If someone asked you today how much accepting a credit card transaction was costing your business, chances are you wouldn’t be able to give them a very accurate figure. Merchants are continuously trying to figure out and understand the various fees that they get charged for accepting credit card transactions. The industry has created a myriad of different fees that can be imposed upon a Merchant and these fees are hidden behind a variety of different rules and regulations created by the Card Associations.

The only fee most Merchants are familiar with is their quoted Discount Rate. The Discount Rate is a percentage of each dollar processed, and possibly an additional flat per transaction fee that the Merchant Services Provider charges the Merchant for processing a transaction. From that Discount Rate, the Merchant Services Provider, Processor, Issuing Bank and Card Associations all take portions for their services.

Turning to the Merchant Services Provider will not always shed light on the fees the Merchant is paying. As the Merchant experiences problems with transactions, causing them to “downgrade”, the Merchant will pay a higher rate for those transactions depending on the level of failure and risk assessed with the transaction. That higher rate equates to more monies being collected by the Merchant Services Provider and more being shared amongst the Processor, Issuing Bank and Card Associations. The Effective Rate is the calculated bundled rate to the Merchant of a transaction after combining the Discount Rate, assessments, downgrades and other per item transaction fees.

Interchange Fees
Interchange Fees are the fees that Card Associations charge for processing a transaction. There are a variety of different Interchange Fees based on how the transaction is sent and the type of Merchant Account. It is usually stated as a percentage of the total bill, plus a flat per transaction rate. This fee covers the costs and time associated with getting funds to the Merchant Bank and getting the billing information to the Issuing Bank. The fee is paid by the Merchant Bank to the Issuing Bank, who then pays the Card Association.

Interchange Fees are normally hidden from Merchants. With the availability of information on the Internet there are many places that now publish current Interchange Fees. See Visa Interchange Fees and MasterCard Interchange Fees.

Here is an example of the fees associated with a typical Visa CPS/Retail transaction a Merchant may process and how these fees are distributed to the various parties involved:

• If we assume a Discount Rate for a Merchant of 2.05% + $0.15 Transaction Fee, then for a $100 Visa charge the amount the Merchant would pay their Merchant Services Provider will be $2.20.
• This is amortized as follows:
  
  
  • Visa and Issuing Bank split the Interchange Rate of 1.65% + $0.10, or $1.75 (see Interchange Rate documents above)
  • Merchant Services Provider and Processor split the .40% + $0.05 mark-up, or $0.45

Because there are dozens of different rates and fees that can be assessed to the Merchant, some processors and Merchant Services Providers have bundled various rates together into “Rate Tiers”. Tiers are usually more simplistic than Interchange Fees in their naming, such as “Qualified”, “Mid-Qualified” and “Non-Qualified”. While this may seem simpler to understand, it does not provide a great deal of detail to the Merchant to understand what they are actually paying for and why.

It should be noted that only Visa and MasterCard actually partake in the Interchange process. Other cards such American Express and Discover do not participate in Interchange. Cards like these are both the Issuing Bank, the Merchant Bank and the Card Association, so they handle all aspects of the card transaction and don’t share their fees.

Discount Rate
The Discount Rate is the fee paid by a Merchant to the Merchant Service Provider to handle the deposit of credit card funds into their Merchant Bank account. It is negotiated at the time that the Merchant selects their Merchant Services Provider and is usually quoted as a percentage or fractions thereof (basis points). The Discount Rate is the amount the Merchant's deposit will be discounted (e.g., a $10,000 deposit with a Discount Rate of 2.03% would become $9,797).

The Discount Rate includes the Interchange Fee, communication costs (leased lines, 800 services, etc.), split processing fees and other miscellaneous costs as determined by the Merchant Services Provider. The Merchant Services Provider does have flexibility when determining a Merchant's Discount Rate based upon the amount of profit the Merchant Services Provider wishes to make on the Merchants Account.

While certain aspects of the Discount Rate will always remain, such as the Interchange Fee, some Gateway solutions can help lower certain costs - i.e. communication costs, split processing fees, etc. - that a Merchant Services Provider must pay and those savings can and should be passed on to the Merchant to help lower the Merchant’s Effective Rate.

A Merchant’s Effective Rate is the true cost of each transaction. You can figure a Merchant’s Effective Rate by summing together all of the fees and charges that were assessed to the Merchant and dividing those by the total dollar amount that the Merchant processed. Do the math on your current statement to figure out what your current Effective Rate is. It is very important to realize that the Effective Rate can be significantly more than the discount rate you were quoted.

Authorization Fee
All processors charge a flat fee per transaction for the authorization request. This fee may be listed as its own line item to the Merchant on their statement or it may be “bundled” into the Merchant’s Discount Rate. Some Merchant Service Providers will state they are waiving this fee, but usually it is just being “bundled” in the Discount Rate.

