Small businesses that accept credit cards understand the headaches that come with that necessary service–credit cards being declined, settling payment disputes with customers and the fees they have to fork over to credit card companies and banks for processing those transactions.
What they may not fully understand though is why they are being charged those fees and that there may be fees they can negotiate to lower rates or, in rare instances, eliminate all together. “Most fees are negotiable, and most merchants don’t understand that,” says Wendy Jacques, sales manager at Instabill Corporation, a merchant services provider based in Portsmouth that helps businesses obtain high risk and offshore credit card processing services.
Business NH Magazine sat down with Jacques to get the skinny on all those fees that may be padding your merchants’ bill.
Credit Card 101
Jacques says many small business owners are hyphenates in their company, as in “owner-sales manager-bookkeeper-custodian,” especially in a startup. When they need to open a merchant account to accept credit cards, it’s often a case of “I need to do it now.” But take a breath before signing the application to open a merchant account for processing credit cards. Read it thoroughly, especially the fine print, because that’s where every fee is spelled out.
“When you get an application for a merchant account, the fees are all in the fine print,” Jacques says. “Once you sign the application, that’s your contract.”
New businesses will be charged higher fees and rates as they have no business history, including no history of credit card processing, refunds or chargebacks (customers refuting a credit card charge and reversing the charge). Chargebacks cost time and money to deal with, and the more chargebacks a business experiences, the higher the rate it will pay to have credit charges processed, Jacques says.
Refunds are another factor banks and credit card companies examine in setting fees. Jacques says where credit card companies used to tolerate refunds being as much as 9 percent of total transactions, they now want to see 5 percent or less or will increase fees.
The level of security of a transaction will also determine the type of rates a business will pay on credit card transactions. A business taking credit cards through a highly secure website that meets PCI data security standards will have lower rates than a business taking credit card information by phone.
When accepting credit cards, especially by phone, get as much information as you can as any transaction where vital information is missing or doesn’t match what the credit card company has on file will result in a higher fee being charged for processing that transaction.
Who’s Qualified?
The transaction fee quoted by the bank or credit card company is for what’s called qualified credit cards. That means the information the merchant has about the credit card being processed matches exactly the information the credit card company has on file (name of credit card holder, account number, expiration date, CVV code, etc.). For numerous reasons, many transactions are not paid at this rate.
If some of the information does not match what the credit card company has on file, but a significant amount does, it is considered a mid-qualified card and a higher fee will be assessed for processing that transaction.
If 10 percent or more of the information doesn’t match what the credit card company has on file, it is considered a nonqualified credit card and will be assessed the highest rate to process the transaction. Business and corporate cards, rewards points cards and gift cards are automatically processed as nonqualified credit cards, Jacques says.
Sales volume is another big factor banks use to determine fees and rates. “They want to see gradual increases—consistent growth,” Jacques says. “They don’t want to see a seesaw. If it seesaws, you don’t have negotiating power yet.”
A business has the strongest negotiating power to lower fees six to nine months after opening a merchant account. “Banks like to take six months of [data], batch them together and develop averages,” Jacques says.
Is your head swimming yet? Well, get ready, because now we’re actually going to talk about all the fees you may be paying. Look to see if there are hidden fees that are similar to the overt fees being charged.
Merchant Discount Fee
This is a fee charged to a business for processing credit cards. It’s essentially a transactional fee. The merchant discount fee is a fixed, monthly standard fee charged by the bank and credit card company for processing charges.
Jacques says the earliest a business can negotiate the merchant discount fee is three months. If chargebacks are 1.5 percent or less of all purchases, you have room to negotiate, but credit card companies really prefer to see chargebacks of less than 1 percent, Jacques says.
If a business has a consistent history of a low rate of chargebacks, it could negotiate a 5 to 10 cent decrease in the merchant discount rate, which adds up over time.
However, if a business has a high rate of chargebacks—2 percent or more—it will be at risk of the credit card company closing the merchant’s account. “You want to make sure you have great customer service and a return policy so as not to have as many chargebacks,” she says.
