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The Green Sheet Online Edition

September 24, 2007 • Issue 07:09:02

Merchant account fees demystified

By Jason Felts
Advanced Merchant Services Inc.

At the request of several readers, I'm dedicating this article to the merchant fees associated with typical transaction processing accounts. I hope it will become a handy reference for you, as ISOs and merchant level salespeople (MLSs), as well as a tool for training new agents.

Interchange-based fees (discount rate)

    Qualified rate (credit)

    A qualified discount rate is the percentage rate merchants are charged whenever they accept regular consumer credit cards and process them in a manner that has been defined as "standard" by their merchant account providers. Typically, this requires that the cards be electronically swiped and the transaction settled within 24 hours.

    An average qualified rate is .0175 or 1.75%.

    Qualified rate for offline debit (debit/check cards without PIN entry)

    Some merchants prefer to not enter PIN numbers. Thus, processors may offer a reduced discount rate known as the qualified check card rate.

    This qualified discount rate is the percentage rate merchants are charged whenever they accept regular consumer debit or check cards and process them in a manner that has been defined as "standard" by their merchant account providers.

    Typically, this requires that the card be electronically swiped and the transaction batched/settled within 24 hours.

    An average qualified rate is .0145 or 1.45%.

    Mid-qualified rate

    Also known as a partially qualified rate, the mid-qualified rate is the percentage rate merchants are charged whenever they accept credit cards that do not qualify for the lowest rate (the qualified rate). This may happen for several reasons:

    • A consumer credit card is keyed into a credit card terminal instead of being swiped.
    • A special kind of credit card is used, such as a rewards card, foreign card, purchase or business card.
    • A transaction is held in the terminal or software without being batched within the specified amount of time (24 to 48 hours).

    A mid-qualified rate is usually .075% to 2.0% and charged in addition to the qualified rate.

    Nonqualified rate

    The nonqualified rate is the highest percentage rate merchants are charged whenever they accept credit cards. All transactions that are not qualified or mid-qualified will fall into this rate category. This may happen for several reasons:

    • A consumer credit card is keyed into a credit card terminal instead of being swiped, and address verification is not performed.
    • A special kind of credit card is used, such as a business card, and all required fields are not entered.
    • A merchant does not settle the daily batch within the allotted time frame.

    A nonqualified rate is usually 1.25% to 2.50% and charged in addition to the qualified rate.

    Interchange-plus pricing

    Larger and more sophisticated merchants usually have their merchant account services priced on an interchange-plus basis. This means they pay a specified markup over and above the interchange costs, as opposed to the typical three- or four-tiered pricing models.

    For example, interchange plus .30 basis points is not uncommon. In this instance, a merchant processing $100,000 in bankcard volume would yield $300 per month in gross profitability before the revenue share.

Authorization and other fees

    Bankcard authorization/transaction fees

    These apply to bankcards issued by Master Card Worldwide and Visa U.S.A.

    The authorization fee is charged each time a transaction is sent to the card-issuing bank to be authorized. It is usually between 10 cents and 20 cents, plus the interchange cost. Even if the transaction is declined, this fee is usually assessed.

    Nonbankcard authorization/transaction fees

    These apply to cards issued by American Express Co., Discover Financial Services LLC, Diners Club Inc., as well as electronic benefits transfer (EBT), gift and loyalty cards, and so forth.

    The authorization fee is charged each time a transaction is sent to the card-issuing bank to be authorized. It is usually between 10 to 20 cents. Some acquirers will separate EBT and gift and loyalty card transactions.

    PIN Based (online) debit fees and network costs

    Online debit cards require that every transaction be electronically authorized. Each transaction is additionally secured with the personal identification number (PIN). There are two ways to price PIN-based debit.

    • A single flat fee (typically in the 65- to 75-cent range, including any debit network fees)

    • A PIN-based transaction fee plus the actual cost for the various debit networks. For example: 20 cents plus actual network cost.

    AVS fee

    Address verification service (AVS) is a fraud prevention service that compares the billing address provided by the cardholder in the transaction with the card issuing bank's records and verifies that they match.

    This fee is typically 5 to 10 cents per item.

    Voice authorization fees

    This fee is only charged when a merchant calls in a transaction to an 800 number for a telephone or voice authorization. It is useful if the merchant's terminal or software isn't working. Most merchants rarely use the voice authorization service. Example: The average cost per voice authorization ranges from $0.75 to $1.50, and is set by the merchant account provider.

    Batch fee

    A batch fee is charged whenever a merchant "settles" a terminal. Settling, also known as "batching," is the act of sending a merchant's completed transactions at the end of the business day to the acquiring bank for payment. It is industry-standard to charge this fee.

    Batch fees often mirror authorization fees: 10 to 35 cents per batch/settlement.

    Statement fee/basic monthly service fee

    The statement fee is assessed monthly and associated with the monthly statement sent to the merchant at the end of each month's processing cycle. This statement shows how much processing the merchant did and the costs incurred.

    The statement reflects the total dollar volume, number of transactions, average ticket and so forth. This fee is a fixed revenue stream and not based on processing volume.

    Typically the statement fee is a flat $5 to $10 per location, per month.

    Debit access fee

    Some acquirers impose a monthly fee on merchants who are set up with PIN-based debit.

