Merchant Account Fees: How They Actually Work
If you are a merchant that currently accepts credit and debit card payments, or if you plan to accept them soon, if you are not already familiar with merchant fees, you soon will be.
Just like there is no one “one size fits all” business plan, merchant fees can vary widely depending on a number of factors, from the type of cards customers pay with, to the companies you choose to partner with and any add-ons or services you choose.
Below we’ll explore the various types of merchant fees in more detail, so you feel confident you are making the right processing decisions for your business.
What are merchant fees?
Merchant fees are any fees assessed to the merchant by the card brands, the payment processor you choose to partner with, and any add-ons or services you select.
Taken together, they fall into one of three categories: set transaction fees assessed by the card brands, universal fees every merchant pays, and situational fees that vary based on specific conditions.
Ways merchant service providers charge you
The first thing you need to understand when it comes to merchant account fees is that there are three main categories they fall under: tiered, interchange, and flat pricing. If you’re currently on flat pricing, then some of the individual fees we’ll be talking about won’t be relevant, but they’re good to know in case you decide to switch to interchange (more on why businesses do that in a bit).
1. Flat pricing
Flat pricing is exactly what it sounds like. You pay one flat fee for all transactions. This usually hovers between 1.75% – 3% and includes a per transaction fee. For example, our flat pricing rate is 1.99% + $0.20 per transaction. This percent + per transaction fee is the standard in flat pricing.
2. Tiered pricing
Tiered plans group different card types and card member associations into “tiers” — most typically three general rates. So depending on the card a customer uses, you’ll be charged one of three rates that applies to that transaction. This includes gift cards, reward cards, American Express vs. Mastercard, etc.
If you’re currently on tiered pricing, it may be worth analyzing what types of cards your customers pay with most often, and consider switching to interchange pricing if you have the chance to save money.
3. Interchange pricing
Interchange pricing is the most granular approach to pricing. Every cardmember association charges different processing fees depending on the card and manner in which it was run, so instead of bundling them together into a flat rate, interchange pricing just charges based on the card type and a small fee called the discount rate on top of that.
Should I switch to interchange pricing?
That depends on which stage your business is in and the types of transactions you process regularly.
Some card types are more expensive than others, so depending on how much volume you have of a particular card type, you may end up paying dramatically less than you would on a flat rate. We’ve even had cases where we’ve saved businesses up to 35% in processing fees by switching to interchange — so these percent differences can really add up.
This potential difference is why many companies transition away from flat and tiered pricing and opt for interchange (often written as interchange plus pricing) as they grow. Flat pricing is convenient at first, but it can really cost you in the long run.
Discover how much you can save with a free statement analysis.
The universal merchant account fees
Whether you’re on flat, tiered, or interchange pricing, there are some merchant account fees that will always appear on your statement. It’s just the way these systems are set up, and these are common across any merchant services provider you may use.
When a transaction is being processed, there is an authorization token that is sent back and forth between the issuing bank (Chase, Citibank, etc.) and the acquiring bank (your business account). The token checks that the balance or credit is available for the requested transaction and either approves or denies the transaction.
There is a low fee that is charged on a per transaction basis for this, and you’re charged it even if a transaction is declined.
Merchant service providers use transaction fees to describe the per transaction fee they collect. Depending on your plan, it may also include the percentage applied or the authorization fee mentioned above.
Assessment fees are charged by the cardmember associations for various expenses including fraud prevention and network operations, and merchant service providers often pass them along to their customers.
The rates per transaction are typically around 0.13% - 0.15%.
There are also various “flat” merchant account fees you may run into. These vary widely by amount.
Monthly or annual fee
Some providers simply charge a percentage of your transactional revenue for a fee, others charge monthly. That just depends on who you’re working with and the way they run their business.
Monthly minimum fee
If a processor charges on revenue and you don’t which a certain floor, they may charge you for not reaching it.
Processing commitment fee
Similar to the monthly minimum, if your contract states that you need to be transacting a certain amount a month and you fail to reach it, you may be charged a processing commitment fee.
This fee is charged to cover the printing and mailing costs for credit card statements. This fee can easily be avoided with online statements, which are typically free.
The internet is antiquating this fee, but if you get paper statements you may be charged for them.
Payment gateway fee
Some merchant service providers have their own gateways or with third-party services. Your MSP may or may not charge for this.
Situational merchant account fees
Also known as incidental fees, sometimes fees happen in certain scenarios depending on your contract.
PIN debit transaction fee
If you accept a transaction that requires a PIN verification, you may be charged for it.
If you have to verify a user’s address for security reasons, this is typically $0.01 per transaction.
Retrieval request fee
When a customer doesn’t recognize a charge on his credit card statement, he may flag it to his card issuing bank. This enlists the card issuer to investigate the transaction and request a copy of the receipt to corroborate the transaction. When the card issuing bank gets involved, providers charge a small fee to complete the request.
If a customer doesn’t recognize a transaction and they flag it, you’ll be charged because the issuing bank will have to collect receipts/evidence to corroborate the transaction. This fee is usually small.
Not only will you lose the revenue associated with a chargeback, but you’ll also get hit with a processing fee.
If you settle a bunch of transactions at once, your provider may charge you a flat fee for that.
Cancellation or termination fee
If you terminate your agreement early, you may be charged.
Voice authorization fee
If you ever have to make a call to authorize a transaction, you’ll be charged a small fee.
PCI non-validation fee
If you aren’t PCI-compliant and/or your system isn’t sending along that PCI verification to the participating banks in a transaction, you may be charged a PCI non-validation fee.
Some MSPs charge you to get set up. Make sure you read the terms carefully and choose an MSP who will have your back.
Red flag merchant fees
Here are some red-flag fees to keep an eye out for.
“Creative” processor fees
Occasionally, processors make up their own fees. For example, we recently saw a statement with an “interchange clearing fee”.
Jacked-up assessment fees
Make sure you’re being charged what the card association (Visa, Mastercard, etc.) actually charges.
Fluctuating discount rates
These can bounce around. Some companies may inflate it until you question them. They’ll usually respond saying their costs went up, but they should have told you. It’s standard for companies to say they can raise rates at any time (we say it, too), but be safe and read the fine print because some companies hope you just won’t notice.
Choose a company you can rely on long-term
In the end, the key is to be diligent and work with people you can trust. Unfortunately, this industry is plagued with people who try to sneak in extra fees to make some extra cash off of negligence.
Don’t let that be an option.
While many providers increase the processor fees by up to 50% year over year, Tidal passes through program and card brand increases with proper notice, detailed explanation, and support. We do not charge an early termination fee, meaning we have to earn your continued business.
At Tidal, we like working with smart, passionate entrepreneurs and people who understand the value of partnership. We provide the best in merchant services and chargeback assistance to businesses who are looking to grow intelligently.
Sound like you?