No one enjoys being hit with additional costs, and that includes merchant account fees. However, considering that the average credit card purchase is five times as much as the average cash payment, these costs are a fact of life. And in many ways, this has now become more a benefit than hindrance.
Even so, it is important to learn why these fees are charged, their different types, and what you can expect to pay.
Merchant account fees: definition and pricing structures.
Merchant account fees are imposed by account providers. Costs can vary according to the pricing model they use. The three most common are interchange-plus, tiered, and flat-rate.
Payment processing is not free. Like you, the companies that provide it are in the business to make money. Therefore, they levy these charges to cover the cost of their services as well as to garner a profit.
What you will pay for these surcharges depends on numerous factors: the payment type, the card network, and the merchant provider. While some of these fees are set in stone, many can be negotiated.
Additionally, what you pay will depend on the pricing model that your merchant account provider prefers.
Common pricing models.
There are three common pricing models.
Interchange-plus pricing.
With interchange-plus pricing, the issuing bank and card network set their pricing. Added to that, the provider will impose a markup on top of the interchange rates and assessment fees to facilitate the payment.
Interchange-plus gives complete transparency about how much you are paying to card networks, issuing banks, and service providers.
Tiered pricing.
In tiered pricing, card types and networks are segmented into unique groups, each with their own processing rate.
Although costs are not broken down thoroughly as in interchange-plus pricing, this model allows you to tailor your pricing to meet customers’ differentiated needs.
Flat rate pricing.
In flat-rate pricing, you are charged the same rate for all transactions, regardless of the issuing bank or card network.
Although this structure is convenient and easy to understand, fees are often higher. Furthermore, surcharges can be hidden by unscrupulous providers.
Types of merchant account fees.
There are four primary fee types. They include processing fees, scheduled fees, incidental fees, and red flag fees.
When you get a grasp on the various types of merchant fees, you can keep your costs down and gain a more complete understanding of your obligations as a business owner. There are four major types of surcharges that you will experience as an entrepreneur.
Processing fees.
First are the processing fees that kick in whenever you complete a debit or debit card transaction. They usually contain three components: an interchange fee, an assessment fee, and a markup fee.
Charged by the financial institution of the customer, the interchange fee makes up most of the cost. The assessment fee is charged by the customer’s card network (Visa, Mastercard, etc.).
The markup fee is levied by your merchant account provider to pay for their services.
Scheduled fees.
Scheduled fees are charged no matter what your payment volume is during any given month. Usually, flat fees are billed at predefined intervals.
Examples include monthly or annual fees, statement fees (for preparing and sending written statements), monthly minimum fees (charged if you do not meet your minimum processing volume), payment gateway fees, and processing commitment fees (charged if you fail to meet your pledge to process a predetermined amount).
Incidental fees.
You also may be hit with incidental fees in the event that a specific event such as a refund or chargeback takes place.
Common types include one-time setup fees, chargeback fees (when a customer disputes a charge), refund fees (after a transaction has been reversed for a customer), batch fees (for processing settlements), PCI non-compliance fees (if your business fails to meet PCI/DSS requirements), and AVS or address verification fees (charged for using the Address Verification Service to verify that the billing address matches what the credit card company has on file).
Red flag fees.
Finally, so-called “red flag fees” are imposed all too often by unscrupulous merchant account providers. They may, for instance, add a markup to the card network’s assessment fees.
ERF integrity fees are sometimes imposed when you process a payment incorrectly, such as by swiping a chip card instead of inserting it. These companies also might arbitrarily raise your merchant discount rate without cause or warning.
The merchant account fee landscape is complex, to say the least. However, when you choose a merchant account provider with a solid reputation for transparency and prompt customer service, much of the confusion can be reduced.
Partnering with a credible vendor will enable you to offer a broad base of payment services to your customers at a fair cost that you can afford.
North is a leading financial technology company that builds innovative, frictionless end-to-end payment solutions designed to simplify and grow businesses of all sizes. From the front door, to the back office, the developer world, and partnerships that expand the payments landscape, North offers proactive, comprehensive merchant services, in-house processing, and more.
