Merchant Services Rates and Fees 101

May 28, 2021/ Posted in Fees and Rates

Many costs come with running a business, and many of them can not be avoided. Among these are merchant services rates. They can vary by hundreds of dollars and mount up to thousands of dollars each year. That’s why merchants should look for an account and service provider with transparent pricing and rates.

In the 19th and early 20th century, farmers needed to use credit in local stores, because their income was seasonal. They were issued cardboard tickets for an easier association of customers with their accounts in the store. Today, we are witnessing a trend where fewer and fewer consumers use cash when purchasing a product or a service. Non-cash options may make up your commerce’s sales from 65% up to 100% because we’re witnessing a drastic increase in the number of customers who choose to pay this way.

If you have been running your company for some time, but haven’t asked your credit card processing provider for any reductions, you should start looking for info on how you can cut on some of those costs. Before choosing the right company to provide you with their non-cash services and setting up a merchant account, you need to understand every possible item you will be charged along the way.

Merchant Services Rates – The Basics

Every time you accept a non-cash payment option, you are charged various average processing fees, which are sometimes referred to as discount fees. While merchant service providers charge a number of these, several other parties make money on each transaction you process, as well. What you are typically charged with is a set of fees that include interchange, service or assessment, and processor’s markup. It’s hard to determine the average cost, as it depends on several factors.

Which Entities Are Involved in the Payment Process and Charge You With a Fee?

Several middlemen are involved in the transitioning process. Other entities, besides credit card processing companies, that play a role in your expenses are card associations/networks and issuing and acquiring banks. Associations are companies that create credit cards, like Visa and MasterCard. Issuing banks distribute cards to consumers, but some associations also take the role of the issuing institution, like American Express. Acquiring banks are there to provide you with services when applying for a merchant account and are specialized only in receiving payments from issuing banks. Credit card processors set up the processing of payments for you, help you with your account, and supply you with the necessary hardware and software needed to accept non-cash transactions.

Every time someone makes a purchase from you, you are charged a small sum.

How Are Merchant Fees Calculated and What Are the Pricing Models?

Whenever customers use their cards by swiping, inserting, and tapping, or any other non-cash method, merchants are charged a fee based on the amount of the transaction. So what is the going rate for merchant services? How much you will be charged depends on different factors that include parties involved and how you accept cards. But it’s also based on your industry, average transaction size, and monthly volume.

The Types of Credit Card Payment Processing Fees

The pricing models that impact what you will be charged can be divided into three types. These include the following:

  • The flat-rate pricing model is the best option for small businesses because of its transparency. With this model, the provider will charge you a fixed percentage on each of the processed transactions, which is usually between 1.75% – 3% and includes a per-transaction fee. Or you will be charged a flat rate or a mixture of two.
  • The interchange pricing model is an interchange rate that is charged by companies like MasterCard or Visa for all transactions. Some account providers may charge you extra, but it’s a markup that can be unnecessary and can be negotiated and decreased.
  • The least transparent is the tiered pricing model, which depends on the type of plastic being used (credit, prepaid, debit), but also on how you accept the payment. This is the type of pricing businesses should consider staying away from if looking for the most economical option because they are opaque and easy for providers to manipulate. When you ask for an offer on this model, you will get what is known as a qualified rate, and it may seem lower than the flat option. It’s because the assessments are listed separately, and it doesn’t include other charges.

But, what option is the best choice when your monthly volume is greater than a few thousand dollars and you’re looking to cut down on costs?

Interchange Plus or Cost Plus Pricing Rates

If you’re looking to secure the lowest rates of credit card processing services, your best option is Interchange Plus. Deciding to go with the Interchange Plus model means that the processor will pass down the costs of interchange and assessment to you, and you will be charged a transparent markup separately. This markup is what processors will refer to as rates, and with low-risk retailers, it could be expected to be around 0.25%, while online low-risk businesses will likely pay a markup somewhere around 0.35%.

Low-risk retailers pay low rates with the right plan.

