How Do Merchant Account Fees Work?
Before you get yourself a merchant account with a provider, you have to gain a clear understanding of how the fees work, what they do for you, and how you can avoid additional fees that you don’t need. Here’s how the charges for a typical merchant account work.
First off, a transaction begins the second your customer swipes, taps or inserts their credit or debit card to pay. You will typically be charged a fee based on the cost of the transaction. The amount you are charged is determined by three factors – the merchant account provider who you opened the account with, your bank and the customer’s bank, and the company that issued their credit card.
Some merchant account providers charge a fixed price per transaction without charging you any additional fees. Others charge a little more than what the credit card issuer would charge directly. Some providers have a tiered pricing system that depends on card type and other variables.
The Different Types of Fee Pricing
Typically, you would be charged a fee based on one of three different pricing models. A flat rate is the simplest of the three to understand. The merchant account provider charges your business either a flat fee per transaction, a fixed percentage per transaction, or a mixture of the two each time a card is swiped. Flat rate pricing is perfect if you are a small business owner because of the transparency of the fees.
For Interchange Plus pricing, the model is a little different. Card companies like Visa and Mastercard charge a processing fee for each transaction. This is called the rate of the interchange. Some merchant account providers will mark this amount up a little and charge you with the increased amount. A good example is when you see a fee of 2.75% + $0.10. The 10 cents is the marked up price, and the 2.75% is the credit card processing fee.
Tiered pricing is the last type of pricing model in credit card processing. This is one with a more diverse array of cost structures. The kind of the card being used, whether it is credit or debit, and even whether or not it is a rewards card count in the determination of your fee. A small business is not one that will find tiered pricing useful because it is very complicated. The actual rate you are charged is different to what you see on paper and involves plenty of additional costs that, while beneficial, are simply not worth the time and effort it takes to keep them managed well.
You Can Change Your Fees
The amount of money you are charged for each transaction doesn’t have to be set in stone. If you are working with a merchant account provider that offers only a flat rate pricing model, then you must put aside your negotiations and accept the fee. However, for providers that provide the interchange-plus or tiered pricing model, negotiating your card processing fee is very possible.
Negotiating involves talking to the provider and trying to get either the credit card processing percentage reduced, or getting a lower markup on the plus plan. Some providers will even bring both down. You have to be wise when negotiating these discounts. For example, if you have a company where the purchases are few and far between, but each purchase is for a lot of money, you should try to get the percentage fee down to save money.
However, if your sales volume is high, but all the payments are small, try to lower the price per transaction. Calculate which would benefit you more and work with that.
One last thing you have to remember about merchant account fees is that your price may vary based on how you process payments. Your payment gateway is either a point of sales system in the store, a mobile phone reader, or an online portal. Fees vary based on the risk of fraud posed by each type of gateway, with online being the riskiest and therefore the priciest. Pick your merchant services provider carefully – you don’t want to elicit unnecessary costs when you should be saving money!