August 16, 2018
By Joseph Gallucci, CEO, PayFrog
[Editor’s Note: As our readership expands, it comes with fresh faces completely new to the card-not-present payments environment. For that reason, we like to get back to basics occasionally. When a merchant begins accepting card-not-present transactions, the monthly statement from its payment provider can be confusing and opaque. The following is a refresher on the fees processors charge, why they charge them and who benefits.]
Credit card processing fees are made up of two parts: the portion the card brand (Visa, MasterCard, Discover, and American Express) is charging the processor to run the transaction, and the extra bit your payment processor is making as profit from the transaction. Let’s call these wholesale fees and retail markup fees. The wholesale fees won’t change from processor to processor because they are set by the cards brands. It is helpful to know what the wholesale payment processing costs are, since those are the non-negotiable, foundational components that make up a credit card processor’s offering for credit card processing fees.
Wholesale Credit Card Processing Fees
There are two main components for wholesale processing fees: Interchange and Dues/Assessments.
You may be surprised to learn that the biggest portion of your credit card processing bill does not go to your processor or the card brand networks (Visa, MasterCard, and Discover). Interchange fees actually get paid to the cardholders’ card issuing banks to compensate them for issuing the card and the risk of fraudulent transactions. Here are a few examples of common Visa interchange rates that card-not-present merchants will likely see often:
- Regulated Consumer Debit: 0.05% + $0.22 (for debit cards issued by banks with over $10 billion in assets)
- Non-Regulated Consumer Debit: 1.65% + $0.15 (for debit cards issued by banks with less than $10 billion in assets)
- Consumer Credit: 1.8% + $0.10
- Rewards/Signature/Infinite: 1.9% + $0.10 (for cards that award cardholders points, airline miles, cash back, etc.)
- EIRF Consumer Credit: 2.3% + $0.10 (for personal credit cards on transactions submitted with inaccurate information; the most probable cause being inaccurate billing address)
There are actually hundreds of interchange rates that can change based on merchant type and other factors. These include transaction size, card type, additional information submitted with transactions, and batch timing. Here are links where you can obtain the full tables for Visa & MasterCard:
- Visa: https://usa.visa.com/dam/VCOM/global/support-legal/documents/visa-usa-interchange-reimbursement-fees-april-2018.pdfhttps://usa.visa.com/support/small-business/regulations-fees.html
- MasterCard: https://www.mastercard.us/en-us/about-mastercard/what-we-do/interchange.html
It’s important to know that all processors in the U.S. share the same interchange costs. It’s also important to know that interchange can be optimized if you’re on the right type of pricing plan. This way, you qualify for the lowest interchange rates, as discussed in the last section of the article.
Dues and Assessments are the fees that go directly to Visa, MasterCard, and Discover for use of their networks. Just like interchange rates, dues or assessments are the same for all payment processors, but they may or may not be passed directly onto your merchant statement. This shift of fees depends on your merchant account pricing plan. Here are a few of the bigger dues/assessments:
Volume assessments on gross card brand sales:
- Visa: 0.13%
- MasterCard: 0.12% – 0.14%
- Discover: 0.13%
- American Express: 0.15% (+0.30% for card-not-present transactions)
International Fees (charged when the card is issued by a foreign bank for a U.S. merchant):
- Visa: 1.25%
- MasterCard: 1.45%
- Discover: 1.35%
- American Express: 0.40%
- MasterCard: Annual Merchant Location Fee: $15/year – Charged for each merchant location accepting over $200.
- Visa: Fixed Acquirer Network Fee (FANF): Chart for card-not-present merchants.
- American Express: Program fees vary by SIC Code and transaction size. Unlike interchange, the AmEx program fees will go directly to American Express as the acting card network and issuer. Most processors utilize the newer Opt Blue program allowing them to charge these wholesale processing costs in addition to a markup on Amex transactions. In most cases, the AmEx program fees are similar to the interchange rates of Visa, making AmEx more affordable for small businesses.
