As a small business, working with credit card processing companies is something that must be done. Generally, if you’re happy with the functioning of the service it might become a “set and forget” solution to the complicated problem of processing payments made to your business. Because the process and fee schedule is a multiple part system with multiple parties involved it can feel extremely complicated and many probably don’t know what they are actually paying for. In the following, the parties involved, the three sections of processing, and some important fees to be aware of will be explained.
In order to understand the fee schedule, it is important to understand all the entities and their roles in payment transactions. It isn’t necessary to be aware of all the different facets to be knowledgeable about what prices are acceptable and what exactly is being paid. There are many different fees and several ways to be taken advantage of if the due diligence in choosing a company is not completed. However, in advancing your understanding of the topic, with the confidence you will be able to determine if your current processing company is lower quality than you previously thought or which company will be a business partner.
Who are The Players?
There are several different entities involved with every single card-based translation. The following details their role in a transaction.
Cardholder A customer that pays for a good or service with a bankcard.
Merchant This refers to the company or business that takes payment via credit card for goods or services rendered.
Issuing Bank The banking entity who issues a bankcard to a customer. They will also be registered as a member of card associations.
Merchant’s Bank A banking entity which provides merchants the ability to take credit card payments, and will be registered to the card associations. Also known as the acquiring bank, or the credit card processing company.
Card Associations – A governing body of the financial institutions that oversee merchant account transactions. The card association provides a network so that information can be shared between members of the card association.
How Do Transactions Take Place?
In the two primary steps in processing, authorization and settlement, there are several steps and involve all five entities. Today these two steps happen nearly instantly in regards to the authorization, and a matter of hours for the settlement.
As the cardholder presents their card for payment, authorization begins. The terminal allows the merchant to pass the card details to the processing company. Through the card association networks, the processor sends the information of the sale to the issuing bank. Issuing bank determines whether or not to approve the transaction and the information is sent back through the card network to the acquiring bank, who route the information to the device or terminal to complete the transaction.
After a batch of various authorizations have accumulated, they are transmitted from the merchant all the way to the issuing bank. The card association debits the net transaction from the issuing bank and credits the acquiring bank the financial total amount. The funds are deposited into the merchant account according to the agreement between the merchant and processing company. The cardholder must repay the debt to the issuing bank, plus interest or fees according to their agreement.
Fees You May Encounter
As a merchant, there are many fees that may not make sense or be recognized. Majority of fees are universal and charged by the issuing banks or card associations. These fees are concrete. Finally, there are fees charged by the credit card processing fees. These fees can vary greatly and may drastically change depending on the level of risk assigned to your business. Low-risk merchant accounts are generally much less expensive than high-risk accounts with the majority of companies. However some processing companies specialize in high-risk merchant accounts, such as Double Helix, and can charge far less than standard acquiring banks. Following are the three types of fees incurred in processing payments.
Transaction Fees a fee per transaction made, usually a flat amount.
Percentage or Interchange Fee a percentage of the transaction paid to the issuing bank.
Assessments these are set industry wide and received by the card associations. This is different between card associations but is non-negotiable.
Markup – The processing company adds their own fees to cover their incurred expenses and profit margin. Because this is specific to the processing company the price is negotiable. An acceptable market is generally about a quarter of the total. This can vary greatly between companies, especially for a high-risk merchant account.
Hazardous Fees
Some fees that are included in the markup portion are particularly troublesome to merchants. These fees may cause an excessive portion of the fee schedule to be markup, costing the merchant considerable profits. Some fees to be aware of include:
Annual/Monthly Fee: These fees are designed to cover the costs of their call centers to provide customer support. It is acceptable for either/or to be on your invoice. If both a monthly and annual fee are being charged there is an issue with the processing company.
Statement Fee/Online Reporting Fee: These fees are charged in order to view either a physical or an electronic version of the account statement. Many companies no longer charge this type of fee.
Monthly Minimum Fee: This is a fee charged to vendors who do not meet a monthly or annual target volume of sales. This varies greatly by the provider and many companies do not charge a monthly minimum fee.
Terminal Fees: Some providers require you to lease a terminal from their company instead of purchasing your own terminal. This will end up costing thousands of dollars more over time than a single purchase.
Application/Setup Fees: Fees to apply or set up a working relationship with a processing company are rarely charged in the current market but are still around. These are unnecessary and can be negotiated out of the contract.
Early Termination Fees: ETFs are common among providers but there can be a tremendous difference between pricing. Avoid ETFs at all costs but it is good practice to seek a company with low ETFs.