How Merchant Account Fees Work

It’s always good to know why you are paying the fees that you are for service. It opens avenues for you to understand whether or not it is even justified. Opening a new merchant account or trying to maximize profits by minimizing expenditure require proper know-how of the fees you are being subjected to and how to save oneself from any unnecessary fees that the merchant account providers are notorious for charging their clients.

In a nutshell, a transaction is initiated the minute the card credentials enter the sales terminal of a store or a business. This can be either a “card not present” or a “card present” transaction based on your business. Based on the cash that the customer pays, the account provider will charge you a certain fee. This depends on several factors, such as the bank of the customer, the bank where the merchant’s account is present, and the card’s issuing bank. Each provider has different ways of charging their clients. Below we will discuss all the various fees that a merchant can be subjected to by their provider. There are three main types of fees involved in a merchant account. They are transactional, flat, and incidental fees. Some if not all, of these fees are negotiable and can be waived off.

Wholesale and Markup Fees

For this, we will have to dive a little deeper into the basics of retail operations. When a merchant or shopkeeper buys their stock, they buy them at a “wholesale rate.” This is when the producer gives them when they buy stuff in bulk that they have to retail later. The merchant then adds a markup. This markup caters to all the costs that are associated with the process of retail. When someone operates a retail store, they not only have to make profits out of the stock they buy, they have to make up for their operating costs and any other costs that come with selling the stock.

Interchange fees

The wholesale fees typically translate to the network and Interchange fees that come with card-based transactions in terms of merchant service providers. The credit card association charges the network fees to the merchant’s bank or any third party service hired by them. After that, the issuing authority of the card charges interchange fees consisting of a fixed amount and a percentage of the sale for which the transaction is being done.

Markup fees

This is a similar concept to standard retail. The Markup fees are charged by the Merchant service providers on top of the interchange fees or network fees that are due to the card association and issuing bank, respectively. The markup fees are what your merchant service provider would charge for processing your transaction between the issuing bank and your bank. These fees vary across various merchant service providers. Some providers choose to disclose it while others do not.

Transactional fees

These make up for the most significant portion of the merchant fees. These are based on two different things, the interchange fees or, as some card associations call it, discount rate. And secondly, a transaction fee, this part applies to any of the fees that occur during the transaction. There are wholesale and markup fees with each transaction, and there are a total of 5 types of transaction fees. They are;

  • Fees of Interchange and Assessment: These are non-negotiable fees by the issuing bank and card association.
  • Fees of Authorization: the fee to run the transaction can be charged by the payment processor, naming it as authorization fees.
  • Fee per Item: Other than the authorization fees, per item fees can be charged by the processor each time the merchant makes a transaction through the credit card terminal.
  • Communication Fee: Each time the credit card terminal sends or receives information from the processor or the bank, the processor may charge a fee.
  • Wireless Service’s Fee: if you use a wireless network to process your transaction, you will be paying an additional wireless fee to avail of that service.

Flat Fees

Flat fees are fixed fees that you will be paying your payment processor. Usually, a provider charges multiple types of flat fees to the merchant, and these can be recurring, one time or annual. The types of flat fees that you can be paid are;

  • Address Verification Fees: For CNP transactions, the AVS fee applies to confirm the cardholder’s address to verify the transaction.
  • Annual Service Fee: Some providers take a yearly fee for their service.
  • Batch Fee: This is the end of day transaction processing fees, and it can be per item or just a flat fee.
  • Gateway Fee: this can be charged alongside the AVS fee. And can be waived off in the case of an in-house gateway system for payments.
  • Fraud Protection and PCI compliance fees: This fee is payable regardless of whether you are in compliance or are not in compliance with PCI guidelines. The reason for that is to ensure that PCI compliance is maintained.
  • Fees of Setting up: This isn’t charged by all providers and can be different based on your choice of a payment provider.
  • Statement Fee: the production and sending of the statement of the transactions performed are the statement fees. Electronic invoices can result in the waiver of such fees.
  • Terminal Fees: a merchant has two choices for a POS terminal. To sell or lease it. A merchant service provider would prefer that you rent it as it would result in their profit, and you would have to pay terminal fees.

Incidental Fees

Incidental fees are ones that occur on the instance of something. For example, there is a chargeback, or there is a returned item. The merchant would be liable for incidental fees by the payment processor. Types of incidental fees are;

  • Chargeback Fees: if a cardholder disputes a charge on their card and wins, there is a chargeback fee.
  • Fees on Returned Items: If a customer chooses to return an item that had been bought using a card, the processor can charge you fees to process the item’s return.
  • Minimum Monthly Fees: each merchant service provider has their predetermined limit of earning from your business. If you fail to meet the hat limit, they will charge you to pay for the difference.
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