Once a business owner decides they want to pursue the payment processing route, the path to choosing a provider can be a daunting task. Each solution offers so many different options, rates, and value added services that can make this a difficult decision. And one of the most confusing and complex parts is also one of the biggest deciding factors for most, price! No matter how much a business owner wishes to say they will choose a solution because of the support or product offerings the price is also a major influence in their decision. A business owner should be asking themselves though, how this payment processing choice will impact their bottom line? Understanding the pricing structure in payment processing is key to understanding which option is best for you.
The pricing structures for payment processors can be very complex as there are so many options for pricing nowadays. So how are payment processors able to offer such different rates from each other? The first step is to understand how the rates are broken down as a a cost to a processor, and how they pass on their cost to you as a business owner.
Generally, there are three parties involved in credit card processing fees — the card issuer, the card network, and the payment processor. The card issuer is the bank or financial institution, that issues cards directly to consumers or your customers. (Chase, Capital One,Bank of America etc). The card issuers partner with the card networks such as Visa and Mastercard on credit and debit cards to sponsor these offerings. And the payments processor is the financial institution that works in the background to securely process and complete a credit or debit card transaction through the card network and the card issuer. For each card transaction, there are certain costs set by each party involved. A card issuer charges a percentage of the transaction amount plus a flat fee for the ability to run that transaction. While, the card networks add an assessment fee of their own, and finally the payment processor charges an additional percentage and flat fee on top of the card issuer, along with some other possible miscellaneous fees.
Every time a customer uses a credit/debit card in your store, there’s a small percentage and flat transaction fee that are paid from the the acquiring bank (merchant account) to the issuing bank (customer account). It’s called an interchange fee. Interchange fees are set by each of the card networks and issuers and is public information available for anyone to view. The interchange cost does not include processor fees as each processor adds their own additional fees. But the interchange cost is the same for every payment processor. It is then up to the processor to add their own additional fees. The purpose of interchange fees is to help the card-issuing bank cover things like the risk of approving the sale, fraud, and handling costs. So it shouldn’t be surprising that the factors that influence these rates relate in some way to the risk taken on by the card issuer. And therefore causes some cards to cost more than others. Some factors that influence this cost difference include:
• The card that’s used
Debit cards with PINs are lower risk than credit cards, so they typically have a lower interchange rate. Rewards cards (travel, triple points, etc.) and business cards typically have have higher interchange rates to cover the cost of the rewards.
• How the transaction is processed
In-person card present transactions at the point of sale (POS) typically have lower rates compared to card not-present (CNP) transactions (online, over the phone, invoices, or mail order). This is due to the fact its easier to identify and verify the cardholder in person as oppose to online or over the phone.
• The amount being charged
Merchants with small ticket sizes and a large amount of sales can qualify for lower interchange rates to help reduce their costs. Major fast food retailers normally qualify for this.
• The type of business
Every business that accepts credit card payments has a merchant category code (or MCC), a four-digit number that’s assigned to them by the acquiring bank or institution. The MCC is used to classify businesses into market segments that simplify IRS reporting.
The MCC also influences how much a bank or institution charges in interchange fees. Business types that are considered “higher risk” or a greater potential for fraudulent charges(like travel, gambling, gun sales, and hospitality) often have to pay higher interchange fees.
While the interchange rate is charged as a percentage and a small flat fee, there are still more fees a business owner will find are always a required cost like interchange and that includes dues and assessments. These are fees that are paid directly to the networks for the use of their card brand, as well as the ability to process transactions on their payments networks. They’re typically lower than interchange fees an amount to fractions of a penny or percentage point. But how much you pay in assessment fees varies by network and depends on things like whether the cards used were credit/debit, transaction volume, and whether foreign transactions were processed. As with interchange fees, these are available for the public to view at anytime.
While the card issuers help set the interchange price with a small percentage and flat rate fee, card networks add their own dues and assessments, the final piece to the pricing puzzle is the payment processor fees. Payment processors have relationships with the card issuers and networks that allow them to process transactions on behalf of their merchants. To cover these costs and the additional ones associated with these relationships, a payment processor must add their own fees on top of the interchange and dues & assessments. This can normally be done through an additional surcharge on the percentage and flat rate of interchange. But can also include any of the below fees.
Payment Gateway-The conduit that passes money between your merchant account and your payment processor
PCI Compliance– The security standard all businesses that accept credit cards must comply with
Chargeback– The fee incurred when a customer issues a dispute for a payment
POS software (monthly SaaS fees)– The amount you pay monthly to use your POS software
POS hardware rental– The monthly costs to rent your POS terminal hardware and other accessories associated with your POS hardware
Batch Fees– Charges for the settlement/closing out of your deposits each day (also called batch header fees)
Hosting Fees– Fees charged for traditional server-based POS systems
Wireless access fee– A fee that can be charged for using a cloud-based POS terminal vs. a traditional phone line
AVS– The Address Verification System is for keyed-in transactions and matches a customer’s billing information to the card being used, incurred on a per-transaction basis
Monthly Statement / Support / Service Fee– Some payment processors charge a flat monthly fee for support-related services, including the preparation and mailing of your monthly statement, as well as general customer support
Monthly Minimum Fee– The fee between your monthly GPV (credit card dollars processed) and the agreed-upon monthly minimum. This fee is only typically charged when a merchant does little to no processing.
NSF (Non-Sufficient Funds)– If a merchant does not have enough money in their account to cover processing fees, they could be assessed a separate penalty.
Voice Authorization– This is a fee that is charged when a merchant calls into a processor to process a transaction over the phone. This usually only occurs if a POS machine is down or not working.
As you can see many things go into the pricing when it comes to payment processing. You have to be mindful that there are three parts that go into the cost including the card issuers, the card networks, and the payment processor. The interchange and dues & assessments charged by the card issuers and networks are a cost that is the same for every business/merchant. While, the processor includes their own nominal additional fees on top of these costs to make up the total cost of processing to you, the business owner.
After learning all of this, you may be asking yourself, why my payment processing application may not include all of these costs? Or why are they bundled together into one flat rate? Tune in to the next post as we explain how a processor is able to break all the interchange and assessment fees down into their own different pricing structures to offer!
Cheers!
Brian
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Payment Processing Wikipedia 