Cost is often a top factor when you're looking for the right merchant account services for your business. If you process a lot of card payments each month, it can be expensive if you go with the wrong provider. There are three types of costs you need to investigate:
- Processing fees
- Account fees
- Equipment costs
Many of the best merchant services and payment gateway providers post pricing on their websites. However, more commonly, you'll have to speak with a sales representative. During these calls, the rep will ask about the specifics of your business, such as your transaction volume, average ticket size, industry and creditworthiness. If you're already processing, many reps will ask you to send them a recent statement so they can try to meet or beat your current rates.
Processing Fees
Whether you accept credit card payments online or in person, you pay a small fee for every transaction, which is expressed as a percentage of the sale plus a few cents. However, providers calculate these costs differently, which makes it difficult to compare prices. To make an accurate comparison, you need to know the types of processing fees and pricing models.
Processing fees have three parts: the interchange rate, the card-brand fee and the processor's markup.
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The interchange rate: This is a non-negotiable cost set by the card brands (American Express, Discover, Mastercard and Visa), and every service provider pays the same amount. Each card brand has its own rate table with different interchange rates based on the type of card (credit or debit, regular or rewards, etc.), your industry, the size of the sales ticket and how the card is accepted (in person or online, using a chip card reader or swiper, etc.).
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The card-brand fee: This is also a non-negotiable fee that the card networks charge; every processing service provider pays the same amount.
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The processor's markup: This portion of the fee is negotiable.
Recognizing how confusing this is, many processors try to simplify processing rates and how they communicate them to their merchants. Most use one or more of these three pricing models: interchange-plus pricing, tiered pricing and flat-rate pricing.
Interchange-plus pricing: Industry experts favor this pricing model – sometimes called interchange pass-through pricing or cost-plus pricing – because it's the only pricing model that shows you exactly what the processor's markup is. This is significant because the markup is the only part of the cost that you can negotiate. As a result, this model has the best pricing for most merchants.
- When you're quoted this rate, it will look something like this: 0.3% plus $0.15. Remember, this is only the processor's markup; you still must pay the interchange and assessment fees. For example, if you have a retail business and you accept a rewards Visa card in person using a chip card reader, the interchange fees might be 1.65% plus $0.10. The card association fee for Visa would be an additional 0.15% plus $0.02. Adding up all three costs, the full rate you would pay for this transaction would be 2.1% plus $0.27.
Tiered pricing: Though this is the most common pricing model, industry experts criticize its lack of transparency. Other names for this model include bundled pricing and bucket pricing, because it attempts to bundle interchange fees, card-brand fees and markups, and then segment transactions into tiers, or buckets. These tiers are often sorted into qualified, midqualified and nonqualified, with separate tiers for debit and credit card transactions.
The low teaser rates that many companies advertise are usually qualified debit transactions, which means they apply only to regular debit cards that you accept in person using a card reader. Midqualified transactions are usually rewards cards, and nonqualified transactions are most often business or foreign cards, though some also include premium rewards cards. Most merchant service providers offer three tiers, but some have as few as two or as many as six.
- When you see this rate advertised, it looks something like this: 1.39% plus $0.21. However, this rate is only for debit cards accepted in person, so if you accept a credit card, you'll pay a different rate, perhaps 1.59% plus $0.21. If it's a rewards card, it would be downgraded from qualified to midqualified, which might add another 1% to the cost. So, for this example, the rate would be 2.59% plus $0.21.
If you're quoted tiered rates, it's important to ask how many tiers there are and which types of cards and acceptance methods apply to each. Make sure you know which types of cards your customers use most so you can judge whether this pricing model is cost-effective for your business. If the majority of your customers use regular debit cards and you accept cards in person, this processing model may be worth considering; otherwise, you should look for a processor that offers one of the other pricing models.
Tip: If you go with a tiered pricing plan, find out how many tiers there are and which types of cards and payment methods apply to each tier.
Flat-rate pricing: Most of the merchant services companies that use this simple pricing model charge a single fixed percentage rate per transaction, though some also charge a per-transaction fee. This pricing model is popular with mobile merchant service providers, and it may be the most cost-effective option for small businesses that process less than $3,000 per month or have small tickets. This type of transaction rate is noticeably higher than those from the other two pricing models, but there usually are no other account fees; all you pay are the processing fees for each transaction, which is why it's such an attractive option for new and very small businesses.
