Credit card processing fees are a long-standing pain for merchants. This post is the first in a series where I answer common payment questions. I should not avoid controversy and explain how treatment fees are derived and transferred to merchants. All the time, I will suggest ways to reduce treatment costs.
The first challenge is to understand the industry jargon.
Card Associations. Visa, Mastercard, American Express and Discover.
Short Brands. Same as short Associations.
Card holder. The person whose name appears on the credit card.
Issuing bank. In addition, "issuer." The financial institution (usually a bank) that creates the credit card and distributes it to its customer, Card Holder. One Issuing bank earns one exchange fee each time its credit card is used. exchange Fees transferred to merchants.
Payment Network. In addition, the "network", "the payment ecosystem", "the payment industry." payment Network describes all companies and technologies that issue credit cards and accept and process credit card payments.
Processor. In addition, "payment processor." A company that produces technology to enable merchants to accept credit card payments. Examples are Fiserv (formerly First Data), Chase Paymentech, Bank of America Merchant Services and Stripe. ONE processor can be a variety of companies and technicians focusing on the flow of money from the cashier to the merchant's checking account.
My qualified transactions. IN level Pricing model, the fee charged by processors to merchants too My qualified transactions is higher than Non-qualified transactions but lower than that Qualified transactions. Each processor determines how transactions are to be qualified. There is no industry standard or state regulation. Examples of typical My qualified transactions are those made with rewards or luxury cards and in some cases when the payment is made by telephone or by post (MOTO – mail order, telephone order).
Non-qualified transactions. IN Level Pricing Model, the course for Non-qualified transactions is generally the highest. Examples of Non-qualified transactions are usually all purchases of e-commerce and those made with luxury, corporate and high reward cards.
Qualified transactions. IN Level Pricing Model, the course for Qualified transactions is the lowest that a processor charges a trader. Qualified transactions carry the lowest risk and is done with most basic credit cards – ie no rewards, no annual fee, standard.
Prices and fees
Quick Connection. In addition, "assessments", "appraisal fee", "association fee." A fee charged by the merchant processor for each transaction and given to Card Brands as compensation. The Quick Connection and Exchange fee constitutes wholesale fee.
Discount. In addition "Merchant Payment Processing Fees", "Processing Fees", "Sales Price Discount." The last, all-in rate that a merchant pays per transaction for processing. The Discount comprises Exchange, Quick Connection, also mark Fees.
Disparage. Also "transaction downgrade." When one processor categorizes a payment as something other than one Qualified transaction. ONE Disparage is poor (but often unavoidable) for traders as it results in a higher processing cost. Each processor has its own criteria for downgrading transactions.
Fixed price. In addition, "simplified standard pricing", "all-in pricing", "packaged pricing." A single all-in fee from a processor to a merchant for all transactions, regardless of type. For example, Stripe offers a standard pricing of 2.9 percent + 30 cents per transaction.
Exchange. In addition, "exchange fee", "exchange rate." A term to describe about 400 different fees earned by one Issuing bank to compensate for issuing credit and financing the payment transaction. Exchange is the income for the bank issuing the credit card. For example, when a customer pays with a Chase Freedom Visa credit card, Chase (the issuing bank) Exchange. Exchange prices are set by Card Brands and collected by processor. Exchange and Quick Connection comprises wholesale fee.
Interchange Plus. A pricing model where the trader is charged Exchange, Quick Connectionand Marking fee. Unlike Fixed price and level Pricing, Interchange Plus offers transparency in how fees are constructed and charged. Interchange Plus is Exchange + Quick Connection + Selection fee (a percentage, usually, is charged by processor).
Marking fees. In addition, "markup", "markup rate." Fees charged to merchants above Exchange and Quick Connection. ONE processor collects and retains mark Fees as compensation for its services.
Level Pricing. In addition, "bucket pricing." The process of setting payment processing fees around levels or categories – usually three or more. The most common are Qualified, Mid-Qualified, also Non-Qualified. ONE processor determines levels and fees. ONE processor also classifies transactions per level based on risk. The online sale of a diamond ring is more risky than the personal sale of a cup of coffee. The diamond ring transaction would be Non-Qualified while the coffee would be Qualified. More risky transactions are usually Mid-Qualified and Non-Qualified, which has higher fees.
Wholesale fee. Also "wholesale price." The combination of Exchange and Quick Connection. Each processor have to pay wholesale fee but can add mark Fees.
Frequently asked questions begin below and continue in subsequent installments for this series. Terms from the payment glossary are activated.
Many issuing banks offer prices such as 2.9 percent + 30 cents. Why are there two charges – a percentage fee and a flat fee – for each transaction?
Flat fees cover operating costs and generate profits for the payment network. Processing credit card transactions requires specialized, complex and connected computer systems that work flawlessly 24/7. It also requires many employees to manage and implement. This massive network of computers and people costs a lot of money to build, maintain and secure. These operating costs are generally fixed. For example, Visa reported its 2019 operating expenses to $ 7.98 billion, up 4 percent from 2018.
The standard fee that comes with each transaction is the payment network's way of recovering operating costs. A large transaction (such as a diamond ring) uses about the same level of computing power as a smaller one (such as a cup of coffee). Thus, a fixed fee ensures that the payment network can cover its expenses and generate a (large) profit, regardless of the transaction amount.
Percentage fees go mostly to the issuing bank to compensate for granting credit.
In fact, a credit card purchase is similar to a loan. When a buyer fails to pay off his credit card loan (the lowest balance of payments), the issuing bank usually charges about 21 percent interest.
The higher the transaction value, the greater the risk to the issuing bank. Therefore, in order to take greater risks by financing larger purchases, issuing banks want a larger fee.
Together, the percentage and late fees turn into an extremely profitable business for the banks.
I see that most exchange fees are less than 2 percent. But my processor takes a lot more than that. Why?
If Interchange is revenue for the issuing banks and a card association fee is revenue for the card brands, how do processors get paid? The answer is Markup fees, which are the extra fees that processors charge retailers over wholesale fees.
Markup is charged to the trader in different ways. Sometimes it is collected in standard pricing (a single rate, for example Stripes 2.9 percent + 30 cents). Sometimes marking fees are more transparent. This is Interchange Plus, which is Interchange plus agreed Markup fees.
Sometimes information on transaction fees is baked. For example, Stripes is 2.9 percent + 30 cents higher than the average exchange rate of 1.8 percent. Thus, Stripes Markup is on average about 1.1 percent.
Marking fees may be displayed outside the transaction. Often, a processor takes a lower profit margin on transaction fees to generate higher profits from other services.
Here is a list of common fees from processors.
- Account Setup Fees
- Annual or monthly fees – often called "general fees" or "maintenance fees."
- Access to payment gateway and installation fees.
- Sales of hardware fees for rent such as rent, leasing, installation and maintenance.
- Payment Card Industry (PCI) compliance and fees that do not meet the requirements.
- Refund fees and fines.
- Fraud prevention fees.
- Support Fees.
- Statement fees – for postage statements.
- Closing or closing accounts.
- Withdrawals and transfer fees.
- Exchange Fees.
- Charge for lowest volume.
When choosing a processor, you should consider all selection fees. Some will be revealed. Others will be hidden or buried in a transaction fee.
Merchants often only look at wholesale fees (fees and card association fees) when comparing processors. This is a mistake as marking fees can be expensive. For example, I've seen processors charge $ 300 for early termination.
Remember that wholesale fees cannot be negotiated. No processor can change them. Markup fees, on the other hand, are negotiable. If you have significant volume, talk to the processor sales team. Show how a reduction in depreciation charges will help your company become a profitable, long-term partner.