Merchant account fees can feel overwhelming for new business owners. There are hundreds of them, and some even have cryptic names like “VISA ISA” or “NABU”, adding further confusion for merchants. However, understanding these fees is important for businesses aiming to manage their finances effectively and avoid unexpected costs.
If this sounds like your experience, this article is for you. Today, we’ll discuss what fees you might encounter, how to spot fees you can eliminate, red flags you might find on your statement, and how to compare different options. Let’s dive in.
Key Takeaways:
- Merchant fees are the monthly fees charged to businesses for their merchant account services.
- Pricing models for merchant account fees include flat-rate pricing, interchange pricing, and tiered pricing.
- Common merchant service fees include processing fees, authorization fees, and assessment fees
What Are Merchant Fees?
Merchant fees are the monthly fees charged to businesses for their merchant account services. While your payment processor typically charges you for these fees, they actually come from a variety of sources. These include card brands like Visa, MasterCard, and Discover, banks, the ones that issue your customer’s debit or credit cards, and your payment processor, the financial institution that handles your merchant account. These fees cover things like:
- The convenience of accepting payments electronically, such as credit and debit cards, mobile wallets, or online transactions.
- Costs to run data across the payment networks.
- Costs to facilitate payment movement from your customer’s bank to yours.
- The overhead costs for a payment processor that supports your business and monitors it for fraud.
Because there are three main entities collecting fees through your month-end merchant statement, you’ll typically see several components, including interchange fees paid to card-issuing banks, assessment fees collected by card networks like Visa or Mastercard, and processor fees levied by payment processors.
These fees can vary in cost from merchant to merchant, and even month to month, depending on factors like transaction volume, card types accepted, processing method, and compliance. We’re here to help you make sense of it all.
Different Pricing Models for Merchant Account Rates
Merchant services providers have similar costs, but different rates. To explain, it’s important to understand that the fees levied by the issuing banks and the card brands are set in stone and can’t be negotiated. The only wiggle room on the fees you pay each month comes from the processor’s fees.
Below, we’ll break down the most common pricing structures in a merchant services contract, along with the pros and cons for each.
Flat-Rate Pricing Model
The flat-rate pricing model for merchant fees is becoming increasingly common thanks to payment service providers (PSPs) like Square, PayPal, and Stripe. This option is popular because it’s relatively simple.
This model is just like it sounds. Businesses priced with a flat rate pay a fixed amount for each transaction, regardless of the card type (credit, debit, rewards, etc.), brand (Visa, Mastercard, etc.), or the specific interchange rates associated with those cards or transactions. This approach simplifies fee calculations, making it easier for merchants to predict and manage their payment processing costs.
Note: There are some exceptions – most PSPs charge a higher flat rate for transactions processed remotely (like over the phone or online).
However, flat-rate models are not always the most cost-effective option for businesses. As we established, the costs your payment processor pays to the banks and card brands fluctuate based on the types of cards you’re accepting. So to create a big enough buffer and ensure profitability, they create a bigger profit margin on the flat rate than they would another pricing structure.
As such, many businesses may end up paying more in fees compared to other pricing models like interchange-plus or tiered pricing. Nonetheless, the simplicity of flat-rate pricing can be advantageous for smaller businesses or those seeking predictability in their payment processing expenses.
Interchange Pricing
Interchange pricing, often referred to as interchange plus or “cost plus” pricing, is a very common merchant fee structure used in the payments industry.
Under this model, businesses are charged the actual interchange rates set by the issuing banks, and the actual assessment fees levied by the card networks for each transaction, plus a defined markup imposed by the payment processor or acquirer.
This payment structure is the one where you’re likely to pay the least because it is by far the most transparent, but that’s also its biggest drawback—it’s the most confusing structure to understand.
The interchange rates are public information posted on Visa and MasterCard’s websites. This allows you to compare the rates you’re being charged per transaction to the actual rate for full transparency. This structure also allows you to see the exact costs associated with each transaction.
The exact interchange rate each transaction qualifies for depends on various factors, including card type, transaction method, and risk level. Assessments get charged both on a per-transaction basis and on a “per occurrence” instance. We’ll get more into those later.
To summarize: because of the cost and transparency benefits, interchange pricing is usually preferred by larger businesses with a significant transaction volume.
Next-Gen Tech, Old-School Service
The tiered pricing structure, also known as bundled or bucket pricing, is an older, and less common pricing structure. Under this model, transactions are categorized into different tiers or rate categories.
Behind the scenes, the processor assigns each interchange rate to one of these tiers (or “buckets”) based on factors like card type, transaction method, and risk level, and charges a different rate for each tier. For example, you’ll typically have three tiers: qualified, mid-qualified, and non-qualified.
Non-qualified transactions often involve downgraded transactions (meaning you skipped prompts or something went wrong with the transaction), high-risk, or corporate cards.
- Qualified transactions are those that meet specific criteria set by the payment processor, such as swiped card-present debit and credit transactions.
- Mid-qualified transactions may include keyed-in/card-not-present transactions or reward cards.
- Non-qualified transactions often involve downgraded transactions (meaning you skipped prompts or something went wrong with the transaction), high-risk, or corporate cards.
While tiered pricing may appear simple on the surface, it can be less transparent and more expensive for merchants, as they may not have a clear understanding of how each transaction is categorized or the specific fees associated with each tier. This lack of transparency can make it challenging for businesses to control.
Hidden Merchant Fees to Look Out For
It’s important to find a merchant account that is transparent and upfront about what they are charging. However, it’s good to know that fees might be buried within a contract.
If there is a linked “addendum,” take the time to open it and, at the very least, use the search function to look for “$” or “fee” in the text.
