If your business isn’t accepting credit cards for payments, the efforts to do so may seem daunting. Is it worth it? Before you can know the answer for your business, it’s critical to understand the fees involved in accepting credit cards.
Let’s focus here on the e-commerce aspect as we evaluate what it takes, cost-wise, to make online payments via credit cards or bank cards available for your customers.
As we reviewed in earlier articles (see Merchant Processing 101 and The Top 5 Benefits of Merchant Processing for Your Business) a merchant account is actually the combination of two things: a gateway service and a merchant account.
Those two entities represent the primary costs of owning a merchant account – the foundation for accepting credit cards for customer payments.
The most popular payment gateway service in the U.S. is authorize.Net. It is used by many of the online software companies, including ClassJuggler. It’s pricing model is very simple. Typical pricing looks like this:
- $15 to $25 monthly
- Small per item fee of 6¢ – 10¢ per transaction
Merchant processing gateway costs
The merchant account is one of the most complicated kinds of accounts to understand from a pricing standpoint, because:
- It can contain so many different elements.
- There are so many different providers.
Looking at a monthly merchant statement is just as much fun as looking at the details of your cell phone bill with all of the crazy little regulatory, network, and other surcharge fees. Let’s explore the four major elements to your merchant accounts cost:
Interchange rate fees
The card networks – Visa, MC, Amex, Discover – all have tables of rates that are assigned to each and every credit and debit card available. Some of these tables contain hundreds of card types each with its own rate. These published rates are referred to as the Interchange rate for a card.
Think of it is the base cost of that card transaction. That interchange is what Visa and MasterCard make in profit on each transaction you run.
Discount rate fees
The discount rate is a tiny percentage (usually between 30 and 80 hundredths of one percent) added to the Interchange rate and represents the “profit” component that the merchant account reseller makes on your business for each transaction.
Per item rate fees
Each transaction has a “per item” fee. It represents a baseline fee for any transaction so that, if the transaction is particularly small, say $5, the reseller will still cover its costs.
Per item fees generally run between 5 and 15 cents per transaction with an additional 5 and 15 cents often added for address verification services.
On top of all the fees mentioned above, there are additional fees added on to your monthly bill, for things like
- PCI compliance
- Statement and management fees
- Government regulatory fees, network fees
- Monthly minimums
- Foreign transaction fees
Many of these fees are often obscure and hard to understand and may remind you of the bewilderment you feel when looking at your phone bill.
These other fees typically add an additional $10 – $20 or more to your monthly fees. And while these represent a small part of your overall bill, they are usually constant.
So Exactly How Are Merchant Accounts Priced?
We just looked at the four cost components of a merchant account, but this doesn’t account for how they are priced by the reseller. There are generally two ways merchant accounts are priced for consumers:
Bundled or tiered pricing
This type of pricing takes large groups of credit card types and rates and groups them together into tiers for simplicity. These tiers represent the percentage and per-item costs you will pay per transaction.
This allows the processor to classify interchange fees under its own rate structure by assigning individual interchange categories to its pricing tiers.
Each reseller can bundle these tiers any way they want, which can be good, neutral, or bad for merchants, depending on how the groupings are determined. These tiers are usually referred to as Qualified, Mid-Qualified, and Non-Qualified.
Interchange plus, cost plus, or pass-through pricing
Another way of pricing merchant accounts is what is often called interchange plus, pass-through or cost+ pricing.
Cost+ pricing ensures that every card transaction is processed at its exact cost as established by the card industry. The reseller then adds their discount (or profit) to each transaction plus their per item fee to calculate the final cost. This makes this pricing model easier to understand.
One Example of Bundled or tiered pricing
The table below shows how a processor might organize nine common Visa interchange categories under a tiered pricing model for a retail business.
So, for example, if a customer paid me $100 with a Rewards I card (in this example), it would be considered a Mid-Qualified level transaction. So 2.25% plus 31 cents, or $2.56 of my $100 would be paid back in fees.
Another example of Bundled or tiered pricing – how costs can increase even with the same rates!
Tiered pricing also makes it possible for a processor to increase your processing cost without increasing your rates.
“What?? how is that possible?”
Take a look at this chart. The card types and tiered pricing is exactly the same as the previous example, but if we move two of the card types that were in tier 2 pricing into the third tier, it ends up costing you more to accept those types of cards. I’ve highlighted those changes in red. Note the change in markup in the 4th column:
So using the same example, a customer pays me $100 using their Reward I level card. I would end up paying 3.35% + 31 cents, or $3.66 cents instead of the $2.56 in the previous example.
That’s $1.10 more for every $100 you receive!
Processors accomplish this by routing a greater number of interchange categories to the more expensive mid and non-qualified pricing tiers. And as a merchant, it’s almost impossible to understand how a reseller has structured their tiered pricing – the pricing itself is simple, it’s the details that matter.
Interchange plus, cost plus or pass-through pricing
Another way of pricing merchant accounts is what is often called interchange plus, pass-through, or cost+ pricing.
Cost+ pricing ensures that every card transaction is processed at its exact cost as established by the card industry. The reseller then adds their discount (or profit) to each transaction, plus their per item fee, to calculate the final cost. This makes this pricing model extremely easy to understand.
The table below shows three of the most common card categories along with their Interchange cost. Note how the discount, or profit, is the same regardless of the card used.
You can see how much simpler it is to calculate your cost. Simply add the discount to the published interchange rate and that’s your fee.
So, if a customer pays me that same $100 using their platinum cash back Visa, I would pay 3.65% plus 25¢, or $3.90 for that same $100.
Understanding costs is important, and now you understand a heck of lot more. But is it all worth it? will you be better off if you do accept credit cards than if you don’t? Believe it not, in spite of the fees and the mental circus of fee, most businesses conclude that it is.
In our next article on merchant processing for small business owners, we look at the savings or benefits you can expect from accepting credit cards.