The Parties Involved
There are a number of parties that jump into action when your customer swipes their card.
Merchant: The business owner who is accepting the payment.
Cardholder: The customer who owns the credit card being used for purchase.
Card Association: VISA, Mastercard, American Express, and Discover. These are not banks, but rather governing bodies that set interchange rates, arbitrate between acquiring and issuing banks, and maintain and improve their networks.
Acquiring Bank: The processor's bank. They hold the merchant’s funds and acquire the money from a sale. In this context, they accept the funds from the sale once a card is authorized and deposit them into the merchant’s bank account.
Issuing Bank: The cardholder’s bank. They issue cards to consumers and pay acquiring banks for the purchases their cardholders make. The cardholder then has the responsibility to pay back that amount in accordance with their credit card agreement.
Payment Processor: This company handles the processing and batching of purchases made with credit, debit, or gift card payments. They typically assist with technology needs and customer service as well, acting as middle-men to the card associations and banks.
Whenever one of your customers uses a credit card to make a payment, each of the above parties is involved. Here’s a quick breakdown of the process and where each party plays a role.
Step 1: The customer purchases an item with a credit card.
Step 2: The credit card is swiped through a processing terminal and that terminal recognizes the card and contacts the issuing bank to request approval.
Step 3: The card is authorized or declined.
Step 4: The processor deposits the funds into the merchant's bank account.*
Step 5: The issuing banks send funds to the acquiring banks to reimburse them for crediting the merchant.
Step 6: At the end of the month, the statement is sent to the merchant that details the interchange for all transactions that month – which is the fee set by card association and paid to the issuing banks to cover the cost of their card programs.
Now that we have a pretty good understanding of the parties involved and how they all work together, we can take a look at what types of fees can be associated with a transaction.
These vary based on your merchant services provider, so if you do not have a Stax account already, pay attention to your monthly bill to ensure you aren’t overpaying for your processing.
These are fees that are associated with each transaction you run at your business. They can be broken down into interchange, assessments, and an authorization fee. These are the only mandatory fees associated with credit card processing since they are set by the card brands. You are essentially paying Visa, Mastercard, Amex, and Discover for the ability to accept their cards.
Interchange rates vary and are primarily based on the type of card you are running. The more expensive it is for the credit card company to maintain the card – rewards, cash back, perks – the more expensive the interchange. This means that debit cards are typically the lowest and business credit cards are typically the most expensive.
On top of interchange, a lot of providers like to make extra profit by charging merchants fees for everything under the sun. These are typically seen on your monthly statement, time and again, and are never actually required in order to accept card payments.
Keep an eye out for monthly minimum fees, statement fees, batch fees, gateway fees, next day funding fees, annual fees, IRS report fees, and others on your statement each month.
Believe it or not, there are even more fees that can be triggered by individual actions. These can include terminal fees, early termination fees, setup fees, reprogramming fees, PCI compliance fees, address verification fees, chargeback and retrieval fees, and payment gateway fees.
Merchant services providers make huge profits off of the fact that many merchants are not aware of what they’re paying and why. With Stax, your processing statement is simple. You pay a monthly membership in exchange for the direct cost of interchange and authorizations.
This pricing model is just how it sounds – providers will charge an additional percentage on top of interchange for each transaction run. Since interchange varies based on card type, there is no good way to predict what you’ll be paying each month with this pricing model. The more you process, the more in markups you’ll have to pay.
Flat rate is a variation on percentage markup models. Instead of charging a percentage extra on top of the interchange (which means each card’s final cost will be different), flat rate models make each card the same percentage. The most popular example of this is Square. No matter what card is being used, you’ll always pay 2.60% for swiped and 3.5% for key entered with Square. This might seem like a good system at first, but the more you process, the more expensive it gets. This is especially true if you process a lot of cards with low interchange rates, like debit cards. These cards average around .5%-1% interchange – so 2.9%-3.5% is a very significant markup.
By far one of the most expensive pricing models, tiered rates put different cards in different tiers and charge based on those qualifications. The important thing to remember with this model is that the tiers are arbitrary and determined by the provider. They can take a look at the most popular card types, and then make sure they are in the most expensive tier.
These models are rarely questioned since merchants often believe there is some sort of reasoning behind the groupings. Since there isn’t, it pays to have a frank conversation with your provider if you see any terms like “qualified”, “mid-qualified” or “non-qualified” on your statement (or better yet, switch to Stax where we never use this pricing model).
Our bread and butter, subscription based pricing models are very often the best choice for merchants. A monthly membership is paid in exchange for the direct cost of interchange. This means that no matter how much you process, you only ever have to worry about the direct cost of the cards you’ve processed and a flat membership.
For more information on Merchant Services, feel free to watch our webinar - Merchant services 101!