Communication Cost
There is always a cost related to moving a transaction from one point to another, this is referred to as the Communication Cost. Depending on the method being used to move the transaction, the cost for it will be higher or lower. The most costly form of communication is via a dial-up connection, since the Processor has to maintain toll-free phone circuits and modems for the calls into its network. There are a variety of connections that can be made using the Internet; these are fairly inexpensive to the Processor so they should be cheaper for the Merchant to use. However, some Processors see this as a premium due to the speed the Merchant enjoys using these connections, so they add a premium fee. A third form of communication is a private line between the Merchant and the Processor. With this type of connection, the Merchant is charged a monthly support and maintenance fee for the dedicated line. Since the Merchant has a separate agreement for this line, there are no communication costs in the Discount Rate. This is a fairly expensive option and primarily used by very large Merchants processing thousands of transactions per day. Merchants taking advantage of a Gateway, which uses its own dedicated connection to the Merchant’s Processor, can save the Merchant considerable money since the Processor is getting paid by the Gateway for the communication cost.

Merchant Service Providers often bury communication costs into their rates to pass them on to their Merchants or they may appear on the customer's statement as 950, 800 or WATS fees. If the Merchant isn’t seeing communication costs on their statement, they are being “bundled” in the Discount Rate.

Downgrades (Non-Qualifications)
A large portion of the costs associated with credit card acceptance is the downgrading or non-qualification of transactions. These are the transactions that do not qualify for the best possible Discount Rate because they don't meet the data content or transaction timing regulations set by the Card Associations.

When a transaction is downgraded, the Merchant is charged additional basis points on top of the quoted Discount Rate. The exact amount is dependent on the type of error or mistake that occurred with the transaction.

Depending on the type of transaction there can be different reasons that would cause it to downgrade. Some of the reasons that a transaction would downgrade include: not being settled within 2 days of initial authorization, missing/invalid Tran ID or Banknet data, missing or corrupt swiped data from the magnetic stripe read of the card or no AVS attempt on manually keyed transactions.

Chargebacks
On any given credit card transaction the cardholder has up to 60 days from the time it receives its statement referencing the transaction to dispute the charge. When the cardholder files a complaint with their Issuing Bank that a charge was not valid, the Issuing Bank issues a retrieval request that is sent to the Merchant. To respond to a retrieval request, Merchants are charged a fee by their Merchant Services Provider. This fee runs from $10 to $50 per retrieval request, the average is $15.

If the Merchant does not respond in a timely basis, it can also be charged a timeliness fee and may even lose the transaction completely.

There are a variety of other instances that may result in a chargeback that do not require the cardholder to initiate the event. These are initiated by the Processor, Merchant Bank or Issuing Bank. Even a partial reversal of the original amount of the transaction is considered a chargeback.

American Express & Discover
Nearly 40% of all business travelers utilize American Express as their corporate credit card and there remains a percentage of cardholders preferring the Discover card. Unfortunately, accepting these card types has historically been an expensive endeavor. Typically, a Merchant pays a third-party routing fee to connect to American Express or Discover. This fee can be as high as $.25 per authorization. The Merchant Services Provider may tell the Merchant that they don't charge for American Express or Discover transactions, but this is almost never the case. The cost may be buried in the Discount Rate, but since third party processors charge the Merchant Services Provider, you can be assured the charges are passed on to the Merchant.

American Express is in the process of altering their authorization and settlement specifications. Many of Shift4’s Merchants who accept American Express transactions have received a letter from American Express about their new Card Acceptance and Processing Network (CAPN) specifications. Basically, what the letter addresses is that if a system is not compliant with the CAPN specs by October 31st of 2006, then there will be an out-of-compliance fee of 25 cents added per transaction.  As a Processor for American Express, Shift4 has already engaged American Express regarding the required changes and we are CAPN compliant.  Now CAPN is becoming the international standard for American Express and Shift4 is working to add additional country and currency support.  For merchants utilizing DOLLARS ON THE NET^®, no change is required on your side. 

Credits
Most Merchants don't realize how much issuing credits costs them. While most Merchant Services Providers charge nothing for credit transactions (except for a communication fee), the Merchant did pay for the original charge that the credit is intended to correct. As an example a clerk goes to key in a transaction for $15, but accidentally adds an extra zero making the transaction $150. Assuming the Discount rate is 2%, the cost to process this transaction should have been $.30, but instead the Merchant will pay $3, a full 20% of the total $15 ticket they'll eventually be funded for.

Additional Charges
There are other fees that are charged to a Merchant for processing that don’t tie directly to the transaction itself. Statement Fees, Monthly Minimums, Annual Fees, Voice Authorization Fees, Termination Fees and Application Fees are common fees that many Merchants are faced with, which need to be considered as part of the cost of processing transactions.

There is no hard rule regarding these additional charges. Some Merchant Services Providers charge them and some do not. Some will decide whether to charge them based on each individual Merchant. And, the amount of the fee may fluctuate with each individual Merchant. Because there can be such a variance in these fees, it is wise for a Merchant to “shop around” and get rates/quotes from several Merchant Services Providers to compare and ensure that the Merchant is getting the best rate possible for its business.