If you have an online business looking to accept credit cards, you'll need to know the credit card merchant fees that acquirers and payment processors charge. It can be complex, especially when a long list of fees are provided in industry languages.
We have condensed in layman's terms how the credit card world functions. Below are the key ideas, terms and charges you should be comfortable with to get started.
Let's look at all the characters in the online payments world:
- The customer / cardholder: This is the individual buying from your business. This can be on the web or face to face. It might likewise be a one-time payment or recurring, for example, a month to month membership.
- The merchant: This is you, as in the the business providing the product and/or service to the customer.
- The payment gateway: This is the platform, typically developed and operated by the payment processor, or licensed from a business that specializes in gateway software.
- The payment processor: These businesses process transactions for the merchant and connects to card associations via the acquirers they work with.
- The card associations: Most notably, Visa and Mastercard. They work a worldwide system that interfaces with issuers and acquirers.
- The issuer: These are banks and financial institutions that issue cards to customers.
- The acquirer: These are banks or financial institutions that capture the funds from credit card payments and then settle to the merchant. This is the party ultimately liable for all financial and compliance risks.
Types of Credit Card Merchant Fees
Let's look at the key types of fees that payment processors charge either individually or part of a flat rate package.
These fees come from:
- The card association (such as Visa or Mastercard)
- The payment gateway provider
- The payment processor
Card Association Fees
Interchange. This is a complex schedule of fees that card associations set and then pay the card issuer. Generally a percentage plus a flat fee, such as 1.6% + $0.21 per transaction. These will not vary by payment processor, and are not negotiable.
However, the fees vary based on several factors, including:
- Type of card - credit, debit, corporate, prepaid, etc
- Card Present versus Card Not Present (such as over the phone or online). Card Not Present (CNP) pays more due to the risk.
- The card's location - if the card was issued in a different country or region than the issuer, higher interchange often applies.
Assessment Fees. This includes an assortment of fees, typically very small, charged by card associations. They are paid to the card associations, and are fixed.
Payment Gateway Fees
The payment gateway you use will typically charge a fee for each transaction, and a monthly fee for services, such as connections to acquirers, 3D Secure, or PCI compliance scans.
Payment Processor Fees
These are fees are set and paid to the payment processor. Often times it will include a markup on the interchange, or a bundled flat rate for the merchant.
Other fees a payment processor may charge:
Chargeback fee: A chargeback results when a customers debates a charge on their credit card and the funds go back to the customer. Once a chargeback has been initiated, the fee is applied to the merchant account, in addition to the funds being deducted.
Chargeback service: The payment processor or its affiliate will often provide a chargeback mitigation service, for example through the Visa Merchant Purchase Inquiry (VMPI) Program.
Monthly minimum fee: This is the minimum that a payment processor charges a merchant for use of the account.
Monthly fee: The payment processor may also have this in addition to the above fees.
Setup fee: Some payment processors have a setup fee, which they often deduct from initial processing.
Terminal fee: For Point of Sale merchants, the payment processor may charge for the terminals, either as a direct sale or a monthly lease.
This was a brief synopsis of the credit card merchant world and the kinds of fees you can expect to see. A merchant account involves many companies, so it can be confusing. As a result, most merchants prefer simple, "one-size-fits-all" payment processors such as Stripe or PayPal which bundle everything together into a simple flat rate. This may be fine for small startups, but bigger merchants would end up paying less for direct merchant accounts, and gain more flexibility.
Also, let's not forget that the "one-size-fits-all" payment processors such as Stripe have limitations. They can only support certain kinds of merchants (business types, business locations etc). As a result, they may not be the right choice for your online business.