Payment processing fees really aren’t that confusing! (even though you just laughed in your head as you read that). But really – once you take a minute to group the fees into a couple different categories, it’s all going to make sense. Believe it or not, we know that not everybody speaks the Payment Processing Language…which is why we’ve put everything into plain English, so it’s easier than ever to understand.
Now, let’s identify which ones you have power over:
Alright, so we’ve gotten the different fee groups out of the way. Now let’s break each group down with definitions, examples and how much it really costs you:
Definition – Interchange, by simple definition, is a combination of the percentage rate and transaction fee charged by VISA/MasterCard/Discover to process a credit or debit card transaction. This is base-cost, rock-bottom, wholesale – whatever you want to call it. Interchange rates/fees are non-negotiable, and are the same for every processor (no matter who tries to tell you otherwise). This is what every merchant is required to pay to accept a card payment. American Express does not participate in the interchange rate system. AMEX is essentially their own processor, so they set their own rates and (just like interchange) no processor or business can adjust or get around these rates. The main difference about AMEX's wholesale rates are...no processor can add markup to them. Therefore, you are going to get the same AMEX rates no matter what processor you go through. So for explanatory purposes, this post isn't going to talk much about AMEX; VISA/MasterCard/Discover rates are where the true differences and fees lie.
Interchange rates and fees were created by VISA/MasterCard/Discover to offset the cost of losses to banks due to credit card fraud, chargebacks, risks, etc. There are a total of nine different variables that go into calculating each interchange rate, such as: card type (consumer, business, rewards), card brand (VISA, MasterCard, Discover), and processing method (swiped, key-entered, online) to name three of them. Some of these variables are out of your control, but there are actually a few that you can control! We explain exactly how you can manipulate interchange rates in your favor and lower your overall processing costs in our Interchange Optimization Guide. Another important aspect to note is that interchange fees are paid entirely to card-issuing banks…that’s right, your processor and VISA/MasterCard/Discover don’t see a penny of revenue from interchange fees.
Examples – Here are a few examples of interchange rates and fees that you may have seen before on your merchant statements:
VISA CPS Retail @ 1.51% + $0.10
VISA CPS Rewards 1 @ 1.65% + $0.10
MC Merit I @ 1.89% + $0.10
MC Merit III @ 1.58% + $0.10
When it’s all said and done, there are actually over one thousand different interchange rates and fees. Because of the nine variables involved, there’s quite literally a different rate/fee for every possible transaction that you could potentially accept.
Cost – Theoretically, interchange fees should make up the bulk of your overall credit card processing fees. That being said, some processors add such ridiculous markup that it starts to trump interchange fees…but in most cases, interchange will make up the bulk of it. Our Payment Processing Plans give you interchange at their true cost with no additional markup to ensure that you are receiving the best rates in the industry.
Definition – Generally speaking, assessments are a lot like interchange in the sense that they are rock-bottom required costs of accepting card payments. No one can get around assessments. The main difference is – these small fees get paid entirely to VISA, MasterCard and Discover (as opposed to interchange which gets paid to the card-issuing banks). This is where VISA/MasterCard/Discover make their money on the transaction. You aren’t always charged each and every assessment that exists; a lot are only in certain situations. That being said, you can be sure there are always going to be some assessment fees included.
Examples – Assessments can be either a percentage, or a fixed fee. We’ve listed below some of the most commonly charged assessments:
Fixed Acquirer Network Fee (FANF) – varies based on processing method & volume
Acquirer Licensing Fee (ALF) – 0.0045%
Transaction Integrity Fee (TIF) - $0.10
Cost – Assessments don’t make up a big portion of your processing fees, but it’s enough to notice them. They are often around 10% of your overall payment processing fees, give or take a few percent.
Markup (percentage & transaction fee)
Definition – Markup is anything that your processor charges you over interchange and assessments. It is most often charged in the form of a percentage and a transaction fee, but on rare occasion it could just be one or the other. Some of your additional monthly fees could also be described as markup, but we’re separating them for the purpose of defining certain fee types. It’s important to understand that, while markup can be greatly negotiated, it is not entirely profit to your processor. They themselves have costs that they are required to pay to their acquiring bank (also called processing bank) and other parties for facilitating the transaction process, so a small portion of this markup will be to cover their own costs. You will not be able to negotiate below their cost. However, that being said, most of the markup is going to be profit, so you’ve got a lot of room to work with.
95% of credit card processors make it extremely difficult for you to identify the markup that they’re charging you over interchange and assessments. In addition, markups vary significantly from one processor to the next, and from one business to the next. Payment processing rates and fees are almost always provided on a per-business basis, meaning the guy who signed up with Processor XYZ 15 minutes before you could be getting a killer deal, while you’re stuck with jacked up rates and multiple BS fees.
