It should come as no surprise that merchant account fees come standard with any high-risk merchant account. Understanding what these fees are and why you are paying them can help reduce costs in the long run. Some fees are negotiable, some fees can be removed entirely, and others are permanent. In any of these cases, it’s important to know what you’re paying and how you can adjust it to minimize extraneous payments and maximize profits.
This is the first part of a two-part post about fees. Here, we will focus on high-risk merchant account fees. Part 2 will focus on payment processing fees, which will be posted next week. If you want to hear more about your payment processing fees, please check out my podcast, Uncensored Direct Marketing and you can watch me explain and give more details about merchant fees. Click this link to watch, and don’t forget to like and subscribe for more content.
First, Understand Your Merchant Services Statement
Before doing anything, you should aim to understand your merchant statement from top to bottom. That might sound tedious and time-consuming, but after the first one or two times, it becomes second nature.
By the end of the month, you should have several documents: your merchant statement, processing statement (complete with a month of processing history), and your bank statement. You should compare these with your merchant contract (not to be confused with your merchant statement) as well as your payment gateway and CRM backlog.
The first reason you’re comparing these is to find anomalies or errors. These documents may not match up 100%, but they should be close enough to not raise a red flag in your head. Time zone differences and next-day payment processing are a couple of reasons why the data might not be identical. Reconcile the content anyway to understand what you’re being charged, and if there are errors then of course you should bring it up with your high-risk payment processor.
The second reason is to understand the fees on your statements. There are many transaction and monthly fees on your statements, including a setup fee, and most are looked over without question—but you should question them all. You can do the research yourself about what each fee is, contact us to do it, or use some other 3rd-party reviewer. This level of attention can quickly add some percentage to your bottom line. And if you have a high volume, say $100k per month, even just half a percent adds up to a significant amount.
One of the most important items on your statement is called the Discount Rate. No, this isn’t an amount you’re saving. Instead, it’s the percentage taken from your sales volume as a fee and they can range by a lot (as low as 1%, as high as 6%).
The discount rate depends on how aggressive your business model is. The goal is to minimize the discount rate as much as possible. However, it’s not something you can negotiate whenever you want. For example, you shouldn’t negotiate this rate if you have a high chargeback ratio (say, over 2%). You also should know how much to negotiate—don’t try to ask for a 1% discount rate if you’re currently on 6%.
The best time is when you’ve been working with a processing company and your business is doing well, or if you’re just starting out (but it’s a little less likely). Remember, it’s always a good idea to aim for a healthy, positive relationship with your processor, acquiring bank, and merchant account provider.
Second, Understand the 3 Ways You’re Being Charged for High-Risk Credit Card Processing
There are three main ways you are charged for credit card processing: flat rate, three-tier, and interchange plus. There have been fluctuations with which method is most popular or “best”, but in the end it all depends on what your business needs and reacts to most positively.
Aim to understand the differences so you can choose or negotiate the method that suits you best.
This is the method used by popular service providers like Stripe and PayPal. Flat rate means you get charged the same amount for everything. It’s usually on the higher end, like 3% or 4%. So that means 4% will cover all credit card processing fees instead of breaking each fee down into its own item.
You can think of it as an all-inclusive rate. You pay a little more, but everything gets covered and you don’t have to go through hours of scanning your documents because it’s neatly packaged in one percentage. However, this is the least beneficial charge rate for most business owners.
Flat rate processing solutions are good as a backup (e.g., in the case that your own merchant account is not functional, then you can implement Stripe or PayPal as a gateway temporarily), but rarely as your primary. It’s good if you’re just starting out and getting a feel for the industry and how sales works.
The tiered pricing method gives a little more freedom and leniency when it comes to high-risk merchant account fees. There are three tiers here: qualified, mid-qualified, and non-qualified. Essentially, the processor can break down transactions by associated risk and then charge a separate fee based on that. You can more easily understand each rate and why it’s being processed that way, but it can also lead to higher fees. This is because processors define each tier differently.
Qualified means consumer credit cards without rewards. These are the lowest risk, so you get charged the least. In fact, most processors will charge this rate for your cards first, and then change the tier, so pay attention to your statement.
Mid-qualified is for Card Not Present transactions, like when typing in a customer’s credit card payment info over the phone or through the mail. There’s more risk here, so you get charged a higher rate. Some rewards cards also fall into this category, but it’s really up to the processor to decide.
Non-qualified is the highest rate. This is also for rewards cards as well as signature and corporate cards. E-commerce typically falls under this category, even the customer is using a regular consumer card.
By far the most beneficial category to date, interchange plus is the most negotiable rate plan available. However, it takes a lot more patience and effort to understand high-risk merchant account fees here as well as timeliness when negotiating interchange plus pricing.
There’s nothing hidden with interchange plus—all interchange rates are published online as the price each card network charges you (i.e., Visa, MasterCard, etc.). The trickiest part is that each rate changes based on your merchant category. For example, if the category states you’re charged a fee of 0.65% per debit card transaction and 1.2% per business card, then interchange plus will say “this transaction is from a debit card, so we’ll charge you 0.65% as cost + the payment processors fee of 1%”
One thing to note about interchange plus is that you’ll always pay far less for personal and debit cards even if your rate is higher, especially in comparison to flat rate processors like Stripe. Transparency is key here; you always know what you’re paying and can easily calculate the associated fees.
Merchant Category Code (MCC)
Back to the tricky part: your Merchant Category Code (MCC). There are upwards of 180 categories of interchange, and it’s not always clear which one your high-risk business falls under. For example, if you are a health and beauty store and you sell a wide range of products, from supplements and skin care to CBD and e-cigarettes/vapes, then you can be categorized under several different MCCs. The one your processor assigns you may not have the lowest rate or be the most fitting according to you. Luckily, you can negotiate this because MCCs are open to interpretation, especially when applying for your merchant services.
One thing to note, not every category can be negotiated. For example, if you work in adult entertainment or other business types that are always categorized as high-risk industries, then you’re stuck with that high-risk category code and the associated processing fees.
Different processors will categorize you in different ways, so it might be beneficial to assign a merchant account as one MCC and another as a different code, then compare the benefits at the end of the month. The results might surprise you. You might even be able to gain a low-risk merchant account category even if your business is technically higher risk. It’s all in the negotiation and the support you can provide to back up your claims.
It’s best to negotiate your code when filing your application, not after. So do the research beforehand and find out which MCCs you’re most attracted to, then plan out your argument for why that code fits you best. Processors won’t be so willing to change it later on. They also won’t be willing to change it if you receive excessive chargebacks
Security and Chargebacks
Lastly, interchange plus rates can be affected by anti-fraud measures like 3D Secure, which can lower rates to 0.1%. There are many 3D Secure integrations available that don’t disrupt the checkout experience, so your customers won’t be deterred from finishing their purchase. Pricing for 3D Secure may cost up to $0.10, but it prevents a lot of chargebacks. Similar statements can be said for AVS and CVV. In the end, you’ll save a lot of money because each credit card transaction is less risky for the credit card processor.
Part 1 High-Risk Business Fees Wrap-Up
By now, you should know interchange plus is favoured, it’s important to read and reconcile your monthly statements, and security pays off in the long run. If you have any questions, DirectPayNet is always here to help you make the best decision for your high-risk business. You can contact our customer representatives at any time. We specialize in high-risk payment processing for e-commerce businesses and are more than willing to help you understand your options and the benefits a merchant account can provide.
Part 2 will cover processing fees, including chargeback fees, early termination fees, transaction fees, PCI-compliance and reserves (like rolling reserves). Keep reading to stay informed about how we can improve your operations, one fee at a time.