Annual Fee
Most banks also charge an annual fee of $99 to $299 just to have a merchant account. But here’s the good news. “You can have that waived immediately without a history. That’s a big one, especially for a startup,” Jacques says.
Statement Fee
This charge is assessed if you request a paper statement. “Some banks will charge you $3 to $5. You can tell them you should not have to pay for that,” Jacques says.
Early Termination Fee
Many companies include an early termination fee in their contracts if a merchant closes an account before the contract expires. Jacques says the average early termination fee is $250, but adds many credit card companies won’t charge it if the merchant gives 60-days notice.
“It’s important to know if a businesses closes an account to set money aside because if there are refunds or chargebacks, and you go into negative in an account, you can go into the Terminated Merchant File list and may not be able to get another merchant account until it is paid off and you receive a letter of good standing,” Jacques says. And even then, you may be charged higher fees on the new account based on that history. Before closing out an account, review the average six-month refunds or chargebacks and make sure you an cover it, she says.
AVS Fee
This a charge to verify an address given to a credit card company when the merchant is accepting a credit card without having the physical card in hand.
PCI Fee
The PCI fee is a monthly charge for banks to conduct scans of the back-end of your website to ensure it is compliant with PCI data security standards. “You can’t get away from them. It’s costly for a bank to have MasterCard show up and do an audit for PCI compliancy. If you are not compliant, your fee will be higher.” The average PCI fee is $10 if your website is compliant and $25 to $50 if you are not,
Jacques says.
Batch Fee
A batch fee is a charge for every batch of credit card charges that a credit card company reconciles. It can be negotiated, but it’s not a fee you will get rid of. It should be about 10 to 20 cents per batch.
Transaction Fees
The credit card company and bank each get another bite of the apple through the per transaction fee. “Visa, MasterCard, Discover and American Express each have a set fee whenever their cards are used,” Jacques says.
If a business can show significant increases in sales, it will be in a good position to negotiate lower transaction fees. “After a good year, they may be willing to drop five cents per transaction,” Jacques says. “For every customer you’re paying those fees on, it can make or break your business and bottom line.”
She recommends businesses adjust the pricing for services or products to take into account the merchant discount and transaction fees they will incur.
Gateway Fee
A gateway is used to connect banks and businesses to process ecommerce transactions, such as Authorize.net or NMI—the most common gateways used by merchants, Jacques says. gateways typically charge $19.99 per month as well as a per-transaction fee of 5 cents.
“If you do not see a separate gateway fee, ask where the gateway fee is included,” Jacques says, as it may be included as part of the monthly fee.
Monthly Fee or What Lurks Beneath
You may also be charged a monthly fee, and that’s where hidden fees are ubiquitously placed. “They are things they won’t list out for you,” but were included in that fine print in the application you signed, Jacques says.
The monthly fee can include such things as:
• A file fee for filing any paperwork associated with your account;
• An over-limit fee that is charged in case you go over your allotted monthly volume in lieu of charging penalties.
• An excessive transaction fee for large fluctuations in volume. This is a way banks try to recoup discounts given on transaction fees, Jacques says.
• A bill-back fee, which is charged if a business wins a chargeback dispute and has to bill the customer again. (Yep, you lose
for winning.)
Monthly fees generally range from $3 to $25. “You can negotiate that fee, especially if it is on the high end,” Jacques says, suggesting it for monthly fees of $15 or more.
There are caveats to heed before doing that, though. A credit card company can charge you for unusual events that otherwise would be covered by the monthly fee, so even if you win the battle of negotiating your monthly fee, you can end up losing the war and be charged penalties.
Also, if you find out your monthly fee includes the gateway fee, that monthly fee may not be as exorbitant as you think.
The bottom line is don’t hold your breath waiting for the credit card company or bank to cut your fees. It takes careful tracking on the part of a merchant to determine if enough factors have changed in his or her favor to make a strong case to the credit card company to negotiate fees. “You as a merchant need to be proactive and ask to review pricing to get rates lowered,” Jacques says.
Current Issue - May 2024