A Practical Guide to Understanding Merchant Account Fees and How They Work

A Practical Guide to Understanding Merchant Account Fees and How They Work

Merchant account fees often comprise a big chunk of business expenditures. The average business owner pays between 1.4% and 3.5% of each transaction as credit card processing fees. 

This is understandably a big deal for small to medium-sized businesses. So, business owners need to understand the various payment processing fee structures to identify which plan conserves the most revenue.

This article will cover everything that small businesses need to know about merchant account fees. Let’s take a look at how they work, how to choose between plans, and the different types of pricing models you might encounter. 

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What Are Merchant Account Fees?

In short, merchant account fees are what a business owner pays every time a customer swipes a card. A few different factors go into determining how much merchants pay for credit card processing and debit card payments. Credit card processing fees (or merchant service fees) are a combination of:

1. Transaction fees – These are charged on every credit/debit card purchase and include the interchange fees set by credit card companies and the per-transaction percentage/markup that some providers charge.

2. Account fees – These include administrative costs and other fees that payment processors charge on top of the interchange and their markup. Some examples are statement fees, monthly or annual fees, monthly minimum fees, etc. 

3. Incidental fees – These are one-time fees such as chargebacks on credit card transactions.

Some MSPs or merchant services providers charge a simple fixed fee per transaction. Others charge a slight markup over what the credit card company charges––be it Visa, Mastercard, Discover, or American Express. Some others use a sophisticated, incomprehensible system of administrative costs, setup fees, and assessment fees to separate business owners from their profits.  

Common Account Fee Pricing Models

As discussed above, merchant account fees can vary quite a bit. Merchant account providers use a few different pricing models to determine how much they charge small businesses per transaction. Most fees can be broken down into the percentage paid per transaction and a fixed fee paid on each item.

Here are three of the most common fee structures used by payment processors:

1. Tiered Pricing

This is one of the most popular forms of merchant account fees. However, a tiered pricing structure makes it hard for merchants to predict what they will be charged month-to-month. There are three different types of processor charges in a tiered pricing model. This depends on what “type” of credit card is used and how much of a risk each transaction poses to the credit card processor.

Qualified: When customers swipe or dip basic debit cards or credit cards that don’t offer rewards, those transactions are typically considered qualified. Merchants will pay the lowest rate for this type of card-present transaction as it poses the least risk. Address verification is easier in qualified transactions since the merchant’s bank can easily pull customer information. 

Mid-qualified: When customers use loyalty cards, membership rewards cards, or manually keyed-in transactions, those are considered mid-qualified. This also refers to some types of online payments or those made through a virtual terminal.

Non-qualified: Business or corporate credit cards, international cards, high-reward credit cards, and card-not-present transactions are considered non-qualified. This is the most expensive type of tiered transaction since the payment processor assumes the most risk. 

Each credit card processor determines what is qualified, mid-qualified, and non-qualified. For example, high-risk sales transactions such as lottery tickets or alcohol may be considered non-qualified.

2. Flat-rate Pricing

In a flat-rate pricing structure (also called blended pricing), the credit card processor chooses a flat fee for all types of transactions. With flat-rate pricing, the sales volume and type of card are irrelevant––merchants pay the same rate no matter what. PayPal is an example of flat-rate credit card processing which can be cost-effective for small businesses with few monthly transactions.

3. Interchange Pricing

Interchange is the fee set by a merchant’s credit card network. Credit card processors that use an interchange pricing model often tack on additional fees. Merchants should review exactly what those fees are before signing up.

Interchange-plus pricing

This refers to the interchange pricing rate that goes to a merchant’s credit card network. The “plus” of the transaction is the markup that goes to the credit card processor. For instance, a merchant might pay a 2.1% interchange rate, plus $0.10 per transaction that goes to their solution provider.

