The Costs of Credit Card Payments
Sam Zietz
Sam is the president and CEO of American Bancard, a three-time Inc. 500 winner and provider of various electronic payments and related equipment and peripherals. Sam can be reached at
[email protected].
In today’s global economy, it is a rare case when a business does not accept some form of electronic payment. That said, there is often a hidden cost associated with e-payments, and for most small businesses, understanding the fees associated with accepting credit card payments is a lot like playing three-card Monte.
In this potentially deceptive version of the game, the processor plays the part of the dealer. The local bankcard agent is in the role of the shill and the merchant (you) is the mark. Many credit card processing companies try to use misdirection to keep the owner focused on one set of numbers, while they roll up profits with hidden fees. When the local bankcard agent promises to save you money, it works a lot like the shill in three-card Monte— they let you win the first game or two. They point out a line item where you are overpaying, but then fail to give you full disclosure on how the process actually works.
For years, the credit card associations (e.g., Visa, Mastercard) have maintained their rules, regulations and pricing models as a secret, known only to their member banks. Recently, with both Visa and MasterCard going public, the confidentiality provisions have been somewhat relaxed, although pricing methodologies are still hard to discover. At the risk of being thrown out of this club, I am going explain to you what goes on “behind the curtain,” so that you will be better armed with the information you need to decrease your costs of accepting credit card payments.
Credit Cards: Primary Costs to Consider
When your business accepts credit cards, there are two primary costs you have to consider: the Discount Rate (a percentage of the sale) and a Transaction Fee (a fixed amount per sale). The two major factors that affect the pricing are: (1) at which Interchange category the transaction clears; and (2) the amount of risk associated with the transaction. Ten years ago, there were approximately 30 interchange categories in the US, for example. Today, there are more than 450, and a similar pattern has evolved across the globe— there are a number of players
who get paid from these fees.
The obvious question for a business owner becomes how to control and/or minimize the cost of the Interchange rate. Some
factors that determine interchange can be easily controlled, while others are more challenging and nearly impossible. Card processors are challenged to price the risk associated with specific business types, and this is where understanding how the risk that you, the merchant, bring to the table potentially provides leverage. If you can reduce your risk to the processor in the following five areas, you have pricing leverage to get the best deal:
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Financial stability of the business – The higher the likelihood the merchant, its guarantors or any imposed reserves can cover any potential refunds or chargebacks, the lower the risk will be to the processor.
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Potential for chargeback – Merchants exceeding a chargeback rate in excess of one percent increase risk to the processor, and run the risk of being placed on the chargeback monitoring program by the associations.
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Future service liability – Future service liability will essentially extend the six-month period the card holder has to dispute a purchase. A cardholder has six months from the time in which the goods or services were provided to dispute the purchase. These types of transactions extend the period in which the processor is exposed.
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"Card-Not-Present" Transactions – The burden of proof in a chargeback shifts to the merchant, whereas in a card-present transaction the burden of proof in a dispute stays with the consumer’s issuing bank. Thus, if an unauthorized transaction takes place, typically the merchant is protected if the card is present, and will lose if the card is not present.
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The type of product or service sold – The perception in the marketplace can affect the perceived risk by the processor; for example, pornography, loan modification companies, credit repair, etc. The type of products or services your business deals with can have a direct impact on your finances.
When it comes to how the processor prices a merchant account, there are an unlimited amount of possibilities; however, most methodologies fall into
three categories. As a business owner, it is essential that you look at your current statements and review the processes you have in place to ensure you’re using best practices to clear your transactions at the lowest possible levels, while also negotiating with your processor to receive as much transparency as possible in your reporting and pricing. In the end, you will ensure that the money you save will be your own.