Card networks can update these fees as often as every six months. Here is the full list of the spring 2018 network fees: https://www.merchantcardservicespro.com/wp-content/uploads/Payment-Network-Fees.pdf
Credit Card Processing Pricing Plans
With an understanding of the wholesale processing expenses that payment processors have, you now know that anything a processor charges above that is basically their profit margin. All businesses need to have a profit margin on their product/service offerings to pay for general business expenses like rent, utilities, payroll, etc. and credit card processors are no exception. So don’t expect processors to waive their markups completely. However, since all processors in the U.S. share the same wholesale processing costs, the only difference in pricing from one processor to another is the amount of their markups. If all processors used the same method for their profit markups, comparing processors pricing would be easy. However, they usually offer one of three types of pricing plans. Knowing them will help you understand what type of plan you are on and if you need to make a change.
A tiered plan offers one or more flat rate(s) to merchants. They encompass the variable wholesale processing cost and a variable markup profit margin to meet the flat rate. Sometimes the tiered rate(s) cover the dues and assessments described above, and sometimes they do not. So be sure to ask your processor or review your merchant statement if you are on this pricing plan. For example, a processor may charge a single tier rate of 2.9% for all transactions.
It’s also common for processors to charge several flat tiers. For example, a three-tiered plan may have a qualified rate (low tier), a mid-qualified rate (middle tier), and a non-qualified rate (high expensive tier). The processor then decides which transactions will be assigned to which tier.
The Cost Plus pricing plan is the one we recommend for merchants who want the best deal. The processor charges a set markup on each transaction. The markup rate is transparent to the merchant, so you’ll know how much your processor is profiting on your account. This can be a negotiating point later on, especially if your business and sales volumes grow and you see your processor’s gross profits rise with your increased activity.
Some merchants fear this type of pricing plan because they do not understand interchange and are worried about having a bill that can fluctuate based on what type of cards they take in a given month. However, card types average out, and if you’re a subscription-based merchant that has clients on recurring billing, you’ll be billing the same cards every month anyway.
Although less common, some processors still use Billback pricing. This is a hybrid billing method which combines a single tier for cheaper transactions with a cost-plus billing method for more expensive card types. The problem with this billing method is its deceptive origin. It was created with the sole purpose of confusing merchants and increasing processor profits. Oftentimes, unscrupulous payment sales reps will tout this pricing plan as a cheaper single-tiered plan. When the plan is billed, only the first month is billed at the lower quoted single-tiered rate. The more expensive surcharges from month 1 are added onto the following month’s bill and this continues in perpetuity. Billback pricing creates the need to look at 2 monthly statements to gather the credit card processing fees incurred from 1 processing month. Sadly, most merchants never realize what is happening on their bill, except that they are paying more than expected.
Retail Markup Credit Card Processing Fees
After the wholesale fees due to interchange and other network assessments, everything else a processor charges a merchant is part of its retail markup. They will vary based on the type of pricing plan a merchant is on, but here are fees that are often built into the markup.
Transactional Credit Card Processing Fees
The below fees occur when your businesses runs credit card sales.
- Authorization Fee: Every time you attempt a sale, the card will be declined or authorized. This is a flat fee associated with that attempt.
- Batch Fee: A batch is one day’s worth of transactions. If you have no sales on a day, then no batch goes out. If you have one or more sales, then a flat batch fee will be charged for that day.
- Discount Rate: This is the percentage-based fee charged by the processor on your dollar volume of sales. If your business is on a tiered plan, then this percentage will be higher and will encompass the interchange fee. If your billing plan is Cost Plus, then this rate will be much smaller, but it won’t encompass the interchange rate, which will be billed separately.
- Address Verification Fee: Your processor has the option to check the billing zip code and street address of a card-not-present transaction.
Incidental Credit Card Processing Fees
These fees do not necessarily happen when you run a transaction. They are avoidable and if you’re doing it right, should happen rarely.
- Non-Sufficient Funds Fee: This fee occurs when the payment processor attempts to pull money from your business checking account, and the attempt fails due to lack of enough funds. The processor usually attempts debits at month-end for collecting their credit card processing fees, but they can also debit mid-month if you have a chargeback or a negative batch (more refunds than sales in a day).
- Retrieval Request: During a cardholder dispute, you’ll be requested to send the cardholder’s authorization signature, a receipt or invoice, and proof of delivery of the goods or services in question.
