect payments from your customers. If you’re selling in other countries, then you’ll need to offer payments via the credit cards in that specific country. In China, for example, you will need to offer UnionPay.
Also called Acquiring Banks also known as Acquirers, these establishments act as mediators in between merchants and credit card associations. They successfully pass batch information and authorization requests along so that merchants can finish transactions in their businesses. A merchant may experience a number of acquirers for one purchase– one that creates monthly statements, one that handles technical support, and one that issues funds to a bank account.
These are the financial institutions that the credit cards, like Chase Bank, Citibank, and Wells Fargo. Some card organizations take on the role of a bank as well, creating and providing their own cards. Good examples include Discover and American Express.
These are business that take care of credit card processing (e.g. sales, support, etc.), typically through the help of an acquirer. They could be financial institutions, independent sales companies, or double-duty acquirers, depending on the situation.
These are unique websites that route purchases to an acquirer. Generally this is when you have an online shopping cart.
In any type of provided purchase, the above-mentioned parties play a role. Here’s a visuals to help you imagine the circulation of a normal credit card purchase.
Now that we’ve covered all the parties involved in a purchase, let’s go over the various types of charges in any given credit card transaction.
These fees are assessed every time you run a purchase. They represent the biggest cost of operating a merchant account.
In addition to transactional costs, you may be billed some flat charges as well. They differ by name, value, and applicability, but at least some of them will show up on your regular monthly statements.
Flat costs are always billed, but subordinate costs only appear per incidence. When a chargeback occurs, for instance, you are demanded a chargeback charge. Some months you will certainly not have any type of chargebacks, and, for that reason, the cost will certainly not be billed. However, there’s more than just one incidental cost so keep reading to figure out what they are.
All of the above costs (transactional, fixed, random) fall into one of two classifications: (1) wholesale costs, and (2) spreads. Just remember, spreads are flexible, while wholesale charges are not.
I’m using the phrase “wholesale” to help you imagine the significance responsible for this type of charge, but it can go by other names as well, like, “base cost” or “pre-markup” etc. Your wholesale costs are precisely like they sound– the wholesale cost of your sales transactions. These costs are established by the credit card issuing financial institution and the credit card associations (Visa, MasterCard, etc.). They are consistent regardless of that provider you choose. In other words, don’t try to shop around for reduced wholesale costs or rates from numerous credit card processors. It’s simply not going to happen.
Your markup costs are how your credit card processor is intending to make a profit from your company. Having the ideal processor, these charges will be small. With the incorrect processor– you’re in trouble. What’s worse is that some processors make it as hard as feasible to know how much markup you’re paying out by using overwelming terms and pricing models that would frustrate even the most skilled business owner. Markup charges are various from processor to processor and are what you should be contrasting when preparing to open a new merchant account.
These are the costs the card-issuing banks and the credit card associations bill for each purchase, and they stand for the largest expense merchants (should) pay per sale and per month. Interchange costs usually consist of a percentage of each transaction accompanied by a flat per transaction fee (2.2% +.15). Assessments are typically based on a portion of the total transaction amount for the month. Examples of these non-negotiable interchange and assessment merchant account charges include: Merit 1/ecommerce/CNP fees, NABU/APF/data usage fees, Dues and assessments. Each card association publishes their interchange and assessment charges online (e.g. Visa, MasterCard, Discover, American Express). Remember, these are the wholesale rates. Now, let’s say you’re on an interchange-plus pricing structure. Your processor will quote you something like (.35% +.15). This is their markup. That is the quantity that they will add to the wholesale rates. But, if you’re on a tiered pricing plan, you’ll get a quote with the Qualified, Mid-Qualified, and Non-Qualified rates that we talked about earlier. Those quotes have the margin baked right into the quote, thus making it more difficult to tell what the processors margin is.
These are charges charged to merchants who do not reach a certain transaction total for the month or year. The minimums will vary by provider, but most of them are around $10,000 to $50,000 a year. This is another fee that is not charged by some of the better providers.
These are costs charged to cover printing and mailing costs for credit card statements. Some merchants bypass these costs by using electronic bill statements, but others pay as much as $15 a month for miscellaneous processing costs.
These are costs that merchant account providers charge in exchange for reporting transaction information to the IRS (1099-K). Most of these charges range from $2 to $5, depending on the provider.
These are alternatives to statement costs, charged to merchants who choose to view their statements online. Most providers will not charge this kind of fee, and those that do often lump it together with others.
The card networks charge certain non-negotiable charges that are passed through to the merchant, such as the FANF.
