Advice on Retail Merchant Account Processing Rates

Merchant Warehouse |

December 7, 2010

It is the business environment – retail, Internet, mail and phone orders (known as MOTO) and so on – that has perhaps the greatest effect on how rates are charged to merchant accounts. This factor is considered along with a list of other variables, including location, type of business transaction, purchase amount and customer profile. Rates are continually adjusted to keep pace with the changing realities of credit card fraud risk and consumer creditworthiness.

Retail environments with card-present payments help stem the growth of illegal card transactions. The customer swipes the card through the terminal and the information is then submitted. When merchants suspect that a fraudulent purchase is taking place, they can request to view the credit cards as well as the individual’s license or other photo ID. Once they have compared the signature from the credit card to the other ID, and everything is cleared, then the payment process can proceed.

How it Works

Interchange rates for card-present transactions have been lowered in recognition of the lower risk for processing them. The credit card associations have decided to do this almost as a sort of reward, but in fact it is just good business. Merchant banks incur charges for processing, so not only are the processing rates assessed on transactions but there are also other associated fees that merchants must pay.

Merchant account processing fees and rates can get confusing at times, and the terms are used quite loosely. You may hear someone mention a “transaction fee” or a “transaction rate,” although both terms refer to a certain kind of per-item charge. It is wise, then, to be very careful about using the right terms and working diligently to make oneself understood when speaking of these rates and fees.

Here is some information that can help you understand them better, and recognize at just what level, whether a percentage or flat per-item fee, they should be.

Discount Rates

This is a percent of the transaction amount. For credit cards and debit cards you should only be paying perhaps a few percentage points, at most. These rates are associated with consumer cards that are among the most widely used. Other types of cards that are widely used include various business cards, commercial cards, reward cards and other specialty types. These are often charged a higher interchange rate.

You should always request that your merchant services provider disclose the pricing structure they are using. Using common sense, you will discover that the solution for you will most likely be to orient your business model as much as possible to the most lenient rates. However, you will not have much room to negotiate if you are an Internet-only merchant, since those rates are among the highest. Remember, it is a function of the risk involved – and not just fraud risk, but risk of consumer dissatisfaction, returns, refunds, over-limit declines, etc. – that ultimately determines what the rates are. And in the course of your many transactions, especially if you have several different “environments” (web, brick and mortar, MOTO) in which you are doing business, you will find that you are being charged a number of different rates depending on individual circumstances.

Transaction Fees

This is a fixed amount that you pay for each transaction. Anything over 20 cents is usually termed “outrageous,” at least by the posters at the various merchant account forums and discussion groups on the Internet. Unless you have a poor business record and no creditworthiness, you should be able to negotiate a better rate than that.

Initial Setup Fees

Fees associated with setting up the account, or application fees, may also be collected from you, although this most often takes place up front, in a lump sum. Some contracts have allowed merchants to pay these amounts over a set period of time, although it is usually only 60 to 90 days. These initial fees are also subject to negotiation and may be waived if your provider and bank believe you may be the next Google.

Maintenance Fees

Merchant providers will sometimes charge you a monthly fee in order to maintain the account. This should not cost the customer any more than $10 per month, and is also subject to being waived. This is separate from the Statement Fee that is usually worked in somewhere in that crowded merchant account statement. Make sure you know what is what on that statement.

Support Fee

If you are on the ball, you can pretend that this does not exist because you won’t be paying for it unless you have zero leverage in the negotiation. This kind of fee is another way that a bank and provider will offset what they think are coming chargebacks, refunds or fraud losses on a new, small or otherwise questionable merchant account. If you are being hit with all kinds of these smaller fees, it is because the next step would be for the merchant account provider, whether a bank or Independent Sales Organization (ISO), to decline your application entirely.

Miscellaneous Costs

Payment processing terminals are also required for any merchant that wants to keep the revenue rolling through his physical store location. Your merchant account provider can issue these to you and implement it within its own system. It is possible to obtain a terminal from a third party, as well, as long as you confirm compatibility beforehand.

Besides the equipment issues, you need to review the merchant account agreement. This will ensure that you will have a clear understanding of charges that are incurred and if you are being mistakenly charged for anything. Make sure that the provider discloses to you the procedures for a quick recovery of bounced checks, chargebacks and fraudulent transactions so you can work together to limit these business killers.

This list may not be exhaustive, and rates and fees change all the time. There is no substitute for current, up-to-the-minute information and details, so stay on top of the rate changes and make sure you are getting the service you deserve from the service personnel at your bank and payment processor. Keep this relationship positive, stay honest and above board in your business practices, reduce fraud and customer-service-related losses (chargebacks, refunds, etc.) – and you should be able to assure yourself of the best possible rates and the lowest possible fees.