Top Sneaky Ways Most Banks Jack Up Your Merchant Processing Fees (Without You Ever Realizing It)
Sep 24, 2019
Some merchants compare 1.95% versus 3.95% and assume that the former rate is better. But, that’s not always the case.
So you got pre-approved to accept online credit card orders and are considering the merchant processing fees in your contract. One payment processor is offering you 1.95% and the other is offering 3.95%. Which one should you choose?
The first processing statement often comes as a shock to most merchants that start accepting credit card orders. When they sign an agreement they think only a small percentage of sales will be shared if they opt for a 1.95% rate. It turns out it’s more complicated than that.
We’ve seen this with a lot with our newer clients. A lack of knowledge about fees and charges can impact profit margin. This is especially true when merchants sell price-sensitive items or have lower margins such as Forex or crypto exchanges. Part of the issue stems from only focusing on the percentages.
For example, merchants look at the rates of 1.95% versus 3.95%. Because the latter is higher, they assume that monthly fees will be more costly. But that’s not always the case.
Also, there’s more fees applied to a merchant account besides credit card rates. So, to help you understand all the fees you should consider, this post will cover:
- Why merchant pricing varies;
- The models for merchant rates;
- The extra fees in your merchant account; and
- How you can lower those credit card processing rates
Before we get started, a note about predatory merchant services providers.
High-risk merchants will face higher fees
Businesses classified as high risk operate in industries that tend to have higher-than-average fraud or chargeback rates. Alternatively, they might be in an industry with reputational risk like adult dating or cam sites, or biz op. As such, merchant service providers are taking on extra liabilities by allowing you to accept card payments. The fees charged help them offset the costs and risks of doing do so. Your payment processor is on the hook for refunds and chargebacks if you cannot fund them or you go out of business.
These fees can at times amount to double what low-risk businesses pay. But being in a high-risk industry doesn’t mean you should be treated unfairly. And that’s what some merchant service providers (MSPs) do.
Some MSPs know it’s difficult for you to get a merchant account. As such, they often offer unreasonable terms that make it difficult for you to turn a reasonable profit after all their fees are considered.
Alternatively, some merchants believe they are getting a merchant account, but what they really are getting is a gateway. In the end, they have no portal to log into and no access to daily performance stats. Real-time data is crucial for keeping abreast of chargebacks and fraud.
Unfortunately, you don’t know this until after you’ve accepted their quick sign-up, no questions asked application. Several weeks later, they review your business model. And after reviewing your sales activity, they often terminate your merchant account. Or, instead of shutting down your account they allow you to keep processing while you pay inflated fees and rates.
You may choose to take the road of opening an account with PayPal or Stripe. These options offer reasonable rates and terms, plus they are quick to open the accounts. But, when a business sells risque products (like supplements, business education, fitness downloads) and attempts to scale, these low-risk processors shut down or freeze accounts overnight. Furthermore, they hold funds while they assess business activity, which sometimes take months.
So, merchants need to understand the fee structures and merchant pricing models to make better choices.
The costs of doing business with credit card processing
Credit card processing fees are a necessity. After all, the various companies involved in the process must make money to justify the cost of helping merchants like yourself get payment facilities.
Some fees are one-time fees, such as set-up or technical integration fees during the onboarding process. The bank’s underwriters, risk and technical integrations staff need to be paid for the upfront work they do for you. Other costs are recurring and payable either monthly or annually.
So, who needs to get paid?
As a business, you’ll pay to three separate fees and entities each time you accept a credit card payment:
- Interchange fees – paid to the bank that issued the customer’s card
- Assessment fees – paid to the card association, e.g., Mastercard, Visa. These companies set the rules for accepting payments with their cards.
- Processor markup – the fee paid to the merchant services provider that manages your credit card processing
The interchange and assessment fees are classified as the discount rate and are generally standard. The processor markup fee is variable. So, the aim is to find the company that offers the lowest markup. It is also important to work with a partner that understands your industry and can be flexible if there are a few bumps on the road such as a few high chargeback months or delays in obtaining PCI compliance. Pricing is important although, if you are operating a supplement business for example, having a flexible and understanding payment processor may be worth a higher fee. As a general rule, if the bank is making a nice margin to cover their liability in the event of affiliate or other fraud with your business, the more likely they are to be understanding if an issue arises.
How are you being charged?
There are three pricing models available for merchant accounts. These are different ways of calculating credit card rates for banks and payment providers.
- Interchange Merchant Pricing
Interchange plus is essentially a pass-through pricing model. A payment sales office will charge interchange fees at cost and then add their markup separately for their margin.
The fees do vary based on whether the customer makes purchases online or over the phone. They also vary based on the type of card used. So, the interchange and assessment rates will differ month to month based on the type of transaction and a variety of other factors. Domestic debit cards carry much lower fees than say a foreign business card. As such, if you’re selling mainly consumer products, this type of pricing may be most beneficial for cost savings as your interchange cost for debit and low rewards consumer cards will typically be under or close to 1%.
- Flat Rate Merchant Pricing
This is the simplest of the models to understand. You are charged one flat rate for the interchange and assessment fees.
So, for example, you may see a rate of 3.75% + $0.15. The percent covers the credit card interchange and assessment fees. The $0.15 is a fee per transaction, some can charge a lower fee for declined transactions vs approved.
