Credit Card Processing Fees and Rates - Where is my Money Going?

Merchant Warehouse |

December 9, 2010

There is always a concern for merchants when it comes to credit card processing and the rates, fees and penalties that are involved. Of course, no one likes to pay high rates for credit card processing, and some fees and penalties can make a business owner downright angry. There are some costs that can be controlled, however, and to learn how to do so you need to understand where your money is going. When you know who is making how much and why, you will be prepared to do something about the controllable costs.

It is important to remember that even fees that are charged to the merchants end up as part of the pricing formula for businesses. Business owners must consider their total cost of operations when setting prices so that they can make a profit and survive. Any fees they are charged, therefore, will be passed along to you as another nickel or dime added to the price tags. Therefore, all credit card fees are important to understand, even those you are not paying directly.

The Major Fees

One main way that credit card companies make money is called the “interchange fee.” Every time a credit or debit card is used for a purchase, the business making the sale will pay a small amount, usually 2% or 3%, with the majority of the fee going to the card issuer’s bank (“acquiring bank”). A portion of it will also go to the “transaction processing network” as well as to the card association (Visa, MasterCard, etc.). When considering the credit card companies’ total income from its card users, the interchange fees account for some 15-20% of it.

Merchants are usually not told about interchange fees as such, but are presented by the bank or account provider with a “discount rate.” The fact is, this rate is the interchange fee plus whatever margin the credit card company wants to add for itself as a “per-transaction fee.” There are also fees for authorizations, whether or not the sale even goes through, and this is direct income for the credit card company and the payment processor (which could be the same or different entities).

Additional Account Costs

Credit card companies charge various fees to their customers, of course, and splits them with the card-issuing banks according to many different formulas. If you miss or are late on a payment, you will be charged a late fee according to the formula in your credit card agreement (or one of the many “updates” mailed after the account is open). If your account goes over its credit limit, you will be charged, too, this time with an “over limit” fee. Using convenience checks or getting a cash advance will result in an additional fee being charged, as well. Purchases requiring foreign currency conversion can be hit with as much as a 3% surcharge, and there are the usual annual/membership fees to add in, too. Finally, your rewards programs probably cost you, too.

There are some reputable banks and financial institutions that are willing to offer their support, in the form of more affordable rates, to the up and coming entrepreneurs The Internet is the most efficient and affordable way to find a provider with such offers as well as financial firms offering “tailored” merchant accounts. The best strategy for reducing fees, of course, is to be a big business with a great credit history and solid profits. The leverage that these firms have is substantial, as they represent ongoing high value to the banks.

Summing Up

Rates associated with credit card processing vary from bank to bank, provider to provider. There are a still a few that will insist on an initial installation fee or a one-time fee for setting up the account, although good negotiating skills on your part can usually get these removed. Of course, it is important to ensure that the service provided to you is as good as the rates offered by the provider, and you may decide it is worth paying a bit more to have a reputable firm of long standing handling your processing and card transactions.

Always compare the rates offered by the various financial institutions. You might like the services offered by one merchant account provider but prefer the rates of the other. In order to best each other in the competition and get your business, the one bank or provider can lower its rates or the other can offer you more, and more specialized, services. Choose the best deal that suits your business. Don’t get tempted to go for options or features you don’t need, or the most sophisticated set-up, and don’t lease your equipment. The lease fees for a year will have paid for a terminal or two, in many cases. Choose a deal that has good credit card processing rates, the best overall service and a way of doing business that suits your particular business. As always, the more you know going in, the better you’ll be coming out!