Setup Fees
Setup fees are one-time charges when establishing a new merchant account. These fees come with the initial setup process. Here’s a breakdown of fees you might see when establishing your merchant services account:
- Software Integration Fee. If your business uses specialized software for payment processing or a point-of-sale (POS) system, there may be a fee for integrating and customizing this software to work with your merchant account.
- Application Fee. Some merchant service providers charge a fee to process and review your application for a merchant account. This fee covers the administrative costs associated with underwriting and assessing the business’ suitability for accepting card payments.
- Account Activation Fee. This fee is charged to activate your merchant account and set up the account infrastructure. It includes tasks like creating your merchant identification number (MID) and configuring your account in the provider’s system.
- Terminal or Equipment Setup Fee. If your business requires physical payment terminals or equipment, there may be fees associated with the setup, installation, and configuration of these devices.
- Gateway Setup Fee. For online or eCommerce businesses using payment gateways, there may be a one-time fee to set up and integrate the gateway with your website or software.
Early Termination Fees
An early termination fee (ETF) is a fee for canceling or terminating the contract with a payment processing provider before the contract term expires. In theory, these compensate the provider for potential revenue losses and administrative costs associated with the premature termination of the merchant agreement. Industry-standard ETFs range from $100 to $500. Some companies, however, could end up being much higher by charging a percentage of your average monthly fees for the portion of the contract that remains unfulfilled.
Annual Fees
Some providers may assess annual fees in lieu of a monthly fee for maintaining the merchant account, which covers the administrative costs and services provided throughout the year.
Strategies to Minimize Merchant Service Fees
There are many strategies you can employ to get the best price when shopping around for a good merchant services provider. Here are some effective ways to make sure you are getting the best provider and rate for your business.
Compare Your Options
Different merchant account providers offer various fee structures, including transaction fees, monthly fees, and setup costs. By comparing options, you can identify the most cost-effective solution that aligns with your business’s financial capabilities and goals. These providers may review other quotes you’ve received, as well as point out flaws or differences and help you understand them. Comparing these rates allows you to select a provider that offers competitive pricing, reducing the overall cost of processing payments for your business.
Negotiate for Better Rates
Merchant account providers usually have different effective rates for credit card processing. Different pricing structures, scheduled fees, setup fees, etc. will make all the difference. You can negotiate some of these terms by requesting:
Merchant account providers usually have different effective rates for credit card processing. Different pricing structures, scheduled fees, setup fees, etc. will make all the difference. You can negotiate some of these terms by requesting:
- Interchange plus pricing
- A fair basis point markup
- A reasonable transaction fee
- Request removal or reduction of scheduled fees (like an annual fee)
There are independent sales offices (ISOs) that work with multiple merchant account providers and can negotiate payment processing
Avoid Payment Aggregators
If you just want to get set up to process payments immediately and don’t care much about what you pay for the service, payment aggregators can meet that need. If you want more control, reliability, and flexibility in their payment processing, then you’re best to avoid them.
You can start by researching different merchant account providers. Look for well-established, reputable companies that have a track record of serving businesses like yours. Read reviews, check for industry certifications, and seek recommendations from peers.
Additionally, payment aggregators typically have minimal-to-no underwriting requirements, which can be a red flag. When evaluating traditional merchant account providers, inquire about their underwriting process. A thorough underwriting process ensures that your business has better protection against fraud and chargebacks. It’s a good indication that you’re working with a legitimate payment processor.
Use a Transparent and Reliable Merchant Service Provider
Navigating through merchant service providers can be challenging, but finding a transparent and reliable one is essential for your business. A trustworthy provider guarantees clear fees, avoids unexpected surprises, and maintains a solid reputation. They prioritize security and compliance, offering robust features to protect your business and customers. Additionally, their responsive customer support minimizes disruptions, ensuring a smooth business experience.
Frequently Asked Questions
What is the difference between merchant fees and bank fees?
Merchant fees cover the costs for processing debit or credit cards on behalf of your customers. Billed monthly by your payment processor/merchant services provider, these fees typically amount to roughly 2.5% to 3.5% of your total debit and credit card volume revenue.
On the other hand, bank fees are charges imposed by banks for various bank account-related services, such as maintenance fees, ATM withdrawals, and wire transfers. They support the operation of bank accounts and related financial services.
How are merchant service fees calculated?
Merchant service fees get calculated based on factors like:
Transaction volume (via a percentage-based “discount rate”)
Interchange fees (charged by card issuing banks)
Assessment fees (levied by the card brands, like Visa and MasterCard)
Monthly fees
Incidental fees
Some industries face higher base fees (like CBD companies, for example) because of their perceived risk. The exact formula varies by payment processor. That’s why it’s crucial to review and understand your provider’s fee structure. If you do, you’ll be able to manage costs effectively and find the best fit for your business.
Is it legal to charge merchant fees to customers?
The answer to this question depends on where your business is located. Some states ban charging additional fees based on payment type (like a $3.00 or 3% surcharge for using a debit or credit card). Other states ban surcharges but allow “cash discounts” where you incentivize customers to use cash by offering them a discount at checkout. Some states allow surcharging but require a clear sign at the point of sale to charge legally.
Other states have no such restriction in place. To know what you’re allowed to and not allowed to do, contact your state’s regulatory body.
How do you avoid merchant fees?
You can avoid merchant fees by refusing to accept debit and credit cards. But doing so puts your business at risk of turning away far more customers than necessary, resulting in a net loss.
To reduce your merchant fees, you can:
Encourage debit card use for transactions over $10.
Follow all prompts given by your terminal.
Talk to your merchant services provider about what’s causing the fees to feel so high.
Compare your rates to other providers to ensure you’re getting a good deal.
Switch providers if needed
Who is responsible for merchant fees?
The business owner or entity is responsible for merchant account fees, as they are the ones accepting electronic payments.
