Education of Merchant Services Rates and Fees
Let’s start at the beginning with the education basics of merchant services fees: Credit card processing rates and fees are broken down into 3 separate parts that make up the total fee you pay.
- Interchange rates – These are the fees that the banks who issue the cards receive for handling the risk of “instant uncollateralized credit”. This compromises the bulk of the total fee a merchant pays.
- Brand fees from Visa, MasterCard, American Express and Discover
- Markup that the processor charges over interchange and brand fees in exchange for servicing your merchant account.
All rates and fees have a % rate and a transaction fee. The transaction fee is the biggest factor for a small ticket merchant. For example, suppose a merchant has an average ticket of $10 and the rate is 3% and $.15. Well, $.15 is 1.5% of the $10 ticket so the full rate is 4.5%. The % rate is the biggest factor of a large ticket. Suppose a merchant has a $100 ticket. Then $.15 is .15% of the ticket and the full rate for the merchant is 3.15%.
The interchange rates are set by the bank associations to reflect the risk. In other words, a corporate or business card carries a higher risk of chargeback, and therefore has a higher interchange rate. A debit card has a low risk of chargeback because the cardholder is using it for small transactions coming directly out of their bank account. Rewards cards rates are middle to high because somebody promises to reward a free airline ticket.
There are hundreds of different rates and transaction fees for different industries, which have varying risks of chargebacks. Swiped payments have a lower risk of chargeback and lower rates than payments taken over the phone. Larger ticket transactions have a higher risk than small ticket transactions. All these different risk categories are reflected in an interchange chart with hundreds of different rates and transaction fees. The higher the risk, the higher the rate.
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