- Chargeback Fee: If you lose the dispute with the cardholder, you lose the original sale amount back to that customer. A chargeback is when the funds are forcibly reversed from your business checking account back to the cardholder. But because you lost the dispute, you’ll also pay a chargeback fee for losing the mediation process.
Flat Credit Card Processing Fees
Flat fees are similar to incidental fees because they do not require a transaction to occur. Instead, they depend on what you’re doing (or not doing) with your merchant account.
- PCI Compliance Fee: The processor pays a Qualified Security Assessor (QSA) with this fee to monitor your compliance with the Payment Card Industry security standards and help prevent your business from falling victim to a data breach.
- PCI Non-Compliance Fine: If you don’t keep certified with your QSA to keep your merchant account compliant, some processors charge a monthly fine until you recertify your compliance.
- Monthly Minimum: A monthly minimum is a fee that is billed if you don’t hit a certain amount of sales volume each month. This is usually pro-rated, meaning if you have some sales it will partially lower the fee until you hit your minimum threshold when it’s waived completely.
- Statement/Customer Service: A flat monthly fee just to keep your merchant account open.
- Gateway Fees: As a card-not-present subscription merchant, you will need a payment gateway to store and encrypt sensitive cardholder account numbers. Through a process called tokenization, you can then set up credit cards subscriptions securely with automated recurring billing. A gateway fee is billed monthly just for keeping it open.
- IRS Reporting: Your payment processor must file an annual form called a 1099-K which reports your gross processing sales. The cost of this is pushed onto the merchant by way of a small monthly fee. Don’t forget to tell your tax accountant to deduct refunds, chargebacks, and credit card processing fees on your tax return as those are not accounted for in your 1099-K form.
Savings for Subscription-Based Merchants
You may think that the credit card processing fees for subscription merchants differ drastically from other card-not-present merchants, but they are actually very similar. The interchange rates an e-commerce merchant qualifies are the same for most subscription-based merchants. The exceptions are Telcom, Cable, and Utility companies, which have specific interchange pricing categories. Interchange rates vary mostly by the type of card being accepted rather than if the charge is a recurring one. Making a charge recurring does not immediately affect the interchange rate. However, there are two key differences subscription-based merchants need to know.
Account Updater Fees
Many subscription-based merchants use a credit card account auto-updater service. For your long-time customers, a credit or debit cards might expire, get lost, or possibly even stolen. It’s not time efficient to call every cardholder when their card expires and they forget to update you with their new card information. To avoid this, subscription merchants use an Account Updater program. It is a small additional fee your payment gateway provider charges you. It updates account information every month. Authorize.net, the largest gateway provider in the U.S., charges a $0.25 fee per updated card. That’s significantly less than the cost of hiring someone to make phone calls to the cardholder requesting updated information. Keep in mind, though, that an Account Updater program doesn’t automatically find new billing addresses. It only updates the account number and the expiration date.
Address Verification Service (AVS) Mismatch Downgrades
The second factor a subscription merchant should take into account is the increased cost of charging a card with a mismatched billing address. Because Account Updater programs cannot find the new, correct address, the transactions for that customer gets a downgraded interchange level. This downgrade is called Electronic Interchange Reimbursement Fee (EIRF). An EIRF can cause the interchange cost to increase by 0.50%. What’s worse, if you’re on a 3-tiered plan, this could cause your transaction to fall from qualified down to non-qualified, potentially costing you 1% or more for the transaction. This can add up over time to be very expensive, especially as more and more of your customer base updates their billing address.
This can affect subscription merchants differently depending on the average transaction size. For example, if your average subscription is only $50/year, it may not be worth your time to collect an updated billing address from your customer to save $0.25 – $0.50 per year. However, if you’re average subscription is $500/month, that AVS savings could equate to $30-$60 per year on that customer.
Fortunately, in your payment gateway settings, you can request to be notified when a transaction goes through with a mismatched billing address. When you receive those email notices, you should have your support staff reach out to those cardholders to update their billing address on file. A single update to their billing address means cost savings on all those future subscription transactions! That is…until the cardholder moves again.
Joseph Gallucci is the Founder and CEO of PayFrog, a merchant consulting firm and a brokerage for credit card processing technologies. He has been in the merchant services industry since 2009, and he enjoys helping businesses and non-profits save money.