Payment processing fees A money-saving guide

Payment processing fees: A money-saving guide

22 May 2024 in Blog

by Ludovic Plisson

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Payment processing is a critical component of any business that accepts card payments. However, understanding the associated fees can be challenging due to their complexity and the various stakeholders involved. This article aims to demystify payment processing fees, including hidden fees, helping businesses make informed decisions and optimize their payment strategies.

The payment processing ecosystem

To understand payment processing fees, it’s essential to grasp the roles of different entities involved in the payment ecosystem:

  1. Merchant: The business accepting payments for goods or services.
  2. Customer: The individual making the payment using a credit or debit card.
  3. Acquirer (Merchant’s Bank): The financial institution that processes card payments on behalf of the merchant.
  4. Issuer (Customer’s Bank): The bank that issued the customer’s card.
  5. Card Network: The system (e.g., Visa, Mastercard) that facilitates communication between the acquirer and issuer.

Tip: Work with Payment Service Providers (PSPs) that have local acquiring licenses in your target markets. This can help reduce the overall processing fees by leveraging local payment infrastructure, which often has lower transaction costs and better local support.

 

Types of payment processing fees

1. Interchange Fees

Interchange fees are paid by the acquirer to the issuer for each transaction. These fees compensate the issuer for the risks and costs associated with processing payments. Interchange fees typically include a percentage of the transaction amount plus a fixed fee.

  • Example: Visa might charge an interchange fee of 1.5% + $0.10 per transaction.

Sources: Visa interchange rates European Economic Area (EEA), US, Singapore, Australia, India and Mastercard interchange rates Europe

Tip: Choose the right type of card for your business. Encourage the use of local debit cards instead of credit cards, as they generally have lower interchange fees. Implementing customer incentives for using debit cards can help in reducing these costs.

 

2. Assessment fees

Assessment fees are charged by the card networks (Visa, Mastercard, etc.) to maintain and develop their payment infrastructure. These fees are usually a small percentage of the transaction amount and are paid by the acquirer.

  • Example: Mastercard may charge an assessment fee of 0.14% of the transaction value.

Tip: Use a high-volume payment processor. Larger processors often have better negotiating power with card networks and can offer lower assessment fees due to economies of scale. 

 

3. Processor fees

These fees are charged by the payment processor, the entity that provides the technology to handle card transactions. Processor fees can vary widely based on the services provided, including gateway fees, monthly fees, and per-transaction fees.

  • Example: A payment processor might charge $0.10 per transaction plus a monthly service fee of $25.

Tip: Compare different payment processors. Look for those offering transparent pricing models (like interchange plus) and negotiate for lower per-transaction fees and monthly charges. 

 

4. Acquirer fees

Acquirer fees are additional charges levied by the merchant’s bank for managing the merchant account and facilitating transactions. These can include setup fees, monthly fees, and chargeback fees.

  • Example: An acquirer might charge a monthly fee of $20 and a chargeback fee of $15 per disputed transaction.

Tip: Use local acquirers in the countries where you conduct significant business. This helps in reducing cross-border fees and improving transaction approval rates.

 

Hidden fees in payment processing

Hidden fees can significantly impact a merchant’s bottom line. These fees are not always transparent and can vary based on the payment processor and acquirer. Key hidden fees include:

 

1. Merchant Discount Rate (MDR)

The Merchant Discount Rate is the fee charged to merchants by their acquirer for processing card payments. It is typically a percentage of the transaction amount and includes interchange fees, assessment fees, and processor fees.

Tip: Regularly review your statements to identify and dispute any unfamiliar or unexpected charges. Conducting periodic audits can help catch unnecessary fees.

 

2. Technical processing fees

These fees cover the costs associated with the technical infrastructure needed to process transactions. They may include fees for payment gateways, software maintenance, and security measures.

Tip: Optimize your payment gateway by choosing one that offers competitive rates without compromising on security and functionality. Compare the costs and features of different providers.

 

3. Chargeback fees

A chargeback occurs when a customer disputes a transaction, leading to a reversal of the payment. Chargeback fees are charged by the acquirer to cover the administrative costs of handling the dispute. These fees can be significant and vary depending on the complexity of the dispute.

  • Example: Chargeback fees can range from $15 to $100 per incident, depending on the acquirer and the nature of the dispute.

Tip: Implement strong fraud prevention measures. Use tools like AVS (Address Verification Service) and CVV (Card Verification Value) to reduce chargebacks.

 

4. Administrative fees

Administrative fees cover various services provided by the acquirer or payment processor, such as statement fees, compliance fees, and account maintenance fees.

  • Example: Monthly administrative fees can range from $5 to $20.

Tip: Bundle services with your processor. Many processors offer bundled services that can reduce overall administrative fees compared to paying for each service separately.

 

5. Network token fees

Network tokens are a cutting-edge technology used to enhance the security and efficiency of online payments. Unlike traditional tokens, which can be static and may require frequent updates, network tokens are dynamically updated and managed by the card networks (e.g., Visa, Mastercard, American Express). This dynamic nature brings several benefits, particularly for merchants dealing with cross-border transactions.