Further Understanding of Charging Along With Each Card Payment – Universal Fees

When looking at small merchants and their account statements, no matter which type of pricing model they have decided on, some items will always be there. Along with how processing works, it’s important to understand the scheduled costs. Keep in mind that, with the flat-rate pricing model, the transaction and authorization fees are the only ones present on a bank statement.

Authorization Costs

This is charged every time a customer makes a payment using plastic like Visa, even if it is declined. It’s sent to your processor, and then through the card network to the issuing bank. The bank checks the account of the cardholder for the sufficient amount to cover the purchase and sends the information back. Each time, you are charged a certain amount.

Transaction Costs

The transaction fee is charged after the requested authorization has passed. It travels the same path from the processor, through the network, into the issuing bank, and then the payment of the specified amount is processed.

Assessment Fee

Assessment fees are charged by card associations. Various expenses are included here, such as fraud prevention, and these are often passed along from account providers to businesses.

Some of the costs you are charged with are universal

Scheduled Charging

Among scheduled charging from your providers, there can be transaction fees that are charged monthly, and this depends on the processor you’re working with. You can be charged a monthly minimum if your provider charges based on your revenue, and you don’t reach a certain amount. The same goes for the processing commitment fee, which is based on the number of transactions. If you haven’t opted in for virtual statements, you may be charged a statement fee, which covers the costs of printing and mailing. If you are provided with a payment gateway that is a special portal that routes payments to an acquirer by your provider, they may also charge you for this. A payment gateway is set up usually in the case of an online shopping cart.

Understanding the costs of using processor services is important

Situational or Best Known as Incidental Fees

Incidental charging may often be included in the fine prints of contracts, but watch out for any hidden ones that aren’t listed here that you may be charged by unethical processors:

  • When you accept payments by debits that require a PIN to be verified, you will be charged a PIN debit transaction fee.
  • Another charge may occur if you have to verify the cardholder’s address for security reasons.
  • When a cardholder doesn’t recognize the transaction, they may flag it, so the issuing bank will have to collect receipts or other evidence, and you will be charged for this.
  • Your business is responsible for chargebacks when a customer wants their funds back for a product or a service, and you have to comply.
  • If you settle a lot of transactions at once, you may be charged a batch fee.
  • A termination fee is charged when you want to cancel your agreement before the end of the contract.
  • These situations may also carry a fee: if you have to call to authorize for transactions (voice authorization); when you aren’t PCI-compliant or your system isn’t sending along that PCI verification; when you apply for a setup of the merchant service.

To avoid paying for unnecessary hidden charges, it is important that you understand everything and carefully read the terms and conditions. Make sure you only sign with a provider that is reliable, transparent, and trustworthy.

You will be charged for payments verified by a PIN

Definitive Red Flags to Look Out For

If you have decided to go with a flat rate, your costs are non-negotiable unless you have enough volume. With all other options, you can negotiate your rates with every statement you receive. But some costs can be alarming, and you should watch out for them.

Believe it or not, some processors may make up their own additional items on statements, however ridiculous it may sound. Also, be sure to check out assessments from card networks and see if you’re being charged the right amount. Some providers may expand the discount rates, and it may be because their costs went up. We advise it’s better to check it out, just to be sure.

Lastly, integrity fees on your statement mean that you’re doing something wrong when processing a payment. It may be that you are swiping chip cards, so pay attention to this kind of charge when it occurs.

Pay close attention to your bank statements for any unnecessary and suspicious charges

Which Credit Card Processing Is Cheapest for a Small Business?

Most processors claim to offer the highest rates or the lowest ones when, in truth, it depends on the type of your enterprise, average amount per payment, and monthly volume. It’s hard to stay competitive in today’s market if you are not accepting non-cash options, even with a small company. So which bank offers the best merchant services? Find a merchant services credit card processing company that does their business transparently, learn what a merchant account is and get a quote. A reliable credit card processing company will help you reduce costs and find the best solution for you.