One of the most difficult parts of understanding card processing is understanding how associated fees work, where the money goes and what you are being charged for. These fees are sometimes intentionally vague and are subject to fine print by many card processors. It is important to know how they work so that you don’t get burned by your agreement.
Every player in card processing gets a cut of a transaction. The fees can be broken down as follows:
Transaction-based fees:
The Discount Rate: This is the lump fee you pay the acquirer per transaction, and comprises a collection of fees divided by the players in the card processing chain. The discount rate is based on a percentage of the transaction’s dollar amount.
Interchange Fee: Paid to the issuing bank and is typically 1-3% of the purchase price. The card network is the player that sets the ground rules for this fee. Why does the card network set these fees when the issuing bank reaps most of these profits? Incentive. Issuing banks issue credit cards. The more an issuing banks makes by carving out some of the processing profit, the more incentive they have to issue more cards, thereby benefiting card networks.
The interchange rate varies by type of card, type of retailer, and a tiered pricing structure based on the risk of charge backs. I will explain why in a later article. Visa and MasterCard interchange rates are public, you can browse through them on their respective websites:
Visa interchange rate chart
MasterCard interchange rate chart
Discover Card and American Express do not publicize their interchange rates. You can discuss their rates with your acquirer. Since as a merchant you are virtually powerless to influence interchange rates, I suppose it doesn’t really matter if you know these if you plan on having a merchant account anyway…until you decide you want to accept either of these cards. It seems that people would be wary of making this decision based on limited information. Correct me if I’m wrong.
Assessment Fee : Fee paid to the card network.
Discount Fee: Fee paid to the acquirer, and/or merchant account provider.
Transaction Fee: Flat fee paid to the card processor for every card transaction, whether approved or declined , typically $0.25 to $0.50. Fee can be higher if the card information is keyed rather than swiped due to the higher risk of charge.
Other fees you may be charged:
Chargebacks: If your customer disputes a charge and it is subsequently reversed and/or if a transaction is reversed for other reasons, you are charged this fee of between $10 and $30.
Daily batch fee: Somewhere around $0.50 each time a batch is sent to the card processor.
Monthly Minimum Fee: Some card processors require a monthly minimum. If fees on your month’s card sales meet or exceed this amount, this fee is not charged. If the fees fall below the minimum, you pay the difference. For example, if your monthly minimum is $30 and the fees for that month add up to only $20, you pay the card processor $10 for the month.
Monthly Statement Fee: Around $10-$15 per month.
Early Termination Fee: This fee is highly variable, ranging between $150-$1000, and is charged if you break the contract before it ends.
If you are an online merchant:
Address Verification Fee (AVS): If you are keying in card information, this service cross-checks your customer’s credit card number with the mailing address. This per-transaction credit card processing fee is sometimes included in the discount rate or is lumped with the flat transaction fee.
Gateway Fee: Monthly fee paid to either gateway provider or card processor if your gateway provider is packaged with your card processor.
Card Processors will also charge you some one-time fees, including setup fees, cancellation fees, and equipment fees. My best advice would be to create an estimate of how all of these fees will add up on a monthly and yearly basis, and compare your options.
ddress Verification Fee (AVS): A separate processing service that cross-checks your customer’s credit card number with the mailing address. This per-transaction credit card processing fee is sometimes included in the discount rate.