Merchant Fees: What You Should Know & How to Avoid Them
Merchant Fees: What You Should Know & How to Avoid Them
- What are merchant fees?
- What are average merchant fees?
- Examples of merchant processing fees
- How merchant fees work
- How to avoid paying merchant fees
- Who has the cheapest merchant fees?
Anyone who accepts credit or debit card payments is familiar with a merchant fee. These ubiquitous charges for payment processing are as much a part of running a successful business as customers or inventory. And though most businesses deal with them on a daily basis, paying merchant fees still tends to be an altogether different experience for each and every business.
What are merchant fees?
A merchant fee is a transactional fee a merchant pays whenever a customer makes a payment at their store with either a debit or a credit card. The fees are deducted from the merchant’s bank account and then paid to whatever bank issued the card (i.e. the card-issuing bank) to cover the services they take on. This can include fraud protection, the costs of dealing with bad debt, and any risk that might be associated with the payment.
What are average merchant fees?
The average cost of merchant fees differs from business to business, but merchant services fees equal around 1.3% to 3.5% of the full cost of the credit card transaction. The exact amount of the merchant processing fee depends on what payment network you’re using (i.e. Visa, Mastercard, Discover, etc.), the type of credit card, and a handful of other factors.
Examples of Merchant Processing Fees
Transaction Processing Fees
The most common of all merchant fees. These are fees charged by the bank, the payment processor and the card associations to make sure your payment is securely processed.
Scheduled Account Fees
General, recurring fees for maintaining your merchant account.
Application or Account Setup Fees
Some providers will charge a one-time fee for processing your application. For the most part, providers don’t charge a setup fee, so it’s something to be aware of when looking to sign up.
Some providers tack on an “annual fee” to help cover upgrades to software and hardware. Again, most providers do not do this, and annual fees can be very pricey.
Early Termination Fees
There are providers who will charge a fee for those merchants who leave a contract early. This should be well documented in whatever contract a merchant is signing.
When, and if, you provide a refund to a customer’s credit card, some providers may add on a fee for the service.
If a customer files a “chargeback” (a request to repay funds that may have been lost due to fraudulent activity) merchants can incur a fee. If the chargeback investigation goes in favor of the merchant, this fee will be refunded.
Address Verification Fees
If a customer pays using a credit card but doesn’t have the credit card on hand, merchants may have to use what’s known as the Address Verification Service (AVS) to ensure that the customer’s billing address matches the one they provide. They cost roughly $.10 per transaction but are strong preventers of credit card fraud.
PCI Non-Compliance Fees
Merchants have a certain period of time after they get set up to become PCI-compliant. If they fail to become PCI-compliant or stop being PCI-compliant, they can be charged a monthly fee until they become so.
How Merchant Fees Work
There are a few steps between a customer paying for something using a credit card and a merchant paying that fee for the service.
- The customer pays for goods or services using a credit or debit card.
- The issuing bank charges a fee to the merchant for the security and management of the card being used in the payment. This is the largest portion of the fee.
- The credit or debit card network charges an “assessment fee” to ensure that the customer has the proper amount of funds in the account before the purchase can be made.
- The payment processor (e.g. Stripe, Paypal, etc.) charges a processing fee to manage the details and logistics of how companies process their payments.
- The combined fees are paid out of the merchant’s account
How to Avoid Paying Merchant Fees
Pass them on to your customers.
The best way to avoid paying merchant processing fees is to add a surcharge to your customer’s bill that covers the fee. Some companies, like Plastiq, will automatically pass the fee onto your customers.
Swipe the card.
In-person credit card processing is a safer bet for all involved. Because of this, merchant fee for customers who swipe or tap their cards is cheaper than online or over-the-phone transactions.
Give customers the opportunity to make ACH payments.
Other payment methods offer little to no payment processing fees. ACH payments–because of their general reliability–have low to no merchant fees and can help offset the fees incurred by credit card processing.
Keep your business PCI compliant.
PCI–or Payment Card Industry–are rules instituted to help cut back on fraud and protect sensitive card information. Businesses typically have 60 to 90 days to become PCI compliant and after this businesses will be charged a “noncompliance” fee. Regardless, becoming PCI compliant helps to ensure less fraud and security risk.
Who has the cheapest merchant fees?
Merchant fees can be pricey so it’s good to know which companies are offering the cheapest ones. Here are a few we recommend.
- 2.6% + 10¢ (contactless) – 3.5% + 15¢ (existing cards on file)
- Great for mobile payment processing.
- 2.9% + $.30
- Additional fees/rates will be incurred for other processes like terminal or recurring billing.
- Considered to be one of the best overall payment processing companies. Widely used for ecommerce.
- Interchange + 0.15% + 8 cents for in-person transactions, interchange + 0.20% + 11 cents for online transactions.
- $25 monthly fee will be added as well.
- A socially responsible payment processing company that is very transparent with associated fees. Good for small businesses with little wiggle room in terms of their spending.
If you accept credit card payments or are mulling over the idea, you need to understand what merchant fees are, what they cost, and how to pick one to best fit your business needs.