Cost is often a top factor in which merchant service provider is best for your business. There are three types of costs you need to investigate:
- Processing fees
- Account fees
- Equipment costs
The best merchant services and payment gateway providers post all of this information on their websites, but many companies require you to call and speak with a sales representative so they can make you an offer based on the specifics of your business, such as your transaction volume, average ticket size, industry and creditworthiness. If you're already processing, many reps will ask you to send them a recent statement so they can "meet or beat" your current rates.
1. Processing Fees
Whether you accept credit card payments online or in person, you pay a small fee for every transaction, which is expressed as a percentage of the sale plus a few cents. Where it gets confusing is that different providers calculate these costs differently, which makes it difficult to compare pricing quotes. Before you start gathering pricing quotes, you need to understand what costs go into processing fees and what the different pricing models are.
Processing fees have three parts:
- The interchange rate. This is a non-negotiable cost set by the card brands (American Express, Discover, Mastercard and Visa), and every service provider pays the same amount. Each card brand has its own rate table, with different interchange rates based on the type of card (credit or debit, regular or rewards, etc.), your industry, the size of the sales ticket, and how the card is accepted (in person or online, using a chip card reader or swiper, etc.).
- The card-brand fee. This is also a non-negotiable fee charged by the card networks that every processing service provider pays the same amount for.
- The processor's markup. This portion of the fee is negotiable.
Recognizing how confusing this is, many processors try to simplify processing rates and how they communicate them to their merchants. Most use one or more of three pricing models: interchange-plus pricing, tiered pricing and flat-rate pricing.
Interchange-plus pricing: Industry experts favor this pricing model – sometimes called interchange pass-through pricing or cost-plus pricing – because it's the only pricing model that shows you exactly what the processor's markup is. This is significant because the markup is the only part of the cost that you can negotiate. As a result, it has the best pricing for most merchants.
When you're quoted this rate, it will look something like this:
- 0.30% + $0.15. Remember, this is only the processor's markup – you still must pay the interchange and assessment fees. For example, if you have a retail business and you accept a rewards Visa in person using a chip card reader, the interchange fees might be 1.65% + $0.10. The card association fee for Visa would be an additional 0.15% + $0.02. Adding up all three costs, the full rate you pay for this transaction would be 2.10% + $0.27.
The best merchant service companies offer this pricing model to all their merchants and are very upfront with their markup, posting it on their websites and volunteering it when you call for a quote. Some of the merchant service account representatives we spoke with in our testing only provided interchange-plus pricing if we specifically asked for it, and some reps were hesitant to fulfill this request. Some agents noted that interchange-plus pricing would only be an option for established merchants, meaning you must operate for a certain number of months with a tiered pricing model before you would be a candidate for an interchange-plus plan.
Other agents we spoke with advised our testers against the interchange-plus pricing model, cautioning that it's only beneficial for vendors processing large transactions or a very high volume of transactions each month. However, this advice directly contradicts the expert recommendations we encountered in our research.
Tiered pricing: Though this is the most common pricing model, industry experts criticize its lack of transparency. Other names for this model are bundled or bucket pricing, because it attempts to bundle interchange fees, card-brand fees, and markups and then segment transactions into tiers, or buckets. These tiers are often sorted into qualified, mid-qualified and non-qualified, with separate tiers for debit and credit card transactions.
The low teaser rates that many companies advertise are usually qualified debit transactions – which means they only apply to regular debit cards that you accept in person using a card reader. Mid-qualified transactions are usually rewards cards, and non-qualified transactions are most often business or foreign cards, though some also include premium rewards cards. Most merchant services offer three tiers, though some have as few as two or as many as six.
When you see this rate advertised, it looks something like this:
- 0.39% + $0.21. However, this rate is only for debit cards accepted in person, so if you accept a credit card, you'll pay a different rate, perhaps 1.59% + $0.21. If it's a rewards card, it would be downgraded from qualified to mid-qualified, which might add an extra 1% to the cost. So, for this example, the rate you pay would be 2.59% + $0.21.
If you're quoted tiered rates, it's important to ask how many tiers there are, and which types of cards and acceptance methods apply to each. It's also important to know which types of cards your customers use most so you can judge whether this pricing model is cost-effective for your business. If the majority of your customers use regular debit cards and you accept cards in person, this processing model may be worth considering; otherwise, you should look for a processor that offers one of the other pricing models.