Furthermore, the pricing model you are given also plays a big role in determining your processor’s markup over interchange and assessments. The two most common pricing models are Interchange-Plus (also called Pass-Through) and Tiered (also called Bundled). For the sake of understanding, we’ve provided a brief explanation of each pricing method below:
Interchange-Plus (aka Pass-Through) Pricing – This is the most transparent and cost-effective pricing model out of all, and also happens to be the model that our Processing Plan Pricing is based upon. Interchange-plus pricing is the easiest to predict because the processor’s markup is consistent and the same regardless of any other processing variables. For example, a processor may quote you 0.25% + $0.10/transaction over interchange and assessments. This is a pretty average interchange-plus pricing quote. This essentially means that your processor is making 0.25% of your overall volume and $0.10 per transaction on top of the interchange fees and assessments that you are being charged.
Tiered (aka Bundled) Pricing – This is where it gets a little tricky to determine markup, because the processor markup varies with this type of pricing. Tiered pricing is when your processor categorizes interchange fees into different pricing tiers, (or ‘buckets’), most often referred to as Qualified, Mid-Qualified, and Non-Qualified. So, out of the 1,000+ total interchange rates, they could put 300 interchange rates into the Qualified Tier, 300 into the Mid-Qualified Tier, and the remaining 400+ into the Non-Qualified Tier. The problem is, all of these interchange rates are going to be less than the Tier’s flat rate, so your processor is going make the difference between the Tier’s flat rate and the true interchange rate. For example, let’s say your processor is charging you 2.49% on the Mid-Qualified Tier. Let’s also say that they put the typical rewards card “CPS Rewards 1” interchange rate into the Mid-Qualified Tier. Well, the true interchange rate for that rewards card is actually only 1.65% + $0.10/transaction. So your processor is now making around 0.75% on every rewards card you accept! That’s an average of 30% of all of the cards you accept! And it gets even worse when you talk about the Non-Qualified Tier; the processor markup (in the form of surcharges) tending to be around 1.00 to 1.50%. It’s insane. If you ever see “Non-Qualified” or any similar variation on your merchant statement or a processor quote – STAY AWAY.
Examples – Like we said above, markups can come in the form of percentages and transaction fees. Therefore, a few examples would be:
0.25% markup over interchange
$0.10 transaction fee over interchange
0.50% non-qualifying surcharge
Cost – Markup is the second biggest contributing factor to overall payment processing fees, sometimes making up as much as 40-50% of your total fees. Markup is where your processor has the opportunity to hide tons of BS fees to suck every dollar of profit possible out of your business, which is why a solution like our Payment Processing Plans is absolutely necessary for total cost-effectiveness and predictability.
Definition – Additional fees don’t really need a definition…they’re pretty self-explanatory: Any extra fees that you are charged in addition to your regular payment processing fees. These are most often in a fixed dollar amount, but in some occurrences the amount could be variable, as well.
Examples – There are a ton of examples of additional fees that you could be charged, but we’ve listed a few of the most common below:
The traditional “Monthly Fee”
PCI Compliance Fee
Customer Service Fee
Monthly Service Fee
Cost – For most businesses, additional fees average anywhere from around $10 to $30 per month. While interchange fees and markup make up the biggest bulk of your payment processing fees, the additional fees are just another spot your processor has the chance to make some additional revenue. In case you didn’t know, most additional fees are actually just BS revenue-generating fees charged by your processor. Our Payment Processing Plans only have one monthly fee (it’s our signature “thing”), so you know exactly what you’re paying at all times.
How To Lower Your Payment Processing Fees
Now that you’re educated on each part to your processing fees, we can bring everything full circle and talk about how you can use this newfound knowledge to lower your overall payment processing fees. As we mentioned in the beginning of the post, you cannot negotiate interchange or assessments. Plain and simple. You can, however, negotiate the markup and additional fees that your processor charges you. Always make sure you are on Interchange-Plus pricing and stay away from Tiered. Find out what your markup over interchange is, and negotiate it as low as you can! Because interchange is the same for every processor, but the markup varies: the best processor is the one that offers the lowest markup over interchange. Also, make sure there aren’t a bunch of random monthly fees tacked on.
Or, of course, if want to guarantee you are receiving the lowest rates in the industry, you could always go with our award-winning Payment Processing Plans. We pass through interchange with 0% markup, and only $0.05 per transaction. Because we don’t apply any markup, we don’t even have to convince you it’s the lowest rate. It’s right there in black and white; 0% markup over interchange! We save the average business thousands of dollars per year on processing. Get in on this savings train!