Running your business can be exhausting and time-consuming. You may find yourself neglecting your payment processing bill month in and month out - especially if you don’t quite understand how to read your statement. What does each fee represent? What fees are unavoidable and which are negotiable? To help you understand all the fees on your statement - and the ones that shouldn’t even be there - let’s start by breaking the fees up into 3 categories: transactional fees, fixed fees, and situational fees.
NOTE: Grab your merchant statement and compare with the fees listed.
These fees are the biggest cost to your merchant account and are charged every time a transaction occurs.
Interchange fee (interchange rate)
The interchange fee is set by the card brand networks and represents the base fee or wholesale cost of accepting electronic payments. This fee is what the acquirer pays to the issuer and the rate varies depending on the industry, the type of business, if the card is present or not present at the time of the transaction, etc. The interchange fees are different for each card type and the rate is higher for points and rewards cards.
Assessment fee (card brand fee, card association fee)
The assessment fee is a small percentage that is paid to the card brands (Visa, Mastercard) on every transaction. It is a fixed transactional fee and the same amount is charged no matter the card type or industry.
Some payment processors mark this fee up without the merchant’s knowledge, rather than charging the true cost.
Authorization fee (transaction fee)
The authorization fee is represented as a dollar amount and is charged each time a transaction is approved or declined.
AVOIDABLE TRANSACTIONAL FEES
Discount rate (qualified rate or merchant discount rate)
The discount rate is the fee charged for accepting and processing a transaction made with a qualified or basic card. It is represented as a percentage of the total transaction amount where a basic credit card is used. Qualified credit cards are the most basic of credit cards and are rarely used as they give no incentive to the cardholder. They, therefore, serve as a baseline price for all other types of credit cards.
Transparent payment processors will not charge a discounted rate and will instead charge the true cost of the qualified interchange fee. However, most payment processors set their own discount rate, posing as having a rate much lower than the basic interchange fee (which is not possible) in order to attract merchants. For example, a credit card company may have an interchange rate of 1.42%, but your payment processor could have their discount rate advertised as 1.32% - 0.10% below what the credit card company has set. In this example, the payment processor would technically lose money on every qualified transaction, so to counter that, these processors will charge hidden and confusing fees to still remain profitable.
The non-qualified rate is charged when a customer uses an affinity or premium card or for card-not-present transactions. Card-not-present transactions are generally associated with a higher risk of fraud and therefore charged at a higher rate. Now, to make things even more complicated, this fee is charged in addition to the discount rate. That’s right - the discounted rate is now bundled with a non-qualified rate that is set by the payment processor at whatever rate they choose. The non-qualified rate is pure profit to the payment processor.
Interchange differential fee
The interchange differential is the difference between the base interchange rate (or interchange rate of a basic credit card) and the actual interchange rate of the affinity and premium card being used. However, in complex pricing models where qualified and non-qualified rates are charged, rather than charging true interchange rates, an interchange differential fee is charged on top of the discount rate to recoup the costs associated with affinity and premium cards such as loyalty points, rewards, etc (Air Miles®, PC Optimum, SCENE®).
Stay tuned for Part 2 where we will be diving into the world of fixed processing fees and which ones you should avoid getting charged.