Flat-rate pricing: Most of the merchant service companies that use this simple pricing model charge a single, fixed percentage rate per transaction, though some also charge a per-transaction fee. This pricing model is popular with mobile merchant service providers, and it may be the most cost-effective option for small businesses that process less than $3,000 per month or have small tickets. This type of transaction rate is noticeably higher than those from the other two pricing models, but there usually are no other account fees – all you pay are the processing fees for each transaction, which is why it's such an attractive option for new and very small businesses.
When you see this rate advertised, it looks something like this:
- 2.75%. Using the above scenario with the rewards Visa credit card, this is the processing fee you would pay. It is higher than the other two pricing models' fee percentages, but there aren't any other fees for your account, which may make it less expensive overall, depending on how much you process each month and what types of cards your customers prefer. The consistent rate makes it easy for you to calculate exactly how much you'll pay in processing fees each month.
2. Merchant Account Fees
In addition to the processing rates you pay for each transaction, you'll pay account maintenance fees if you're working with a full-service merchant account provider or payment gateway service. These typically use the interchange-plus or tiered pricing models. Generally, providers that use the flat-rate processing model don't charge account maintenance fees.
When you ask about account fees, most sales reps will tell you about the monthly fee, but there are a lot of complaints online from merchants who saw fees on their credit card processing statements that they weren't told about when they signed up for their accounts. For this reason, it's important to read the full contract (application, terms of service and program guide) to ensure you're aware of every fee you'll be obligated to pay before signing up with any processor.
Here are some of the fees that most merchant services providers charge. For a detailed list of fees to look for as you read processing contracts, consult our article, "Credit Card Processing Fees: Small Business Guide."
- Monthly fee: Most merchant service companies charge a monthly fee, sometimes called a statement fee, that covers the cost of preparing your monthly billing statement and providing customer support. It usually costs $5 to $15. Some providers may charge more if they roll other regular account fees into this charge.
- Gateway fee: A payment gateway is necessary if you intend to accept credit cards online. Small business owners with online shops need a gateway because it encrypts and securely transmits credit card data from your website to the processor. Pricing varies, as some processors charge a monthly fee of around $10 for this service, some charge a per-transaction fee ranging from 10 to 25 cents, and some charge both.
- PCI compliance fee: If you work with a standard processor that gives you your own merchant account, you're required to be PCI compliant, which means that you adhere to the data security standards the Payment Card Industry developed to help merchants prevent data theft and fraud. Most processors that charge this fee offer to help you complete the annual questionnaire that is required to demonstrate your compliance. Your rep may call or email to remind you to take it each year, or the processor may note it on your statement. On average, this fee is $99.
- PCI noncompliance fee: Even if the processor doesn't require you to pay an annual PCI compliance fee, it may charge you a monthly noncompliance fee if you fail to establish compliance by filling out the annual questionnaire. You can easily avoid this fee by staying up to date with your PCI responsibilities. This fee can be very high, ranging from $20 to $60 per month, as it is meant to discourage you from letting your PCI compliance lapse.
- Chargeback fee: If a customer disputes a charge and requests their money back, the processor charges you this fee. Chargeback fees usually cost $15 to $25. Chargebacks are more common when you accept credit cards online than in person, because typical reasons for chargebacks include delivery failures, technical errors, fraud and customer dissatisfaction. Another common cause of chargebacks is if your store name is different from the name on your merchant account and your customer doesn't recognize your merchant name on their credit card statement.
Some processors charge a setup or application fee for your merchant account, a payment gateway setup fee to connect the payment gateway with your website, and an early termination fee if you want to close your account before the contract's term expires. The best providers don't charge these fees, though, so you should ask to waive them if they're included in your pricing quote or look for a provider that doesn't charge them.
3. Processing Equipment Costs
If you accept credit cards in person, you need to purchase a card reader or terminal. Here are the three most popular options.
- Mobile card readers: This is the cheapest option, as many providers give you a free swiper when you sign up for an account. If you want to purchase a mobile card reader that also accepts EMV chip cards, contactless cards and mobile payments, it costs less than $100.
- Credit card terminals: This is the midrange option. These devices cost $150 to $600, depending on whether you choose a countertop or wireless unit. They have built-in keypads and receipt printers, and all new models can accept both chip cards and contactless payments.
- POS systems: This can be the most expensive option, though costs depend on the type of system you choose. Tablet POS systems are often the least expensive and work with mobile card readers. Models with built-in card readers cost $1,000 to $1,500.
The most important thing you need to know about processing hardware is to avoid leasing it, as leasing contracts are noncancelable and, in most cases, you'll pay much more for the equipment than it would cost to buy it upfront. It's enough of a problem that the FTC cautions against it, noting that businesses that lease may pay thousands of dollars for equipment that costs just a few hundred dollars to purchase.