Whether you’re setting up a new merchant account or just reviewing your monthly statements, you may find yourself asking, “What are merchant account fees?”
If you want to accept credit cards for your business, you’ll need to pay merchant account fees. These fees can seem complicated and overwhelming, but they don’t have to be. Understanding how they work can help you process payments more efficiently and get the best deal on credit card processing.
What is a merchant account?
For any business, credit card processing begins with setting up a merchant account.
A merchant account is a type of bank account that allows businesses to accept credit and debit card payments. Typically, these accounts are established through a payment processor, which acts as a link between the merchant and the customer. Essentially, a merchant account is an agreement between a business, a merchant bank and a payment processor for the settlement of credit card and debit card transactions.
When a customer makes a purchase with a credit card, funds are deposited into the merchant account and then eventually into the merchant’s bank account. The payment processor deposits funds into the merchant’s bank account at regular intervals, usually on a daily or weekly basis.
If you plan on accepting credit card payments, you’ll need to get a merchant account.
What are merchant account fees?
Merchant accounts come with a set of fees.
For every transaction, there are five merchant account fees you’ll pay when you process a credit card.
- Interchange fees
The interchange fee is what credit card issuers (like Visa, MasterCard, Discover and American Express) charge for processing credit cards. Interchange is a percentage of the total volume of a transaction plus a small, per-transaction fee. The percentage varies depending on card type. For example, a corporate credit card and a rewards card have different interchange fees. Interchange fees are non-negotiable, since these are what payment processors must pay to credit card issuers to process your transactions.
Assessment fees are charged by credit card networks (such as First Data). They’re based on total monthly sales volume instead of individual transactions, and they’re usually lower than interchange fees. Like interchange fees, assessment fees are set by an outside party–the credit card network–and can’t be negotiated.
- Discount rate
The discount rate consists of dues, fees, and assessments that businesses must pay for accepting credit cards, the largest of which being the interchange fee.
- Payment processor fees
The payment processor connects the merchant to the credit card network, allowing them to process payments. Payment processors make money by charging a processing fee on top of the interchange rate. These fees vary significantly by provider, and can be affected by factors such as sales volume and type of business.
The cost of these fees also depends on a payment processors’ pricing structure. Certain pricing structures are designed to provide the lowest processing costs, while others are much less transparent. There are three main pricing structures: interchange plus, flat rate, and tiered pricing.
Interchange plus pricing is the most transparent pricing model. With interchange plus, you pay a fixed amount above the interchange rate. For example, if a transaction has an interchange fee of 1.75%, you would be billed 1.75% for the transaction plus a small percentage from the payment processor. You’d be able to see exactly how much you were charged while getting the lowest processing fees for your business.
Flat rate pricing is the easiest pricing structure to understand. You simply pay the payment processor a flat fee for all credit and debit card transactions. Unlike interchange plus pricing, flat rate pricing never changes. However, flat rate pricing isn’t always the cheapest option. To negotiate a low flat rate, take a look at your last three credit card statements. Find your average processing fee and then use this number to angle for a lower fee. If you can get a rate that’s lower than your historical average, then you know that you’ll save money each month.
Tiered pricing buckets interchange rates into three categories: qualified, mid-qualified, and non-qualified. This system gives each card a predetermined price based on its category. However, tiered pricing is the most expensive pricing structure and can be very difficult to understand when you get your monthly statement. It also allows payment processors to hide their profits and take advantage of merchants. To get the lowest merchant account fees, choose an interchange plus or flat rate pricing structure.
- Setup and monthly fees
Some payment processors will charge setup and maintenance fees to cover business expenses like support and security. Others even have early termination fees that lock you into a contract.
Century Business Solutions has no early termination fees and requires $0 setup fees, $0 upgrade fees, and $0 maintenance fees. We also provide free, 24/7, in-house customer support along with an experienced in-house software development team.
How to lower your merchant account fees
The way you process credit cards can affect your merchant account fees. When a credit card transaction occurs, the interchange rate is determined by the type of card and how it was processed.
However, certain frowned-upon processing practices cause your transactions to be classified in a higher interchange bracket. The riskier a transaction seems, the higher its interchange rate. This is called a downgrade.
Too many downgrades will raise your monthly processing bill. The problem is that many merchants don’t know what downgrades are or how to avoid them.
Here are four simple ways to avoid downgrades and lower your fees:
- Preauthorize and capture for the same amount
If the preauthorization amount is different from the capture amount, the transaction may appear to be fraudulent.
- Batch out every day
Close your batch every day (either manually or automatically) to avoid stale authorizations. Stale authorizations occur when too much time passes between authorization and settlement. In most cases, the time limit is 24 hours, so it’s best to batch out at the end of the night.
- Include AVS
Include AVS (address verification system) with every transaction by entering the billing zip code. Providing the zip code lowers the risk of the transaction because the extra information reduces the chance that the transaction is fraudulent.
- Use a PCI-compliant payment gateway
A PCI-compliant payment gateway, such as EBizCharge, helps lower your merchant account fees by automatically sending line-item details and invoice information already stored in your system to the point of sale. These details are used to qualify your credit cards, including business and government cards, at the lowest possible interchange rates.
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Contact us for a free demo and see how we can help lower your merchant account fees today.