On a recent episode of the Uncensored Direct Marketing podcast, my guest Julian Reyes brought up how easy it is for agents like us to rip off business owners with confusing merchant services pricing.
He said that dozens of agents liked to operate in a cloud of obscurity, and it wasn’t until much later that he realized that he had been screwed over by several hidden fees that were buried in the fine print.
With that in mind, it’s worth spending time educating you on merchant account fees to ensure eager salespeople don’t push you into hidden processing costs and surcharges that could add up to as much as 10% (if not more) off the top of all your online sales.
Once you understand how payment processing fees actually work, you’ll know how to spot when someone is trying to sneak something in under the radar.
So without further ado, let’s get into it.
What are Merchant Account Fees?
The fees you pay associated with your merchant account are made up of a collection of charges passed over to merchants from entities such as payment gateways, payment processors, and credit card companies such as Visa and Mastercard.
There are a lot of fees that you may end up paying per transaction. But broadly speaking, they fall into three categories: set transaction fees charged by the card brands, universal fees every merchant pays regardless of circumstances, and situational fees that vary based on specific conditions.
Thus, as you might expect, merchant fees can vary widely depending on several factors. From the brand of card a customer pays with to the specific pricing policy your payment processor has concerning a certain transaction type, what you are charged could vary quite dramatically to another merchant in another industry if you make the wrong choice.
Need a little more help trying to compare payment processors? It goes much deeper than the fees they charge! We’ve distilled the evaluation process into some neat criteria for you. Check them out here!
The Three Primary Methods Merchant Account Providers Use to Charge You for Their Services
Once again, there are three primary buckets into which merchant account pricing structures fall: flat fees, tiered pricing, and interchange-plus pricing. So let’s quickly run through each of them.
Flat pricing is exactly what it sounds like. You pay one flat fee for all transactions regardless of the card issuer or the type of payment made. This could cost you anywhere between 1.5% – 3% and includes a per-transaction fee. For example, a flat pricing rate might look something like 2.5% + $0.30 per transaction.
This percentage and per-transaction fee is the standard for flat pricing models and is most commonly offered by third-party payment facilitators such as PayPal and Stripe.
Tiered plans group different card types and card member associations into “tiers.” In most cases, there are three different price bands (it seems the payments industry LOVES the number three!).
So depending on the card type and issuer a customer uses, you’ll be charged a different rate accordingly. So you might pay one rate for a payment made with a Discover credit card, and a totally different rate for a payment made with a Visa debit card.
Not to libel any other merchant services providers, but this is the pricing method our merchants encounter the most problems with. Often the lowest rate is the one that’s advertised in marketing materials and gets merchants on board.
But once they integrate the credit card processing company into their small business, they find that most transactions fall into the highest pricing tier. Sometimes, a dozen or more conditions need to be met for a transaction to qualify for the lowest tier.
Of course, the other issue is that salespeople and processing service providers bury the qualification criteria for the best processing rates in 30 pages of small print in font size 4! (No, I’m not joking!).
Sometimes the markup being passed on you as the merchant is extortionate compared to the initial wholesale fees charged by credit card networks. The whole debacle is then made a thousand times worse by a monstrous cancellation fee for early termination of the agreement.
Interchange Plus Cost Pricing
Interchange pricing is the most granular and transparent way for a merchant account provider to charge you for their services. The interchange fee refers to the cut that each moving part of the payment processing chain receives during a transaction.
These parties include:
- The credit card association
- The credit card’s issuing bank
- The credit card processor
- Merchant account providers
- Payment gateway provider
Each different possible combination of the above is charged at a different rate based on certain agreements and integrations they have with each other. Thus, Visa may have several different interchange rates depending on how the card was run, who processed it, and which bank issued it.
Those rates are publicly released and are regularly changed and adjusted depending on current circumstances. Interchange plus cost pricing refers to charging you a transparent markup on those publicly-available interchange fees.
So a merchant services provider may charge interchange + $0.15 on each payment, to use an arbitrary example.
This pricing option is often far cheaper per transaction than using the above two methods. As mentioned, some merchant services companies are charging double-digit markups on those wholesale credit card processing fees. That’s how we can often save merchants switching to interchange pricing as much as 20-30% in fees associated with card transactions.
Plus, you have the advantage of knowing where you stand from the outset.
However, you need to be aware of several more fees you can expect to pay as a high-risk merchant.
Other Fees a Merchant Account Provider Charges
There is a myriad of possible additional or circumstantial prices your merchant account provider could charge you. There are also several fees that you will be charged regardless of your choice of pricing structure. So let’s take a look at the main fees.
When a transaction is being processed, an authorization token is sent back and forth between the issuing bank and the acquiring bank to check that the balance or credit is available for the requested transaction. The transition is subsequently either approved or declined. There is a tiny fee charged on a per-transaction basis for this procedure, and you’re charged it even if a transaction is declined.
The second part of the fees associated with each sale you make is a transaction fee. Merchant service providers use transaction fee to describe the per-transaction fee they collect. Many providers describe this fee differently. Some express it as a percentage of each transaction, which includes the authorization fee mentioned above. Others charge a set amount on top of the authorization fee they pass on to you from issuers and acquirers. So read the fine print!
Again, a standing monthly fee is pretty common for a merchant account provider. Sometimes this is expressed as a percentage of your processed revenues. Other providers prefer charging a flat fee. It all depends on their specific company policy.
Not only will you lose the money from the card payments disputed by customers, but you’ll be hit with a chargeback fee from your MSP too! Again, this is a standard fee charged by all providers, and each prices them slightly differently.
Cancellation or Termination Fees
These can be enormous and quite deliberately hidden in the dossier of terms and conditions that accompanies the three-page long contract you sign! Make sure you find out what it is, as you’ll have to pay it when leaving an agreement you’re not happy with later down the line.
Foreign Transaction Fees
Again, domestic merchant account providers charge another standard fee for payments made in another currency or from a different country.
Other Common Fees
Those listed above are just a few of the most common fees, but there are several others that you may need to look out for, including:
- Payment gateway fees
- Minimum processing commitment fees
- Statement and reporting fees
- Address verification system fees
- Batch processing fee
- PCI non-compliance fee
- Application or setup fee
- Point-of-sale (POS) hardware fees
When it Comes to Merchant Accounts, Always Read the Fine Print
There are so many fees charged as part of your merchant account that it can be hard to know where to start. The truth is that there are no shortcuts when it comes to protecting your business. You need to read the fine print, with a magnifying glass if necessary!
It does help if you have an expert on hand to read the contracts for you and spot secret or completely made-up scam fees that could leave you losing as much as 20% off the top for simply accepting credit card payments for your small business.
We work with all kinds of high-risk online retailers and can secure much better rates on your behalf by leveraging the industry relationships we’ve built over the last two decades. By working with us, we can ensure that you don’t fall into any of the traps set by devious operators that give the payments industry a bad name.