Merchant Accounts - What Should They Cost?

By T. L. Lindemood

Regardless of what company provides your Merchant Account, there are certain fees that will always apply. This is because the major credit card associations (Visa, MasterCard, Discover, and AMEX) have a set fee structure that is passed along on all transactions handled over their networks. These fees (known collectively as InterChange, Dues, and Assessments) are non-negotiable. Whether Company A, B, or C provides your Merchant Account, these costs will remain the same because they are set by "a higher authority," so to speak.

In fact, a large number of variables go into determining what the base rate is for each type of transaction run through your business. Here are just a few examples of what affects the costs associated with each transaction:

What type of card was used (debit or credit)?
Was it swiped or key-entered (or done over the Internet)?
Were rewards or points offered on the specific card used for the transaction?
Was it a corporate or purchasing card?
What type of business are you in?
How long did you wait from the time the transaction was run to close out the batch?

I like to think of these fixed costs as the "science" behind pricing in the credit card processing world - the "art" comes in with how each individual processing company bundles these prices and passes them along to you, the business owner.

The key is to understand that the fees added ON TOP of the fixed costs is where you have room to negotiate on behalf of your business.

Therefore, before you sign a credit card processing contract, be sure you have a thorough understanding of all the fees and charges that will be associated with your new Merchant Account.

Here are some of the typical fees associated with credit card processing:
Discount rate (a percentage of sales)
Per-item Fees
Monthly Minimums
Statement Fees
Annual Fees
Application Fees
Chargeback processing
Early Cancellation Fees
Fees for supplies (e.g., drafts, roll paper, etc.)
Terminal purchase, lease or rental fees

Be sure ALL of these fees are spelled out clearly, in writing, on your contract before signing. I personally wouldn't consider a company that charges an application fee or an annual fee. Same for monthly minimums. I've reviewed many statements where a seasonal or low volume merchant did $0 in processing for a given month, and got hit with $40 or $50 in monthly fees because there was a $25 monthly minimum, plus other ongoing charges, written into their contract.

Also, beware of any processing company that over-simplifies their fee schedule. Many will lead with a very low rate (i.e. 1.29%) and the merchant will go about their business believing that this is, in fact, what they are paying for processing. The reality is that this low rate will apply only to a very specific type of transaction - debit (rather than credit) card, swiped at the point-of-sale (vs. being key-entered into the terminal). All transactions falling outside these specific parameters (including ALL credit cards - especially those offering some type of perk or reward to the user, non-swiped transactions, etc...) will be charged at higher - often MUCH higher - rates. Push your agent to reveal - in writing - what those rates are up front to avoid any unpleasant surprises.

Finally, be sure to find out what specifically causes your transactions to "downgrade" to those higher discount rates - and make sure you are working with a company that will work with you to avoid those downgrades - many won't as that is where the true profit in your account lies.