Understanding Payment Processing Fees
We’ve learned about how payments come in, but what about the other side of the coin? What will it cost? As you might’ve guessed, everyone who touches the transaction wants to get paid, including the issuing bank, the credit card association (Visa, MasterCard, etc.), the merchant bank, and the payment processor. At its most basic, every time you process a sales transaction, you pay four fees:
A percent of the transaction amount: The issuer gets paid by taking a percentage of each sale, called the interchange. This fee varies depending on a bunch of things, such as industry, sale amount, and type of card used. At last check, there were almost 300 different interchange fees!
Another percent of the transaction amount: The credit card associations (Visa, MasterCard, etc.) also charge a fee, called assessments. Yet another percent of the transaction amount: Your merchant bank takes a cut by charging you a percentage fee. The amount here also varies by industry, amount of sale, monthly processing volume, etc.
A dollar amount for every transaction processed: The payment processor (who might also be your merchant bank) makes money by charging a fee, called an authorization fee, every time you process a transaction (whether it’s a sale, a decline, or a return – no matter). Plus, it can charge fees for setup, monthly usage, and even account cancellation. Usually, the first three fees (the percentages) are all added together and quoted as a single rate, while the transaction fee is quoted separately (e.g., 2.9% + $0.30).
Complicating the picture, most pricing structures generally fall into one of three categories:
You pay a fixed percent for all transaction volume, no matter what the actual costs are. All of the above fees are baked into this single rate. For example, you are charged a bundled rate of 2.9% of the transaction amount + $0.30 per transaction. On a $100 sale, the fee you pay works out to be $3.20.
Interchange Plus Pricing.
Your merchant service charges you a fixed fee on top of the interchange. For example, 2.0% + $0.10 on top of a 1.8% interchange fee. On a $100 sale, that works out to be a $3.90 fee. Of course, remember that there are 300 or so different interchange fees, so the 1.8% can vary wildly!
The processor takes the 300 or so different interchange rates and lumps them into three buckets (or pricing tiers): qualified, mid-qualified, and non-qualified. This makes it simpler for you (and them) to understand. However, because the processor defines the buckets any way it wants, it can be expensive. As an example, the fees you pay on a $100 sale could range from $2.50 to $3.50, depending how it has been classified.
Whether you’re expanding a brick-and-mortar business to accept payments online or starting a new venture from the ground up, it’s important to know how online payments, players, and pricing work before the first customer hits 'check out.' That way, you’ll be prepared with a plan that works best for you and your business.