Understanding Fees

When setting up a merchant account to process payments, many are confused about the different rates and fees involved. But as with any business decision, fees are just one part of the process. Smart merchants will also look at the ease of setting up their system, ease of using their equipment, and the quality of customer service for questions and concerns. When picking a merchant service provider, you will want to compare the integrity and reputation of the company and its overall package. Before entering into a contract, you should know the main credit card processing fees.

Discount Rate

The discount rate is simply a percentage charged on each transaction for payment processing services on debit and credit card transactions. The merchant sets up the service and agrees to the rate when they create their merchant account. The rate is generally lower for cards that are swiped or tapped and higher for cards that are manually input or other card-not-present transactions.

Interchange Rate Fees

Interchange fees are the transaction fees that the merchant’s bank account must pay whenever a customer uses a credit/debit card to make a purchase. The interchange fees are usually paid to the bank funding the transaction and thus bearing the risk. For example, if you have a Chase credit card on the Visa payment network, Chase receives the fees on your transactions. The fee is calculated based on the authorization costs, losses due to fraud and credit, and the average bank cost of funds. This rate is revised regularly, typically in April and October, but changes can be made at other times.

Transaction Fee

For every transaction that is run, a fee is charged. This fee is charged whether the transaction is approved or declined.

Assessment Fees

The assessment fee is a fee paid directly to the card network (Visa, MasterCard, Discover, etc.). In the example above, Visa would receive the assessment fee on every transaction if you were using your Chase Visa card. Some will charge higher rates for credit cards than debit charges. Some networks may charge higher rates when the transaction volume is greater. Many businesses will have both local and e-commerce transactions, which will add to the complexity of the payment processing costs.

Annual or Monthly Fee

Most merchant service providers charge a monthly fee. These costs vary widely from provider to provider. Sometimes processors charge annually for a merchant account.

Batch Fee

When you settle your daily batch of transactions and transfer the funds into your bank account, you are often charged with a batch fee. This is sometimes also called a batch-header fee.

Chargeback Fee

In simple terms, a chargeback is the reversal of a credit card payment that comes directly from the bank. Each time a consumer files a chargeback, the merchant is hit with a fee. The fee can range from $20 to $100. (This is sort of like an insufficient funds fee when a check is returned.)

You may not encounter all of the above-listed fees, but these are some of the most common fees. When choosing a merchant account, do research, compare companies and reputations, and pick a provider that will over you flexibility and scalability for your company. Review your contract carefully and negotiate the best rates for your account.