Partnering with the right payment processor can be the difference between a healthy profit and financial struggle for merchants in a wide variety of industries. While the features offered by merchant services companies are important, low transaction fees are understandably the primary concern of most businesses, and an important step in securing the lowest fees possible is to understand the different pricing models available prior to signing a contract. In this article, we’ll look at one of the most common models – tiered pricing – and how it compares to the less common, but highly beneficial interchange plus pricing model.
One of the most important questions any business should ask themselves when looking for a new merchant account or merchant services provider is “how will this service impact my profitability.” It can be easy to simply write off merchant fees as a cost of doing business – and certainly, they are – but small differences in those fees can have big impacts on a merchant’s bottom line. A difference of a fraction of a percentage point or a few dimes in fees, when applied over every single transaction a business does, can easily be the difference between profit and loss – success and failure. So, it’s incredibly important for merchants to realize that not all pricing plans are created equal, and to understand the options they have available to them. One pricing plan that merchants looking for a new payment processor should keep an eye out for is interchange-plus pricing – a less common, but highly beneficial pricing model that helps to eliminate overcharging by keeping fees grounded and transparent.
In 2017, a class-action lawsuit was brought against Worldpay Inc. alleging that 200,000 merchants were overcharged with unexpected markups and additional fees. Worldpay settled that lawsuit for $52 million, but it’s recently come to light that, despite the settlement, Worldpay may not have changed the practices that led to that legal trouble in the first place. That’s putting some Worldpay merchants on edge, and making it more important than ever that merchants don’t skim over the details of the fine print, both to avoid unpleasant surprises, and to know when merchant charges have been levied inappropriately.
A merchant’s profitability is determined largely by the costs of doing business, and one of the most common costs merchants in the digital age run into is the fees associated with processing card payments. Many merchants just assume that all payment processors and all fee structures are alike, but that couldn’t be more untrue. Merchant services providers use a variety of pricing models, the most common of which is the fixed-fee structure used by major third-party providers like PayPal. But that pricing model is actually extremely wasteful for all but a small subset of merchants, and the majority of businesses will bleed profits unnecessarily by utilizing it.
Credit card transaction processing fees seem simple on the surface, but the overall fees are actually made up of many smaller fees, sometimes numbering in the dozens. In the interest of transparency and regulatory compliance, payment processors break down all of those fees on their merchants’ monthly statements. That’s good for both the processor and the merchant, but without context, many merchants find the huge number of line items confusing.
Not all potential fees apply to all merchants, but there are some common ones that the vast majority of merchants encounter in their monthly statements, and those are the ones we get the most questions about. The following is a quick breakdown of those common fees and what they represent.
Merchants are all painfully aware of the fact they’re charged fees on the card transaction they put through, but many don’t understand what those fees are made up of. While those fees contain a number of different components, the largest portion is made up of the interchange fee. Interchange fees are charged on every single credit card transaction regardless of who a merchant partners with for their payment processing, so it’s important to understand at least the basics of what they are and how they’re calculated.