    This fee is usually less than $5 per month and is in addition to the PIN-based debit and network fees.

    Monthly minimum fee

    The monthly minimum fee is a way to ensure that merchants pay a minimum amount in fees each month. If a merchant's qualified fees do not equal or exceed the monthly minimum, the merchant is charged up to the monthly minimum to satisfy the minimum fee requirements.

    Example: A merchant has a $25 monthly minimum fee. The qualified fees for the most recent month of processing total only $15. The merchant is charged an additional $10 to meet the monthly minimum requirements. It is industry-standard to charge a monthly minimum.

    Online merchant reporting fee

    Many acquirers offer merchants the ability to view their credit card processing data online. Typically, the reporting features will be far more robust than terminal-based reporting. This optional monthly service costs from $2.50 to $10 per month.

    Terminal repair/replacement

    Most acquirers offer a warranty program that extends repair or replacement coverage to POS equipment in the event of a failure. Often POS equipment supplies, such as paper rolls or ribbons, are thrown into the package. The typical cost is $5 to $10 per location per month.

    Retrieval fees

    If a consumer disputes a transaction, a retrieval request is initiated. It takes the form of a letter requesting all hard-copy sales drafts and/or invoices to demonstrate the validity of the transaction.

    This information should be fulfilled as quickly as possible for disbursement to the issuing bank.

    This fee is typically charged whether or not the chargeback is successful and is not dependent on the chargeback amount. The typical cost to a merchant is $10.

    Chargeback fees

    An acquiring bank may assess a fee on a merchant when a chargeback occurs. The fee is typically levied only when the chargeback is successful. However, it is not determined by the amount of the chargeback. A typical fee is from $15 to $25 per charge-back.

    ACH reject fee

    The automated clearing house (ACH) fee is imposed when a merchant's payment of monthly fees bounces for any reason. Similar to a nonsufficient funds fee imposed on a checking account by a bank when a check bounces, this fee is usually about $25.

    Annual fee

    This is simply an amount that is charged annually for maintaining the merchant account. Some acquirers charge this fee; others do not. A common amount is $69 per year.

    Payment gateway

    A payment gateway is an e-commerce service that authorizes payments for e-businesses and online retailers. An example would be Authorize.Net. It is the online equivalent of a physical POS terminal located in most retail outlets.

    A merchant account provider is typically a separate company from the payment gateway; however, the account provider could bill the gateways fees for simplicity.

    Example payment gateways fees: The setup fee, including software or license, ranges from zero to $195. The monthly fee is $5 to $10; per item is 5 to 10 cents.

    Wireless gateway

    A wireless gateway is charged by a network offering wireless credit and debit solutions for on-the-go merchants. This fee is only relevant or charged when merchants are processing through a wireless device.

    These can range from pager devices or cellular phones with card readers attached to traditional terminal solutions. The fees would typically be: wireless setup/activation fee ranging from zero to $100; monthly wireless gateway fee $12 to $20; additional wireless per item fee 5 to 10 cents.

    Reprogram, application, installation or setup fees

    Many MLSs charge a merchant an upfront, initial fee, which can have a variety of names, to establish the merchant account. In most cases this fee (when collected) is 100% profit to the MLS. Such fees typically range from zero to $195.

    Cancellation or early termination fees

    While controversial, most merchant accounts have some sort of cancellation or early termination fee. There is significant cost in setting up and maintaining a merchant account.

    This fee helps recoup some of those losses should a merchant cancel, especially in the beginning.

    It's my belief that cancellation or termination fees should be a fixed amount, such as $250, $395, or some other appropriate amount.

    Beware of acquirers that charge a variable cancellation fee. For example, some acquirers will charge the number of months left on the contract term times the average fees that merchants have been paying each month.

    Under such a scenario a merchant could be liable for thousands of dollars.

    Again, any cancellation or termination fees should be disclosed and be a fixed amount, not a hidden fee to soak an unsuspecting merchant for thousands of dollars.

    Equipment/software fees

    There are various ways a merchant can acquire POS equipment in today's competitive marketplace. I will not use this article to debate the various options; I'll just list them for simplicity.

    • Purchase: A merchant can buy the equipment.
    • Lease: A merchant may prefer a fixed monthly payment for an extended period, as opposed to the initial capital investment a purchase requires. Leases range from 12 to 60 months. The average lease for POS equipment is 48 months.
    • Rental: Merchants can rent POS equipment month-to-month. This is good for retailers who want a low payment without the long-term requirements associated with a lease.
    • Free placement: If a merchant agrees to the terms of the offer, a merchant can enjoy the use of POS equipment without specifically paying for it.

Hopefully, this will be a useful guide to the various charges associated with merchant accounts. If you have any questions or comments, please contact me directly.

Let's build that million dollar portfolio. end of article

Jason A. Felts is the founder, President and Chief Executive Officer of Florida-based Advanced Merchant Services Inc., a registered ISO/MSP with HSBC Bank. From its onset, AMS has placed top priority on supporting and servicing its sales partners. The company launched ISOPro Motion, its private-label training program, to provide state-of-the-art sales tools and actively promote the success and long-term development of its partners. For more information, visit www.amspartner.com, call 888-355-VISA (8472), ext. 211, or e-mail Felts at jasonf@gotoams.com.

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