However, you may end up paying more on a flat rate than the interchange plus model if most of your transactions are consumer credit or debit. Some transactions attract lower fees than others. If you’re paying a flat rate for all transactions, you do not get the benefit of the lower rates.
- Tiered Merchant Pricing
This model bundles all costs and categorizes credit card transactions in 3 tiers.
The processor pays the assessment and interchange fees on your behalf and then charges your business based on levels it creates. The levels are labeled as qualified, mid-qualified, and non-qualified. Qualified tier offers the lowest charge and the non-qualified the highest. The merchant service provider typically categorizes low reward and debit cards as qualified, higher reward or cash back cards as mid-qualified and business or foreign cards as non-qualified.
Want to slash your merchant processing fees by up to 3%? Email DirectPayNet today and find out how much you can save!
You aren’t paying attention to these other credit card processing fees and costs
There are other costs associated with accepting card payments besides the discount rate and the MSP markup. Below are five types of fees added to your processing statement each month.
1. NABU & APF
NABU and APF are part of the assessment fees. Mastercard’s Network Access Brand Usage (NABU) fee is a charge for credit card processing through Mastercard’s network. APF is Visa’s Acquirer Processing Fee, also known as the Visa Authorization Processing Fee. These fees are usually passed to merchant and are a few cents per transaction.
2. Chargeback Fee
This is the fee paid to your payment provider if a customer dispute results in a chargeback.Keep in mind that your customer’s bank has already charged your payment provider a fee for a chargeback. Your provider refunds the customer’s funds on your behalf and charges a fee for this. It ranges between $20 – $40 depending on your risk level. Note that only low risk merchants get the luxury of paying $20 per chargeback.
3. Representment Fee
When a merchant receives a customer dispute for a transaction, they have the choice of challenging it. If you fight or dispute a chargeback, you are required to pay a representment fee.
4. PCI Non-Compliance Fee
Card companies set the Payment Card Industry Data Security Standards (PCI DSS). Some processors charge a PCI fee to cover the cost of maintaining compliance or if you fail to adhere to the standards.
With a bundled fee, you might miss that you’re paying for this. Check your statements to verify. You only need to pay this fee if not PCI-compliant. If you are compliant, then this is one of the fees you can get rid of. Contact your MSP to ask about getting your PCI non-compliance fee removed.
5. Merchant Reserves
As a high-risk business, it’s more than likely that your payment provider will hold a merchant reserve. This occurs when a share of your sales are set aside to pay for unexpected expenses. It can be useful if you go out of business or if chargeback and refund requests surface (as the bank does not want to pay for that liability).
We’ve provided a cheat sheet on lowering merchant account reserves. Take a read.
The reserve requirements may decrease over time. But, if badly managed in the initial stages of your business, you might face cashflow problems. Thus, budget for at least a 10% reserve from some platforms. Others may hold your funds for 6 months, while some processors keep funds for 3 months. Asking your provider to cap the amount of the reserve will ensure to free up your cashflow as you scale.
Lowering your merchant fees
You cannot escape from paying merchant processing fees. But you should understand what they are, why they exist, and how you can lower them.
Flat rates are generally more costly if you accept local payments via your domestic merchant account. But, you will have room for negotiating card processing fees with an interchange model or tiered pricing.
Remember that banks and payment service providers must get a percentage of your revenue to operate their business. They must also cover liability for allowing you to use their payment platform. So, don’t be unrealistic in your expectations of the discount you can receive.
Prevent non-compliance fees by becoming and staying PCI compliant. Steps you can take include integrating 3DS to reduce chargeback and chargeback representment fees. A tool like 3DS is a great option, especially if your price points are extremely low. For example, $4.99 on an initial trial subscription offer requires an anti-fraud measure, because you don’t want to pay $35 for a chargeback on this transaction.
Also, consider getting offshore merchant accounts. When it comes to Interchange fees, territories will differ. For example, on average, EU interchange fees are lower than North America’s. But in North America, Canada is higher than in the USA. These are some of the little nuances that a merchant account support services company can help you with.
Other ways you can look to reduce your risks and thereby lower your fees include:
- Outsourcing to chargeback management companies to reduce chargeback and fraud rates;
- Using machine learning by adding anti-fraud tools to the backend of your website; and
- Beefing up your refund policies to give customers freedom to get their funds back if they are unsatisfied with your product or service. This is especially important for high-risk merchants such as those selling supplements, business opportunities or high-ticket luxury items.
Where do you go from here?
Merchant processing fees are quite complicated. So, make sure you understand the costs associated with accepting credit card payments so you can budget for these added expenses.
With careful management and favorable fraud ratios, you can lower them over time. Plus, you can start on the right foot when you choose the right payment processor. Pay attention to the terms in the contracts and read the fine print. Understand the pricing model and payment structure before you sign an agreement.
Getting cheap pricing is possible, but ask yourself this question: “What you’re getting for that money?” Take advantage of companies like DirectPayNet that operate in the high-risk community. They understand your struggles and know how to help you find the best solutions.
DirectPayNet provides payment strategies that can help you maximize your conversions globally all at an efficient rate. We also help our clients with merchant accounts that are on the brink of a shutdown. We can help you avoid bottlenecks that occur by relying on one solution for your business.
If you are ready to get more affordable merchant processing rates for your business, now is the time to contact our sales team.