RATES AND FEES
Merchant accounts are not free - a variety of charges are involved.
Some fees are charged on a monthly basis but most are charged on a per-item or percentage basis. All of the monthly fees are at the discretion of the merchant account provider but the majority of the per-item and percentage fees are passed through the merchant account provider to the issuing bank according to a schedule of rates called Interchange fees, which are set by Visa and Mastercard.
Each transaction is categorized into an interchange category depending on the kind of card that was used for the transaction and the circumstances of the transaction.
For example, if a transaction is made by swiping a card through a credit card terminal it will be in a different category than if it were keyed in manually, if a transaction is made using a rewards card it will fall into a different category than a standard card.
The permutations add up - in total there are about 130 categories, each with a different rate.
Merchant account providers usually group the 130 categories into 3 or 6 categories and apply a single rate to that entire bucket. This includes Retail, Mail Order / Telephone Order and eCommerce or Card Not Present.
They base that rate on the average interchange rate that they expect for that category plus a markup for themselves.
These tiers describe costs for different kinds of credit cards when processed under different kinds of circumstances. For example, a check card costs less than a consumer credit card which costs less than a business card.
The method of how a credit card is processed changes which tier of Interchange is applied. For example, a swiped credit card costs less to process than one keyed into a credit card terminal.
Interchange Based Fees
3-Tier Pricing is the most popular pricing method, although 6-Tier Pricing is gaining in popularity quickly. In 3-Tier Pricing, the merchant account provider groups the transactions into 3 groups (tiers) and assigns a rate to each Tier.
A qualified rate is the percentage rate a merchant will be charged whenever they accept a regular consumer credit card and process it in a manner that is has been defined as "standard" by their merchant account provider. This is the lowest rate a merchant will incur when accepting a credit card. The qualified rate is also the rate commonly quoted to a merchant when they inquire about pricing. For example, for an internet merchant, the internet interchange categories will be defined as Qualified, while for a physical retailer only transactions swiped through their processor in an ordinary manner will be defined as Qualified.
Also known as a partially qualified rate, the mid-qualified rate is the percentage rate a merchant will be charged whenever they accept a credit card that does not qualify for the lowest rate (the qualified rate).
This may happen for several reasons such as:
A consumer credit card is keyed into a credit card terminal instead of being swiped;
A special kind of credit card is used like a rewards card or business card;
A mid-qualified rate is usually 1.50% - 2.50% higher than a qualified rate. Interestingly, the kinds of transactions that are usually grouped into the Mid-Qualified Tier only cost 0.30%-0.50% more in interchange costs, so the merchant account providers make much of their profit from these transactions.
With the prevalence of rewards cards it is not uncommon for 15-40% of transactions to be mid-qualified.
The non-qualified rate is the highest percentage rate a merchant will be charged whenever they accept a credit card. All transactions that are not qualified or mid-qualified will fall to this rate. This may happen for several reasons such as:
A consumer credit card is keyed into a credit card terminal instead of being swiped and address verification is not performed;
A special kind of credit card is used like a business card and all required fields are not entered;
A merchant does not settle their daily batch within the allotted time frame;
A non-qualified rate is usually 2.00% - 2.50% higher than a qualified rate (and only cost 0.50%-1.50% higher in interchange costs).
As a result of the Wal-Mart Lawsuit and to compete against Pin-Based debit cards (which are processed outside of the Visa and Mastercard networks), Visa and Mastercard lowered the interchange rates for debit cards well below those for credit cards. Merchant Account providers have gradually had to pass the savings on to their customers. Consequently, each of the 3 original tiers have been divided into Debit and Credit, for a total of 6 tiers.
Interchange Plus Pricing
Larger and more sophisticated merchants usually have their merchant account services priced on an interchange plus basis, which means that they pay a specified markup over and above the interchange costs.
The Authorization fee is charged each time a transaction is sent to the acquiring bank to be processed. Even if the transaction is declined this fee is assessed.
The statement fee is a monthly fee associated with the monthly statement that is sent to the merchant at the end of each monthly processing cycle. This statement shows how much processing was done by the merchant during the month and what fees were incurred as a result.
Monthly minimum fee
The monthly minimum fee is a way to ensure that merchants pay a minimum amount in fees each month. If a merchant's qualified fees do not equal or exceed the monthly minimum they will be charged up to the monthly minimum to satisfy their minimum fee requirements.
Example: A merchant has a $25.00 monthly minimum fee. Their qualified fees for their most recent complete month of processing total only $15.00. This merchant will be charged an additional $10.00 to meet their monthly minimum requirements. It is industry standard to charge a monthly minimum.
A batch fee is charged to a merchant whenever the merchant "settles" their terminal. Settling a terminal, also known as "batching", is when a merchant sends their completed transactions for the day to their acquiring bank for payment.
It is industry standard to charge this fee.
If a merchant encounters a chargeback they may be assessed a fee by their acquiring bank. This fee is typically charged whether the
chargeback is successful or not and is not dependent on the amount of the chargeback.
Equipment and Installation
These costs include hardware/software, set-up and programming. If you're purchasing an e-commerce solution from your Web hosting company, you may be able to avoid these costs altogether, or they may be bundled into your hosting fees.
Some banks hold back a percentage of merchant transactions to cover contested charges. Chargeback fees can also be charged when disputes are settled in favor of credit card holder. Fraud often takes the form of disputed charges, which, in the U.S., are almost universally settled in favor of the card holder. This means that in addition to losing the amount of the sale -- after the product has been shipped -- the merchant loses the $20-50 that the bank charges in chargeback fees. Also, if the merchant has too many chargebacks, he's at risk of losing his merchant account. Merchants who think they're going to set up shop without a customer service phone number will likely lose more than the cost savings of no 800# in chargebacks. High chargebacks also result in an increased reserve requirement. Begging your banker to let you keep your merchant account is much worse than begging to get him to give you one.
The good news is that depending on your provider, these fees can greatly differ, and most can be negotiated. E-tailers need to do research compare rates and services, apply these to their specific costs, and then make an informed decisions. Many merchant account providers offer cost information on their sites. Provided you do your homework and shop around, you should be able to offer your customers the ease of credit card payments without adversely impacting your business.
All the fees and charges are required to be disclosed to you prior to your commitment to the merchant agreement between you and your bank or merchant provider, and are usually enumerated carefully to you in the merchant agreement itself.
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