Merchant Processing Fees

As a new business owner, you’ve just received your first credit card processing statement. Once you recover from the initial sticker-shock, you move to the next logical question: “What does all this mean, and how do I manage it?” The bad news: these statements, which contain complicated credit card processing fees that typically represent the fourth-largest expense category for a business owner, are not going away. The good news: with some basic understanding of terminology, a small business owner will be prepared to effectively manage these costs and negotiate rates, which will directly impact his/her bottom line.

For starters, it’s important to understand the four key players behind all card processing: the merchant service provider, the processor, the issuing bank, and the card associations. The merchant services provider is the company that actually sets up the business owner with equipment and the ability to process transactions. That statement with sticker-shock will come from the merchant services provider. The processor is the ‘acquiring bank’ that passes credit card information so that transactions can be approved and completed. The issuing bank, whose name is usually on the credit card, is responsible for issuing the card to the consumer. The card associations – Visa, Mastercard, American Express, and Discover – are the big boys who set the rules.

All four of these players are getting a piece of the statement fees you’re paying as a business owner. The merchant services provider passes along these fees in each statement. (Be sure to ask for sample statements when initially meeting with providers.) It’s important for business owners to recognize and control which ‘pass-along’ fees include mark-ups by the processor. The best way to manage this is to negotiate with the merchant service provider for what’s known as ‘interchange plus’ pricing. The other pricing model is ‘tiered’ or ‘bundled’. While tiered models can be effectively managed, it’s more difficult to control excessive markup rates which often do not appear in statements.

In summary, prior to choosing a merchant provider, remember to meet with three, request sample statements, choose interchange plus pricing if possible, and negotiate!

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2 responses to “Merchant Processing Fees

  1. I do management consulting work for small to medium entities. Thank you for pointing this out. I believe that many start-up entrepreneurs are not aware of exactly how much card fees will be cutting into their profits. Also, I have found that these fees often differ significantly between banks, so doing your homework may save you a great deal of money, especially in the long run.

  2. Well said, and thanks for your comment. A good rule of thumb is to plan for 3% per transaction to go towards these fees. I spent 7 years in merchant processing sales for American Express, a great company. Their rewards programs, award-winning client service and smart marketing campaigns all combine to create quite a loyal cardmember base…which makes that 3% easier to justify for the small business owner.

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