Fees for Nothing

Merchants have suspected for years that the smoke screen of complexity that surrounds the fees they pay for credit card processing allows opportunists to scrape slices off their revenue.

By Stephen Erickson

As a merchant, every time you accept a customer's credit, PIN debit or signature debit card, you pay a "Merchant Discount Rate" (a percentage of that transaction), and various fees, that are distributed to the credit card issuer (i.e., Chase, Citibank, Capital One), the respective association (i.e., VISA, MasterCard, Discover), the third party processors (i.e., First Data, TSYS) and your merchant services provider. The average cost to you for a $100 transaction can be as high as $3 or more in fees.

You might argue that some of these rates and fees are too high, but at least most of them are associated with an actual service necessary to accept credit card payments. Any other fees or surcharges that show up—or don’t show up—on your monthly statement are fees for nothing.

As a point of reference, Interchange rates are the largest portion of card acceptance and are based on rules that determine what percentage the bank that issued the customers' credit card gets to keep from the credit card transaction. The Merchant Discount Rate is typically at or close to the cost of a basic transaction. From there most service providers charge additional fees known as “surcharges” that greatly exceed the applicable Interchange rate. Surcharges are basically fees for nothing, tacked on by your merchant service provider and serve no other purpose than to boost their revenue at your expense.

The driving force behind most fees for nothing is the most hidden fee of all: your sales agent’s commission, which you will never see on any monthly statement. Typically, the agent who sold you your contract and equipment, but doesn’t provide any additional services, earns around $0.30 for every $100 charged for as long as he or she retains your contract. Merchant service providers know that paying a monthly commission to a salesperson every month would be unacceptable to most retailers, so instead of listing a “sales commission” on your statement, they price it directly into your discount rate and, more to the point, have created an assortment of fees with more acceptable sounding names in an elaborate shell game to cover the cost of what they have to pay their agents every month, as well as add more profit to their own bottom line.

A new model of merchant service providers is emerging today that is not based on an indirect sales force and provides all the services you need directly to you without any hidden fees. But, if your merchant services provider is still doing business the old way, here are some of the more popular pseudo fees you may be paying real money for, grouped by category.

Customer Service – Some fees may be based on a real service, but are charged at an unreal rate. Inflated chargeback fees are typical of this type. Similarly, industry buzzwords are often exploited to hide fees. Take the entirely respectable word “compliance,” for example. Compliance isn’t a service you should have to pay for with a “Compliance Fee.” Merchant service providers have to comply with certain standards in processing your account, such as Payment Card Industry (PCI) Data Security Standards. Compliance is not a service at all. It’s a requirement. Some processors also tack on fees for after-hours customer support, which is offered for free by a growing number of card processors.

Equipment and supply fees – A long time ago it might have made sense to lease or rent, but equipment costs have come down to a point that it makes no sense today. A whole industry of fees is associated with card readers, terminals, maintenance, paper and other supplies. There are costs associated with providing and maintaining equipment, but the more reputable merchant service providers only charge cost for equipment. If yours is tacking on a profit margin for itself, you can do better.

Contract fees – Termination fees can run into thousands of dollars per year, as if the service provider knew in advance that you would one day wake up and want to get out of your contract. Termination fees are traps that you just need to avoid in the first place. Annual fees appear to be justified only by the fact that it has been a year since you got charged the last one.

Random transactional fees – There are a number of fees that have a legitimate sounding name but an illegitimate purpose. This assortment of fees, often tied to individual transactions or other recurring actions, seem to be calculated to ensure that you get less when you are actually selling more. For example, batch fees, charged each time you batch out your terminal, effectively penalize you every time you batch out. What’s worse, if you are batching out more than once a day—which you usually only do on your best sales days, you get penalized each time.

Considering that swiping a credit card through a reader and getting an approval only takes a moment, it is amazing what actually does happen. It is, in fact, a complex process, but it is not magical. Everything about it has a precise purpose and should make sense. You deserve to know what you’re being charged for. After all, it is your money.


Stephen Erickson is CEO of EnablePay (www.EnablePay.com) which embodies a new business model for merchant services that is based on delivering processing services directly to the merchant without depending on a network of independent sales agents. He can be reached at 1-866-509-1322.