Additional Factors That Impact Pricing

Merchant account fees aren’t simple. There are a few additional factors that influence what business owners will pay for credit card processing. These include:

  • The merchant service provider/payment processing company
  • The merchant’s bank/acquiring bank/business bank account
  • The customer’s bank––also called an issuing bank
  • Whether it is an eCommerce or physical transaction
  • The company that issued the customer’s credit card
  • Any discount rates applied by the payment processing company
  • Whether it is a card-present or card-not-present transaction
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It’s important for merchants to understand how they’re being charged for credit card payments. Credit card processing fees can add up quickly. So, business owners need to be sure they’re retaining the most profit from every single transaction. The size of a merchant’s business, their average transaction size, and the price point of products all have a role to play.  

Ultimately, you’ll need to consider a range of factors when it comes to choosing the right credit card processor for your business. The major ones are:

  • How much you can afford to spend on hardware. For merchants that conduct in-person sales, your hardware budget will make a big difference in what software you can choose. Very small businesses may only have enough to afford a small card reader rather than a full POS system, which often comes with a processor you have to use.
  • The type of merchant you are. eCommerce-only merchants have to run all their transactions as card-not-present, so processors who charge significantly more for those will not be a good fit.
  • The number of transactions you process per month. Whether you process many, many small transactions over the course of a month or just a few big ones can make a difference in what merchant account fees you get charged and what type of pricing structure will benefit you. 

Hidden Fees and Markups to Avoid

Unfortunately, not all credit card processing companies are on the up and up about their fee structure. Hidden fees and markups can be detrimental to a small business’s income. Here’s a quick rundown of some of the most common merchant account fees.

1. Chargeback Fee

Chargeback fees range from $20-$100 and they can add up quickly. They occur when a customer requests a refund from the bank for their purchase. This can be due to fraudulent transaction claims or hidden repeat fees (from the retailer). Chargebacks can also occur when the merchant is unwilling to issue a refund when the customer is unsatisfied with their purchase.

2. Monthly Minimum Fee

This is a monthly fee certain credit card processors charge when the minimum transaction amount for the month isn’t met. Essentially, it helps credit card processing companies recoup some of the money lost on smaller accounts. These fees can be significant for businesses that don’t meet the minimum transaction fee amount in card purchases. Their merchant account provider can technically charge them the difference.

3. Early Termination Fee

Also known as the “cancellation fee,” the early termination fee is what some processors charge if a merchant wants to close their account before their contract ends. It can prevent merchants from being able to leave a contract that’s not working for them. So, beware––it can keep business owners stuck in expensive agreements.

4. PCI Compliance Fees

PCI compliance is the responsibility of both the merchant and the credit card processor. Some companies will charge an additional fee for these services in order to offer a slightly lower upfront rate to you. 

As a side note, because PCI compliance is so important, it’s worth investigating any payment processor you’re looking at to make sure that they are doing their due diligence on these services. Not all companies are scrupulous about these duties.

5. Administrative Fees

Payment processors who nickel and dime you are likely to charge some administration fees as well. The most common are batch and statement fees.

  • Batch fees tend to be quite small, but they’re charged each time you batch out, which is typically a daily process.
  • Some processors will charge you the cost associated with creating, printing, and mailing you your statements.

Understanding the Wholesale Pricing Model

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Most credit card processors take a fixed percentage of every transaction as part of their merchant account fee. This makes it harder for business owners to turn a profit, especially those who process many transactions or those who have a high transaction volume. 

This is where Payment Depot is shaking things up. Payment Depot uses a wholesale pricing model, charging a monthly fee (with zero cancellation fees) instead of taking a percentage of each transaction. It’s PCI compliant, offers award-winning 24/7 customer service, and provides cutting-edge free payment gateways/card readers on signup. 

With Payment Depot, small businesses can choose the plan that helps them save the most, so it’s easier to turn a profit. Click here to learn how Payment Depot helps merchants save an average of over $400 a month on credit card processing today!

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