Where do Processing Fees Come From? Pt. 2

By John Robinson, of Cocard Synergy

For the remainder of this discussion, I’ll discuss interchange fees and then a little about the fees to the merchant account provider. The assessment fees paid to the associations, both being small and not negotiable, can wait for another day.

Interchange fees usually make up roughly 80% of the fees you pay per transaction. (If they are less, then you are almost certainly being overpaying for your merchant account.) They’re the fees paid to your customers’ banks. These issuing banks are members of either Visa or MasterCard’s association, and issue cards with those logos on them. They define what the interchange fees will be based on what kinds of cards they’ve given your customers and whether or not you include certain information when entering a transaction.

Once upon a time, issuing banks earned all their money from fees charged to their cardholders; meaning the merchant fees were fairly low and meant only to cover costs. However, as time went on, certain types of cardholders (namely those using rewards cards, signature cards and commercial cards) often paid on time and in full, leaving the banks without income from late fees and interest fees in those areas, so the banks looked for ways to increase revenue on the use of credit cards by those cardholders.

Likewise, merchants often wish to still accept cards when some of the provided information doesn’t match with the issuers’ databases, and obviously the banks want to hedge against potential losses in these transactions by increasing the cost to do them.

Also, they need to cover the costs of their rewards programs…and so there you go. Banks will be banks, and they have shareholders, etc. In other words they must make their profit someway.

But:

Do you remember I said, back in Part 1, that there’s a fee area which could “vary wildly”? This happens to be something you and your merchant account provider have some control over…and which is the basis of our philosophy here.

Obviously things like the credit card volume figure into the profit margin merchant account providers are shooting for. We need to know we’re making enough off a small account to justify giving it as much love and service as one of our large accounts…I can’t speak for other providers, but we won’t take on accounts that we can’t give a lot of attention to. However, there are other factors that account for those wildly varying fees.

Most merchant account providers don’t stick to a certain margin above their costs for a particular transaction. Most add additional profit on transactions that have a higher interchange cost. For example, if a provider is charging a .30% spread above their cost on a regular consumer card, that’s what you’d expect them to charge above their cost on a rewards card. Now, in a face to face retail environment (where cards are swiped), a rewards card has an interchange cost that’s .11% above a regular card, so a retail merchant should expect to pay only an additional .11% on those cards. However, many providers charge .35% or .50% or higher. Then, if you ask why rewards cards are so expensive, they’re not untruthful when they say, “Well, it costs more for us”…they’re just omitting that it was only .11% more.

You shouldn’t need to be an expert, but you should know enough to spot an expert and be able to keep an eye on whether they’re actually providing good service or not. What you need is a basic understanding of who gets these fees, how much, and which part you can negotiate and work with. And a great provider (such as Cocard Synergy!) should be willing to show you this.

Like this post? Then subscribe by RSS | Email