Understanding Credit Card Processing from a Merchant Perspective

Who Moved my Fees?

Are you always confused on how much your processor charges you when you make a credit card transaction? Credit cards come with small fees that may vary from processor to processor. If you have always wondered why your credit card is charged differently when you buy items online or at stores, this article will shed light on the types of fees that processors may be levying on you.

Credit card fees may seem challenging to understand if you do not know how merchants are charging you and types of costs that come with credit card transactions. However, the charges are pretty straight forward if you look at them individually. To begin with, there are two types of payments charged on a credit card. There are base costs and markup costs.

Wholesale costs: These are non-negotiable fees that are charged by all credit card merchants. The fees take the largest portion of credit card charges and typically consist of 75 % to 80% of the total fees charged.

Markup costs: These are negotiable fees charged by merchants and typically account for 20% to 25% of the total credit card fees.

Wholesale Credit Card Processing Fees

Base credit card costs comprise of interchange and assessment fees. The base cost is fixed for all credit card processors. Therefore, both the large processors and the local small banks pay the same interchange and assessment fees. Let’s look into details theses two fees.

1) Interchange Fees

Interchange fees are paid to banks that issue credit cards. Credit card brands like MasterCard and Visa as well as processors do not get any revenue from interchange fees. These fees comprise of the largest credit card fees.

There are a number of things that banks take into consideration when determining the interchange fees. These include your type of business, credit card type, and the processing method. Apart from these, banks also take into consideration chargebacks and refunds.

While interchange fees are fixed across all processors, only the stakeholders of card-issuing banks can update interchange fees.

2) Assessment Fees

Assessment fees are charged by Discovery, MasterCard, and Visa on every transaction on one of their cards. The fees are fixed for all processors and thus you cannot get a better deal from one provider against another.

However, if you have a bundled pricing system, you can be charged a different assessment cost. This is because processors can manipulate pricing in a bundled pricing system. Bundled pricing refers to a bucket type of pricing where a processor charges interchange fees into three pricing tiers. The assessment fee is then charged differently depending on the type of bundled pricing that the processors choose to use.

Apart from the assessment fee, which is a percentage charge applied to sales volume, other fees may be levied on credit card transactions. For example, there may be fees for foreign handling, network access, etc. at the individual transaction level.

Markup Costs Processing Fees

Customers can negotiate the market fees charged on their credit cards. The markup fees are arrived at after a number of variables have been considered. Some of the variables are negotiable while others are not or can only be negotiated to a certain degree.

The markup fees do not go to one particular party. Instead, they are split to all the parties that are involved in processing your transactions. These parties include your software provider, ISO(s), processors, acquiring bank and other parties. The fees that make up the markup costs have to cover the costs and profit of the parties involved.

Markup fees vary from processor to processor and depend on the fees your business charges, pricing model and amount of transaction.

Pricing Model

The main distinction in pricing models is based on whether the interchange fees are itemized and charged separately from the markup or they are blended with the markup.

One of the factors that affect the markup costs is the pricing model. There are four popular methods of pricing used currently:

  1. Interchange-plus pricing: With this pricing model, the processor’s markup is not affected by interchange qualification. This means that you will pay the same fee irrespective of the type of card you are accepting or how you will process it (e-commerce, keying, swiping). Regardless of the underlying interchange, the processor earns a fixed percentage.
  2. Subscription /membership: This is a pricing model that depends on recurring credit card payments. The difference from interchange-plus is that instead of percentage markup on transactions, there’s a small fee per transaction. The additional markup is charged as a flat subscription fee on a monthly basis.
  3. Tiered: The pricing model is also known as bucket or bundle pricing. The pricing is named so after the way the processor categorizes the fees into three-tier pricing i.e. qualified, mid-qualified, and non-qualified. While the three-tier pricing is the most common, the pricing model can have separate tiers for different types of cards.
  4. Flat rate: Unlike tiered pricing, all transactions in the flat-rate model cost same percentage and transaction fee. This makes the transaction cost high, but since processors using this model (Stripe, PayPal) do not charge a monthly fee, this model is suitable for low volume businesses.

Types of Credit Card Fees

Credit card fees can be transaction fees, flat fees, or volume-based fees. MasterCard and Visa publish their interchange fees for various types of transactions. The base cost is fixed but the markup costs will vary from processor to processor. Credit card fees can be categorized into three main groups. These are transaction fees, flat fees, and incidental fees.

a) Transaction Fees

Transaction fees consist of a larger part of credit card fees than volume-based fees. The fees are charged every time that your gateway or machine contacts the processors to charge a particular transaction. The amount of transaction fee is a pre-determined amount that is charged irrespective of the type of size of the transaction.

b) Flat Fees

Flat fees are fixed regardless of the transaction volume or sales made. The fees are usually charged monthly or annually and include retrieval fees and PCI compliance and non-compliance fees.

b) Incidental Fees

Incidental fees are triggered by certain instances, varying from processor to processor. These instances include insufficient funds or chargeback.

Get the Lowest Credit Card Rates

Since credit card base costs are constant for all processors, you should check the markup costs when you are looking for a credit card processor. Ideally, the best processor will be the one offering the lowest markup over assessment and interchange fees. Most SaaS companies shop for rates while they should be shopping for markup over base costs. Apart from this fee, there are other costs to consider. For example, a business should check the separate costs that a merchant may be charging.

When it comes to credit card processing, look for a merchant that has simplified the whole payment process. You want to be concentrating on building your business instead of juggling up to get your API linked to your in-house applications and getting the payment gateway to function. Simplicity is key to ensuring your business operations are flowing smoothly.

When you are looking for a payment processor, get one that has the lowest markup costs. This may seem insignificant at the start. However, when you start moving high volume transactions, it may make a big difference in your revenues.