Everything to Know About Online Payment Processing Fees

What are payment fees?

In order to understand charges for payments, we need to revisit the online payment processing process. Although the customer and your business are the main parties in any online payment, transfer of funds could not occur without the aid of technological middlemen, each of whom take a cut of the amount transacted:

The Acquiring Bank

Also known as the merchant bank, the acquiring bank accepts payments on your behalf and stores them in your merchant account. It does so for a small charge per payment, which is known as a markup fee. Any charges in this category usually depend on some of the factors that govern your relationship with your bank, such as your monthly processing volume or your industry.

The Issuing Bank

The issuing bank or the client’s bank also make a percentage charge for each sale, known as an interchange fee. Interchange fees are a balancing mechanism, through which some of the costs of the issuing side are covered by the acquiring side. The payment card market has a two-sided market structure, as supply and demand on one side determine the supply and demand of the other side, and the interchange fee is payable when transferring funds from one side of the market to the other, and covers some of the issuing side’s costs.

  1. the operating costs (costs for processing the transaction);
  2. the costs for the payment guarantee for the merchant;
  3. the security of fraud-prevention costs.

Credit Card Associations

If the transaction involves a card, then the cost for an online payment will also include a credit card transaction fee, known as the assessment fee. This fee is non-negotiable for a merchant, and it is determined by credit card associations such as Visa and MasterCard, who charge it to all merchants receiving payments.

The Payment Processor

Since they facilitate the entire transaction, the payment processor is another party who gets paid during the process, charging a set amount every time it processes a transaction. So, whether they’re accepting a payment on your behalf or processing a decline, no scenario exists without a processing fee involved.

How are card processing fees bundled?

When shopping around and reviewing online processing fees, you may have run into several different pricing models. Merchants can feature their prices in different models, all which employ the same elements in calculation but have some variations. If you’re wondering what is the average fee for credit card processing, the answer is “it depends.

Flat-rate payment fee pricing

This is perhaps the easiest model to understand — regardless of the type of card the shopper is using, a merchant pays the same fixed fee per transaction, which is usually made up of a percentage of the sale and a dollar amount.

Interchange plus pricing model

In this model, the payment processor charges you a fixed fee, usually made up of a percentage of the sale plus a dollar amount, on top of the interchange fee. Interchange fee refers to the sum of the interchange and the assessment fee, as in “2% + $0.20 + 1.8% interchange fee.”

Tiered fee pricing

The principle of the tiered pricing model is that the level of the risk associated with the interchange applied determines your online processing fee. The processor classifies any of the 300 interchange rates in one of three categories: qualified, mid-qualified, or non-qualified. The more qualified the interchange rate used, the lower your processing costs.

Membership fee pricing model

This model is similar to interchange plus pricing, as it separately features markup and interchange costs. By contrast, however, membership pricing charges a flat dollar amount per transaction (no percentage markup here) and a flat monthly subscription cost on top of that.

Other merchant fees associated with online payment processing

On top of the credit card processing fees detailed above, your business may be subject to other flat or variable fees that are in place for those accepting payments online.

  • Account setup fees. While most professional payment processors will not charge setup fees, some high-risk account providers may apply the charge as part of their sign-up process.
  • Address Verification Services. Depending on how your contract is negotiated, you may incur an AVS cost each time a transaction is checked. While this system is integral in your fraud fighting arsenal, be sure to keep a good grip on how it’s billed.
  • Chargeback fees. Every time your chargebacks are processed in favor of your customers, you will incur an additional chargeback fee. Ensure you have the right approach to deal with chargebacks to avoid these unexpected hefty costs.

Conclusion

We hope that the information presented here helps you understand and evaluate online payment processing costs. In any new contract, consider the features, capabilities, and protections offered by the supplier, in the context of what they want to charge you, and you’ll start off new collaborations from a position of power.

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2Checkout (now Verifone)

2Checkout (now Verifone)

2Checkout (now Verifone) is the leading all-in-one monetization platform for global businesses built to help clients drive sales growth across channels.