- When you see this rate advertised, it looks something like this: 75%. Using the above scenario with the rewards credit card, this is the processing fee you would pay. It is higher than the other two pricing models' fee percentages, but there aren't any other fees for your account, which may make it less expensive overall, depending on how much you process each month and which types of cards your customers prefer. The consistent rate makes it easy for you to calculate exactly how much you'll pay in processing fees each month.
Merchant Account Fees
In addition to the processing rates for each transaction, you'll pay account maintenance fees if you're working with a full-service merchant account provider or payment gateway service. These typically use the interchange-plus or tiered pricing models. Generally, providers that use the flat-rate processing model don't charge account maintenance fees.
When you ask about account fees, most sales reps will tell you about the monthly fee, but there are a lot of complaints online about surprise fees on credit card processing statements. For this reason, it's important to read the full contract (application, terms of service and program guide) to ensure you're aware of every fee.
Here are some of the fees most merchant services providers charge. For a detailed list of fees to look for as you read processing contracts, see our guide to credit card processing fees.
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Monthly fee: Most merchant service companies charge a monthly fee, sometimes called a statement fee, that covers the cost of preparing your monthly billing statement and providing customer support. This fee usually ranges from $5 to $15. Some providers may charge more if they roll other regular account fees into this charge.
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Gateway fee: A payment gateway is necessary if you intend to accept credit cards online. Small business owners with an online shop need a gateway because it encrypts and securely transmits credit card data from your website to the processor. Pricing varies; some processors charge a monthly fee of around $10 for this service, some charge a per-transaction fee ranging from $0.10 to $0.25, and some charge both.
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PCI compliance fee: If you work with a standard processor that gives you your own merchant account, you're required to be PCI-compliant. That designation means you adhere to the Payment Card Industry (PCI) Data Security Standard, which was developed to help merchants prevent data theft and fraud. Most processors that charge this fee offer to help you complete the annual questionnaire that is required to demonstrate your compliance. Your rep may call or email to remind you to take the assessment each year, or the processor may note it on your statement. On average, this fee is $99 annually.
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PCI noncompliance fee: Even if the processor doesn't require you to pay an annual PCI compliance fee, it may charge you a monthly noncompliance fee if you fail to establish compliance by filling out the annual questionnaire. You can easily avoid this fee by staying up to date with your PCI responsibilities. This fee can be very high, ranging from $20 to $60 per month, as it is meant to discourage you from letting your PCI compliance lapse.
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Chargeback fee: If a customer disputes a charge and requests their money back, the processor charges you this fee. Chargeback fees are usually $15 to $25. Chargebacks are more common when you accept credit cards online versus in person, because typical reasons for chargebacks include delivery failures, technical errors, fraud and customer dissatisfaction. Another common cause of chargebacks is if your store name is different from the name on your merchant account and your customer doesn't recognize your merchant name on their credit card statement.
Some processors charge application and setup fees for your merchant account, a payment gateway setup fee to connect the payment gateway with your website, and an early termination fee if you want to close your account before the contract's term expires. The best providers don't charge these fees, though, so you should ask them to waive these fees if they're included in your quote or look for a provider that doesn't tack them on.
Tip: Avoid merchant account providers that charge an application or setup fee. The best providers won't hit you with these extra expenses.
Processing Equipment Costs
If you accept credit cards in person, you need to purchase a card reader or terminal. Here are the three most popular options:
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Mobile card readers: This is the cheapest option, as many providers give you a free swiper when you sign up for an account. If you want to purchase a mobile card reader that also accepts EMV chip cards, contactless cards and mobile payments, these cost less than $100.
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Credit card terminals: This is the midrange option. These devices cost $150 to $600, depending on whether you choose a countertop or wireless unit. They have built-in keypads and receipt printers, and all new models can accept both chip cards and contactless payments.
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POS systems: This may be the most expensive option, but cost will depend on the type of system you choose. Tablet POS systems are often the least expensive, and they work with mobile card readers.
The most important thing to know about processing hardware is to avoid leasing it, because you can't cancel a leasing contract and, in most cases, you'll pay much more over the long term than if you purchase it outright. It's enough of a problem that the Federal Trade Commission cautions against it, noting that businesses that lease may pay thousands of dollars for equipment that costs just a few hundred dollars.