Some card schemes offer lower interchange fees for transactions processed with network tokens. For example, Visa’s network token interchange rate is up to 10 basis points lower than non-tokenized transactions, making it a cost-effective option for merchants

Comparison:

  • Traditional Tokens: Static and require frequent updates, leading to higher fees and potential transaction declines if card details change.
  • Network Tokens: Dynamically updated, ensuring higher authorization rates and reduced fraud risks. Visa and Mastercard offer lower interchange fees for network token transactions.
  • Example fees for a $100 Transaction:
  • Traditional token fee: Typically 1.5% + $0.10
    • Total: (1.5% of $100) + $0.10 = $1.50 + $0.10 = $1.60
  • Network token fee: Typically 1.4% + $0.05
    • Total: (1.4% of $100) + $0.05 = $1.40 + $0.05 = $1.45

Tip: Implement network tokens for high-risk transactions and recurring payments to maximize security and authorization rates. This can reduce overall fees and improve transaction success rates.

> For a deeper dive into how tokenization improves efficiency and security, check out our previous article Efficiency Meets Tokenization.

 

6. 3D Secure (3DS) fees

3D Secure fees are charged for using the 3DS authentication protocol, which adds an extra layer of security for online card transactions. This fee covers the costs associated with verifying the cardholder’s identity.

  • Example: 3DS fees can be $0.05 to $0.10 per transaction.

Tip: Enable 3DS selectively. Use 3DS for high-risk transactions to balance between added security and additional fees.

 

7. Excessive Reattempt Fees

Excessive reattempt fees are charged when a transaction is repeatedly retried after being declined, using the same information. These fees discourage excessive retries that can overload payment systems and increase fraud risk.

  • Example: Visa’s excessive reattempt fees can be applied if a transaction is retried more than 15 times in a 30-day period.

Sources: Visa Excessive Reattempts Rule & Fees

Tip: Set limits on retry attempts. Implement policies to minimize retry attempts on declined transactions to avoid excessive reattempt fees.

 

Different Interchange Pricing Models

1. Blended Pricing

In a blended pricing model, the acquirer charges the merchant a single rate that combines all the fees associated with the transaction (interchange fees, assessment fees, and processor fees). This model simplifies billing but can obscure the individual cost components.

  • Pros: Simple and predictable.
  • Cons: Often less transparent, potentially higher overall cost as the acquirer may include a markup.

 

2. Interchange Plus Pricing

Interchange plus pricing, also known as cost-plus pricing, separates the interchange fees from the acquirer and processor’s markup. The merchant pays the actual interchange fee plus a fixed markup determined by the acquirer.

  • Pros: Greater transparency, potentially lower costs.
  • Cons: More complex billing, requiring merchants to understand the breakdown of fees.

Example: If the interchange fee is 1.5% + $0.10 and the acquirer’s markup is 0.2%, the merchant pays 1.7% + $0.10 per transaction.

Sources: Interchange plus pricing explained by Square

 

3. Tiered Pricing

In tiered pricing, transactions are categorized into different rate tiers (qualified, mid-qualified, and non-qualified) based on criteria like card type and transaction method. Each tier has its own rate, with qualified transactions being the least expensive and non-qualified being the most expensive.

  • Pros: Can be simpler than interchange plus for some merchants.
  • Cons: Less transparent, higher potential costs, difficult to predict.

Example: Qualified transactions might incur a 1.7% fee, mid-qualified a 2.5% fee, and non-qualified a 3.5% fee.

Sources: Tiered pricing model by Helcim and Merchant Maverick on Tiered Pricing

 

Example Breakdown of Fees for a $100 Transaction

To illustrate how these fees apply to a real transaction, let’s break down the fees for a $100 transaction using a typical interchange plus pricing model:

  1. Interchange Fee: Reduced due to network token usage, typically 1.4% + $0.10.
    • Calculation: (1.4% of $100) + $0.10 = $1.40 + $0.10 = $1.50
  2. Assessment Fee: 0.14%
    • Calculation: 0.14% of $100 = $0.14
  3. Processor Fee: $0.10 per transaction
    • Calculation: $0.10
  4. Acquirer Markup: 0.2%
    • Calculation: 0.2% of $100 = $0.20
  5. Network Token Fee: $0.05 (reduced compared to traditional tokens)
    • Calculation: $0.05
  6. 3D Secure (3DS) Fee: $0.05
    • Calculation: $0.05

Total fees:

$1.50 (Interchange) 

+ $0.14 (Assessment) 

+ $0.10 (Processor) 

+ $0.20 (Acquirer Markup) 

+ $0.05 (Token) 

+ $0.05 (3DS) = $2.04

For a $100 transaction, the total cost to the merchant would be approximately $2.04.

 

Key Takeaways

  • Interchange Fees: Essential costs paid by acquirers to issuers, typically involving a percentage and a fixed component.
  • Blended Pricing: Simplifies billing but may obscure the cost structure.
  • Interchange Plus Pricing: Offers transparency and potentially lower costs but is more complex.
  • Tiered Pricing: Groups transactions into tiers with different rates, but can be unpredictable and less transparent.
  • Additional Hidden Fees: Including network token fees, 3DS fees, and others that can significantly affect total costs.

Understanding these pricing models and hidden fees helps merchants choose the most cost-effective and transparent option for their business.

 

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