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A Merchant’s Guide to Credit Card Costs

Understanding Credit Card Transaction Fees & Interchange

Posted Jan 29, 2018
Credit cards help businesses by allowing customers to buy. But they have a cost.

How Are Credit Card Transaction Fees Calculated?

The card brands (VISA, MC, DISCOVER, AMEX) control between 70% to 90% of the fees you pay each month.  That’s something most retailers do not know.

Your merchant services provider, or ISO agent (like us here at Simpay), has no influence on the vast majority of your costs.  We have to pass them through to you.

The brands call their incredibly complex fee structure “Interchange.” This rate is a fee charged by banks that covers the cost of handling and the credit risk inherent in a credit card transaction. Interchange fees are usually paid to the bank funding a transaction and thus bearing the risk.

But interchange is not just one fee. It is made up of literally hundreds of rates. Each rate is developed based on a wide range of factors, all meant to evaluate the risk associated with a credit card transaction. For instance:

  • Your business category
  • Average transaction amount
  • Card-present vs card-not-present
  • What verification information you collect when a transaction takes place
  • If you accept international orders
  • If you use an EMV terminal or not
  • When a card number is manually entered
  • Is the card related to one of the many points/cash-back earning programs
  • Many, many more factors

What most merchants do not realize is that each transaction you process has to have its own unique interchange rate calculated and charged!  That’s why your “average card fees per transaction” fluctuate from month to month!

 

FEES: The Other Cost to Card Transactions

The card brands, authorization networks, and banks have many fees, each of which your ISO must consider when setting up your pricing, whether they come through as monthly or annual fees or are bundled into your transaction cost.

For example, there are regulatory compliance fees, batch settlement fees, chargeback fees, site inspection fees, you name it. And they range anywhere from $15-$99 per year, per fee. Some are flat fees and some are per-transaction fees.

These are the non-negotiables. If you are a business, accepting cards, you are paying these fees. Some of these fees are even set by the government.

And if you accept debit cards, you’re paying fees, too. Debit card networks charge switch fees, interchange fees and a per-transaction fee.

Though they may aggravate us, fees are simply part of the cost of doing business.

 

Tiered Pricing

For many years, ISOs and banks set the fees for credit card transactions according to 4 tiers.  These were rather broadly defined. Each tier varied based on the perceived risk and transaction volume. And it was very easy for a transaction to be kicked into a more costly tier.

But the marketplace (all of you!) grew impatient with such a broad-based approach. You demanded more specifics to know what it was that was driving your card transaction costs  And a new approach to payments was created — ‘Interchange Plus.”  

Like tiered pricing, with the Interchange Plus pricing model, the fee a merchant pays is determined by the interchange rates we’ve explained above, along with a modest mark-up to compensate the ISO and the network that provided the “transaction pipeline.”

The difference is that, rather than bundling up similar interchange categories into a broad tier that charges a single rate, each interchange level is shown to you for every transaction.  And that allows the potential for you to pay less, since each transaction is priced on its own, not bundled with others that could inadvertently raise your overall cost.

In our next blog, we dig further into processing costs and answer the million dollar question of why your money takes as long as it does to hit your merchant account.