Your Guide to Understanding Your Credit Card Processing Fees
With so many different fees involved with credit card processing, it’s not easy for you as a business owner to keep track of what you’re being charged. But the more you know, the more likely you’ll notice an unfair cost and look to dispute it. Not to mention, it will help you have a better understanding of what your true overhead is. Below is our complete guide to all of the different types of processing fees and everything you need to know to truly understand them.
Parties Involved with Credit Card Processing
Before you can understand your fees, you need to know who is charging you them! The parties associated with processing fees can be thought of as financial middlemen between you, the merchant, and your customers. Some of these middlemen include:
- Credit Card Associations: These are your major credit card companies (Visa, Mastercard, American Express, etc.).
- Credit Card Issuing Banks: These are the institutions that issue the credit cards, like Chase and Wells Fargo. Some card associations, like Discover and American Express, take on the role of a bank, developing and issuing their own cards.
- Credit Card Processors: You may know them as Acquiring Banks or Acquirers, these institutions are the messengers between merchants and credit card associations. Credit card processors allow merchants to complete transactions.
- Merchant Account Providers: These are the companies that manage all aspects of credit card processing. Depending on the situation, these providers can be financial institutions, independent sales, organizations, or double-duty acquirers.
- Payment Getaways: These are special portals that route transactions to an acquirer (ex: an online shopping cart).
Types of Credit Card Processing Fees
There are three main types of fees that the above parties can charge you to complete a transaction. They are:
- Transactional Fees: Transactional fees are charged per business transaction.
- Flat Fees: Monthly flat fees are dependent upon the type of business you run.
- Incidental Fees: Incidental fees are only charged when something happens (ex: a chargeback).
Each type can be further broken down into smaller fees that are dependent on the nature of your business.
Transactional fees represent the biggest cost of operating a merchant account.
Interchange Reimbursement Fee
The interchange reimbursement fee should be the largest expense paid both per sale and per month. This fee is charged by credit card associations and card-issuing banks per transaction. Wholesale rates for this fee typically consist of a percentage of the transaction as well as a flat per transaction fee (ex: 2.1%+ .10). This fee is usually based on a percentage of your total transaction volume for the month.
If you are on an interchange-plus pricing structure, your processor will quote you a price that will be added to the wholesale rate (ex: .25% + .10). For merchants on a tiered pricing plan, you will get a quote with a qualified, mid-qualified, or non-qualified rate. You will not see the markup, making it more difficult to know what the processors’ margin is.
There are various flat fees you can be charged. While you may not encounter all of them, some of the more common flat fees in credit card processing include:
- Terminal Fee: This fee only applies to businesses with physical locations.
- Payment Getaway Fee: This is e-commerce’s version of terminal fees. Not all online businesses have to pay these fees; some processors have in-house payment getaways that are free.
- Payment Card Industry (PCI) Fee: These are fees paid to the PCI either for noncompliance or compliance. In noncompliance cases, you pay because your business is not upholding the standards set by PCI. This could wind up costing you more money in the long run. In compliance cases, you have to pay the merchant account provider to ensure you follow the regulations at all times.
- Annual Fee: These are fees charged every year for the basic use of a provider’s services. Not all merchant account providers charge this fee.
- Early Termination Fee: This fee can be avoided, as long as you do not cancel your contract early.
- Monthly Fee: This fee is mostly charged for the purpose of covering call center costs.
- Monthly Minimum Fee: This fee is charged to merchants who do not reach a certain transaction total for the month and/or year. While the minimum transaction total varies by provider, most are around $50,000/year.
- Statement Fee: This fee is charged to cover printing and mailing costs for your statements. Some merchants bypass this fee by using electronic billing statements.
- IRS Report Fee: Merchant account providers charge these fees for reporting transaction information to the IRS (1099-K).
- Network Fee: Card networks charge non-negotiable fees that are passed through to the merchant (ex: Fixed Acquirer Network Fee, or FANF).
While not all incidental fees can be avoided, the goal is to have as few of these charges as possible. Some examples of incidental fees include:
- Address Verification Service (AVS): This fee is charged on every e-commerce or telephone order transaction. It is important for these types of businesses to keep an eye on their AVS fee. Retail businesses that occasionally need to key-in card information don’t need to worry about this fee as much.
- Retrieval Request Fee: This fee is charged every time a customer initiates a dispute on a charge from your business. The retrieval request is the first step in the chargeback protocol. If the actual chargeback occurs, you will be hit with a chargeback fee (on top of losing the money from the sale).
- Batch Fee: This fee is charged whenever you submit a batch of transactions.
- Non-Sufficient Funds (NSF) Fee: NSF fees are charged if you do not have enough funds in your account to cover your merchant account expenses.
All credit cards and merchant account providers have their own set of costs associated with their services. The more you understand what you are being charged for, the more you can negotiate with your processor to help you save money.