“Merchant fees” are more commonly referred to as “interchange fees.” The term is used by the payment card industry to describe what a merchant’s bank (“acquiring bank”) pays a customer’s bank (“issuing bank”) when that merchant processes transactions with cards in the Visa and MasterCard associations.
In a typical credit card transaction with a typical merchant, the issuing bank subtracts the interchange fee from the sum it remits to the acquiring bank (the one handling transactions for the merchant). When the acquiring bank pays the merchant, it will also deduct a small, additional fee for itself. In common usage, these deductions are called merchant fees whether considered together or separately.
The credit card associations set these fees, which are the largest of the various charges that banks levy against merchants’ credit card sales. Accounting for some 70 to 90 percent of the total, the merchant/interchange fees consider credit/debit card types, card brand, merchant type and size, transaction category (online, in-store, mail or telephone order) and other factors in complex, changeable rate schedules. There is normally a flat fee portion, to which is added a certain percentage of the total transaction value, including all applicable taxes. A number of studies put the total merchant fee at around 2 percent per transaction.
Fighting the Fee Fight
Merchant fees are not always popular, of course, and state and federal regulators have investigated charges of collusion and price-fixing in the past. The largest retailers, like Wal-Mart and Sears, have much more leverage with both card associations and the financial sector, and can negotiate advantageous deals. While cash and PIN-based debit cards understandably remain the most popular means of remittance with retailers, the average merchant is not in a position to refuse the major bankcard association cards.
For some merchants, the merchant fees can offset their slim profit margins, but even this is seen as a cost of doing business, considering the much more damaging alternative – not making credit card sales. Merchants can always hold out hope that the U.S. might follow the lead of some other industrialized countries and coerce (or force) the card associations to reduce the interchange fees, at least for SMBs (Small and Medium Sized Businesses). Also, since the fees are the object of ongoing litigation in the United States right now, there may be relief in sight if the courts find in favor of the merchant plaintiffs.
The most important thing, of course, is to work with the laws and procedures that are in place, and use your business skills and common sense to work smarter and harder. On the one hand, reduce expenses as much as you can, including ones associated with your credit card processing. On the other hand, work efficiently and effectively, growing your business and your profit margin as best you can. Keeping control of your merchant fees, as much as you possibly can, is a good start.