An annual fee is any fixed charge that banks or other financial institutions charge for the use of merchant accounts, credit cards or other financial instruments. Faced with rising costs and increased competition, banks have removed the annual fees for some instruments while increasing others.
A few decades ago when credit card companies competed to get hundreds of millions of cards out to consumers, their annual fees were non-negotiable costs of doing business. In 1980 the US Government passed a temporary moratorium on issuing new credit cards. In turn the issuing banks began charging annual fees to all of their existing customers ranging from as little as $35 per year for average cards to as much as $1000 per year for cards like American Express Platinum that offered “perks” and held a perceived level of status.
Today competition for clients has led companies to eliminate annual fees on most cards as well as offer other incentives such as zero interest periods, redeemable points, discounts on certain purchases, low interest balance transfers and cash advances.
Merchant accounts however have increased their fees, and with good reason. In order for a new merchant account to be issued, companies that provide them are required to perform a variety of checks on the stability and credit worthiness of the business and its principal owners. This requires the expenditure of time and resources by the companies issuing the merchant accounts. Though technology has made it easier, it is still quite an effort to successfully process and rate a new business’ standing.
In a post-911 world, background checks have become routine for most employers, and complex systems are in place to make that process faster and more effective. But that only covers criminal backgrounds, citizenship status and other national security criteria. Merchant account companies additionally must check into the financial backgrounds of businesses and individuals.
Trained individuals using the latest software spend hours tracking the backgrounds of applicants and businesses and rating them on a complicated system designed to determine their credit worthiness. If certain areas are impossible to ascertain, resultant zero scores in those categories might not exclude an applicant, but they will certainly lower his overall evaluation.
Financial background checking is not an easy task. Records of past financial indiscretions can be sealed by savvy attorneys. Even without a conscious attempt to conceal past indiscretions, uncovering precise details of complicated financial maneuvers and accurate descriptions of corporate ownership and liability can be time consuming endeavors. Add in foreign individuals and offshore accounts, and determining an applicant’s worthiness for a merchant account takes significant work.
Furthermore, these checks are also done on a regular basis both for the protection of the card holders and as a way of gauging increased scores of newer merchants. After periods of exemplary behavior, new companies welcome the opportunity to raise their credit standing in the industry in the hopes of lowering costs and perhaps borrowing more capitol.
Because of the extensive processes needed to check the background of a merchant, and because merchants are entrusted with the handling and processing of large numbers of credit cards, valuable customer information, and monetary transactions, the annual fees charged by merchant account issuing companies are used to cover the cost of the initial appraisal and subsequent updates.