Ideal Cost Reacts: CreditCards.com’s “Small-Business Guide to Credit Card Merchant Fees”
In this article, the editor discloses that the website has affiliate compensation from third-party advertisers, but those relationships don’t affect the content. So, does this article get all of the facts correct? Let’s read the entire article and find out.
Who makes money
“When a customer makes a purchase with a credit card, business owners pay a fee to three different parties:
- The credit card network associated with the card a customer uses: Visa, Discover, Mastercard, or American Express.
- The bank that issued the card be it Capital One, Wells Fargo, Chase, Bank of America or any other.
- The merchant account provider, which is the company that provides the equipment and software used to scan and process credit card payments.”
These three parties all make money on each credit card transaction, so the big picture is correct. However, the processing client does not pay these three parties separately, and they certainly don’t pay on each transaction. The client only receives one monthly statement for billing, and that is from the merchant account provider. The merchant account provider is in charge of distributing the rest of the funds. This part in the piece leaves out the fact that the merchant account provider’s salespeople make money every single month. This is usually determined by how much they overcharge their clients. Overall, we find this paragraph truthful, but it missed some crucial details.
Merchant fee breakdown
“The rate that owners pay to close a credit card sale consists of two parts: base costs and markups.
- Taken together, both costs are known as the merchant discount.
- This is the most important fee for business owners to understand
- The merchant discount is the final rate that they pay to take credit card transactions.”
Base costs and markups account for the majority of the fees on a credit card processing statement, but certainly not all of the fees. Certainly, the discount isn’t the final rate that clients pay for credit card transactions. There are fixed and variable recurring fees as well as incidental charges such as chargebacks and retrievals. Furthermore, the discount rate sometime consists of both the base rates and markups, but often the discount rates, or markups, are billed separately from the base rate.
Merchant fee variables
“Several factors determine what you’ll pay each month for a merchant account.
- What industry your business is in.
- How much you sell in an average month.
- How you accept cards: Expect to pay different fees if you accept cards in person, over the phone or online.
- You will also pay less if your business only accepts card transactions in person.”
Credit card processors don’t have different assigned rates and fees for each business industry. Typically all industries will pay the same unless the business type is considered high-risk such as online pharmaceuticals, online tobacco sales, etc.
It is correct that the sales volume will give clients more leverage to get a better deal, but it isn’t always the case.
Accepting credit cards by chip insertion is considered less risky than online, or by phone, so the fees are generally reflective of that risk.
The author doesn’t mention some of the most important variables for determining merchant fees. For example, credit card processors want low-risk clients. Here are some additional examples of what they look for to assess risk:
- How many years you have been in business
- How long you have accepted credit cards
- How long you have been with the credit card processor
- How many disputes or chargebacks you receive monthly
- The average transaction size
- If purchases are made online or over the phone, how long you take to deliver
- Your return policy
In addition to the above factors, there is one economic principle that overrides everything else:
How much clients are willing to (over)pay for their service.
Essentially, this translates much can credit card processors get away with overcharging clients for accepting credit cards. At what point will the overcharges cause clients to see if their fees are fair?
Overall, this article had most of the basics correct. Unfortunately, the sources for the story left out much of the relevant information.
We give this article a B-.
Don’t Take on the Credit Card Processors by Yourself
Since 2009, IdealCost.com has helped hundreds of companies nationwide reduce their merchant account fees through identifying and fixing hidden profit, overcharges, fake fees, and billing errors. Clients have saved $300-$20,000 per month on their credit card processing fees without going through the hassle of changing their processing vendor, bank, or equipment. Switching credit card processors should be a last resort, only reserved for funding delays, poor customer service, or technical difficulties. Before you consider switching credit card processors, see if you qualify for IdealCost.com’s monthly savings program. Upload your most recent merchant statement for a free analysis. You’ll receive an estimate within 24 business hours.
If you are opening a new credit card processing account or switching credit card processors feel free to contact us for a free consultation. IdealCost.com can help secure the best terms and fees based on your specific needs.