These are charged to retailers who have physical stores, where they straight swipe a customer’s card. If you operate a company on the internet, you will not have to worry about this. Some service providers try to lock merchants into terminal lease contract, but as we’ve discussed before, don’t rent a terminal. Some payment providers will urge you to buy your machine straight-out for a low one-time fee. This can save actually thousands of bucks in the long-run.
Payment Gateway Charges: These are similar to terminal costs, but they are applied to ecommerce companies instead. Some processors have in-house payment gateways that are free of charge You can learn more about payment gateway’s here.
These are charges paid to the Payment Card Industry, either for noncompliance or compliance. In the case of noncompliance, you have to pay because your business is not upholding PCI standards, which could cost you even more money in the long run. In the case of compliance, you have to pay the merchant account provider to make sure you remain in line with the regulations at all times. Unfortunately, some providers charge for this service without actually providing it, so you need to make sure you are being cared for at all times.
These are charges charged every year to cover the basic use of a provider’s services. In our opinion, this is a bogus fee. Most of the better merchant account providers will not charge it.
This is pretty self-explanatory. It is a charge that is charged if you cancel your contract early. Another fee you definitely want to avoid.
These are costs that are charged each month, usually for the purpose of covering call center costs. Ironically, most of the phone calls that come in are the result of mistakes made by the merchant account providers, making them the cause of their own costs. If you’re looking for the lowest monthly fee possible (a good idea if you have a low volume) take a look at Payline Data. They have a plan for just $5 per month.
If you have an e-commerce or telephone order business, beware of the AVS charge. It will be charged on every single transaction. For retail businesses that occasionally key-in card information, you don’t need to worry about it as much.
Every time a customer initiates a dispute on a charge from your business, it sets into motion the chargeback protocol. This retrieval request is the first step. The fee covers any expense related to the retrieval request.
After the retrieval request, the actual chargeback may occur depending on the circumstances. If it does, expect another charge on top of losing the money from the sale.
Every time you submit a batch of transactions, a batch fee (or batch header) is charged. It only happens once or twice a day, so don’t worry too much about an extra dime or two.
If you don’t have enough funds in your bank account to cover your merchant account expenses, you will be assessed a NSF (non-sufficient funds) cost.
When it comes to selling merchant accounts, there are four preferred ways of pricing: interchange-plus, tiered pricing, subscription/membership, and blended.
The first is referred to as an interchange plus pricing model. This is the most plain-spoken pricing model with the most reasonable terms and charges. Interchange-plus itemizes wholesale fees and markups and plainly lists them on your month-to-month statement. It may make your statement a little bit more difficult to read, but it’s worth it since you’ll understand specifically what the distinction in between your wholesale costs and markups are.
If you aren’t lucky enough to be on interchange plus pricing, chances are you’re tied up in a tiered or ‘bundled’ pricing model. In fact, the vast majority of business owners are on a tiered plan, which may make it more difficult to review and understand some statement charges.
Tiered pricing plans categorize credit card transactions into several groups– qualified, mid-qualified and non-qualified Generally, certified rates are the lowest, and the transaction rates boost for mid-qualified and are highest for non-qualified transactions. Qualified transactions have to comply with all of the processor’s criteria for processing, such as a swipe in-person with a batch settlement the same day. Failing to meet one or more standards may result in a ‘downgrade’ to mid-qualified or non-qualified tiers.
Though tiered pricing plans aren’t always a bad thing, some suspicious merchant account processors will take advantage of this more difficult price plan to charge merchants too much charges. You could end up paying a lot more than you want to with little way of identifying specifically what you are paying for. This is due to the fact that processors frequently fail to divulge which tiers the merchant’s purchases are falling into, making it near difficult to establish the markup rates.
This is a relatively brand-new pricing system, but it’s catching on. It is similar to interchange-plus in that the actual expense of the purchase is billed individually from the mark up. But the distinction is that you do not pay out any portion markup, just a tiny transactions fee. For merchants with large purchases especially, this kind of pricing can save a lot of money without decreasing transparency. Check out Payment Depot for a terrific instance of this kind of pricing.
This is like tiered pricing, but without having the tiers. Rather all transaction cost the exact same portion and transaction charge, regardless of the wholesale cost. All costs are blended together to create one consistent rate and charge. This tends to make the transaction price very high, particularly for debit transactions. But because processors using blended rates (like Stripe and PayPal) normally do not charge a month-to-month charge, this pricing model often makes sense for low-volume businesses.
Each credit card and merchant account carrier has a various set of costs associated with its companies. Some of them are inescapable, but others can be bargained. Remember to select interchange-plus, and keep in mind that most of the flat charges can be bargained. If you refine a lot of deals, don’t be afraid to deal with your processor. With that in mind, there are several processors out there that are really transparent with their costs and are more than delighted to place you on interchange-plus credit card processing charges.