The Complete Guide to Credit Card Transaction Fees
Are there days when you wonder if it’s even worth it to accept credit cards at your business? Do those days happen to correspond with the days you receive your monthly card processing statements? Hmm…interesting coincidence.
We know that accepting plastic is usually worth the cost in the end, whether or not you occasionally fantasize about the good ol’ days of all cash. Still, there’s no denying that card processing fees add up fast. It can be hard to determine where they are all coming from and why they are being charged. Some fees are automatically charged monthly, while others are charged consistently on a per-transaction basis. Still others are charged on a per-transaction basis but only under certain circumstances. Is your head already spinning?
Fortunately, Merchant Maverick has great resources on all things related to card processing costs. I’ll direct you to these as we go along. As you may have caught from the title, this post will focus specifically on credit card transaction fees. (Okay, we’ll throw debit cards in there too). Let’s begin by defining what we mean by “transaction fees.”
Table of Contents
- A broad definition of “transaction fee”
- A more precise definition
- Why am I charged flat per-transaction fees?
- Why should I keep a close eye on transaction fees?
- How are transaction fees labeled on a statement?
- Where will I encounter transaction fees?
- Final Thoughts: How can I keep my transaction fees under control?
A broad definition of “transaction fee”
When most people think of “credit card transaction fees,” I’m pretty sure they’re thinking of the following definition: anything you are charged on a per-transaction basis. If you want an introduction to all of these various fees, this article might not be for you. Please see our Complete Guide to Rates and Fees for more generalized rate and fee information first. If, however, you are looking at your processing statement and want to figure out what some of the specific “nickel and dime” transaction fees mean, read on!
A more precise definition
In the payment processing industry, the term “transaction fee” can actually mean something a bit more specific. We often limit the use of the term to fees charged as a flat dollar amount per transaction. These are the fees we will examine in this post. We will not be looking at percentage-based fees here. Percentage-based fees are often referred to as processing “rates” rather than fees.
Why am I charged flat per-transaction fees?
Per-transaction fees are usually less than one dollar. Sometimes, they are even fractions of one cent. So why do they even exist, especially if you’re already getting charged a percentage of each sale? Is this just another excuse for “The Man” to squeeze you dry, $0.0001 at a time?
I find it helpful to think of these fees as what you pay for the privilege of using pieces of the processing system each time you run a card. Whatever costs are involved in transmitting, encrypting, storing, looking up, verifying, authorizing or otherwise handling the transaction and card data ought to be covered by flat per-transaction amounts. After all, data is data, no matter if the transaction was $5 or $5,000. We’re just moving electrons around in either case. In contrast, costs based on the percentage of the volume of the transaction cover the relative risk involved in handling different amounts of money.
Why should I keep a close eye on transaction fees?
Here are a few reasons transaction fees deserve your attention:
- They are often “small” — sometimes even fractions of a cent — but can add up quickly
- There are lots of different types
- They tend to have odd or vague names and abbreviations
- The names and abbreviations are not necessarily standardized across the industry
- It’s hard to decipher exactly what function each one serves
- It’s easy for merchant account providers to sneak in extra, unnecessary ones
- It’s easy for providers markup existing, legitimate ones
How are transaction fees labeled on a statement?
Honestly, the nomenclature for transaction fees is all over the map. We’ll dive into some of the specific names and abbreviations for individual fees as we go. Fortunately, most statements will at least divide any percentage of volume charges and any per-transaction fees into two separate columns. Here are some common headings for flat per-transaction charges:
- Item rate
- Item fee
- Sale item fee
- Per item
- Per item rate
- Per item fee
- Disc P/I
- Tran fee
- Trans fee
When you match up the main column heading to the individual name or abbreviation of each charge along the left-hand side of a statement, you should have a good idea of what the fee is and how much you’re charged each time. Pay attention to the number of transactions that incurred the fee too. This will often help clarify the fee’s identity and purpose.
Where will I encounter transaction fees?
1. Interchange Rates
The interchange rates (a.k.a., interchange reimbursement fee, wholesale rate, or discount rate) are decided upon by the card networks. Interchange rates differ depending on card and transaction type, but most are composed of a percentage of volume rate and a flat per-transaction fee. Interchange costs are considered non-negotiable for merchants.
2. Your Processor’s Markup
Depending on your pricing model (e.g., tiered, blended, interchange-plus, subscription), your processor’s markup will be handled differently. The markup over interchange may already be lumped in with your overall rate, or interchange may be charged separately from the markup. In other words, whatever is quoted as your “processing rate” may or may not have interchange already included. If you’re not sure which pricing model you have, grab a statement and we’ll walk you through how to find out. What you need to know going forward is that your rate — whether it’s just your provider’s markup or a blend of their markup and interchange — may include a percentage fee and a flat per-transaction fee component. And, depending on the pricing model, it may include just one or the other type of charge.
3. Card Brand Fees
These fees are collected by card networks — Visa, MasterCard, etc. — and most of them are charged on a transactional basis. Like the interchange costs, they’re considered non-negotiable, pass-through costs by your merchant account provider, so watch out to make sure they don’t get marked up! Card association fees may involve a percentage of volume or a flat, per-transaction charge, depending on what the fee is supposed to cover (catching a theme here?).
Dharma, one of our preferred merchant account providers, maintains a handy list of card brand fees. We also keep a detailed list of the most common ones. I’ll list just a few examples below. Each card brand tends to have fees that cover the same kind of things, but with frustratingly different names, just to annoy us all. As you might expect, Visa and MasterCard’s fees line up more closely than the other card brands.
- Assessments: This is the main card brand fee. In fact, sometimes people just use “assessments” as a blanket term for all card brand fees. Visa charges 0.13% + $0.0195 per transaction for all your Visa credit card sales, for example. We might call the second piece — the $0.0195 — a “transaction fee” by our working definition. Sometimes, that flat per-transaction bit is separated out and called the Acquirer Processing Fee (APF). For MasterCard, the flat per transaction part of the assessment is called the Network Access and Brand Usage Fee (NABU). Note that some blended pricing plans may already incorporate these assessment costs into your rate quote.
- Fees for Transaction Problems: Some card brand transaction fees only kick in if something out of the ordinary happens, such as when there’s been a mistake, mismatch, or omission in the way the transaction was processed. This includes fees with exciting names such as the Zero Floor Limit Fee, Misuse of Authorization Fee, and Transaction Integrity Fee.
4. Authorization & Authorization-Related Fees
All transactions require some kind of authorization. If the card is accepted, the authorization turns into a full-blown transaction. If the card is declined, then an authorization procedure has taken place without a transaction ultimately occurring. This means that you can potentially have more authorizations (and authorization fees) than transactions that actually go through.
So how do processors cover authorization costs? Well, some providers bake any authorization costs into the flat per-transaction fee that comes with your rate quote. In my mind, that’s exactly what any flat per-transaction fee charged by your processor should cover. Nevertheless, the technical difference between a transaction and an authorization is part of the reason why you’ll often see them broken down into separate categories and fees.
If you’re on a pricing plan that has no per-item flat fees, you can bet that authorization costs have been covered by a higher percentage of volume charge, or by some other piece of your plan’s overall fee structure. Meanwhile, there are definitely a few authorization and authorization-related costs that are commonly charged separately:
- AVS Fee: The Address Verification Service is accessed as part of every keyed-in transaction to provide an additional layer of fraud protection. The card’s billing address is requested and verified before authorization is given. eCommerce and telephone-order businesses must use this service every single time they authorize a transaction. Consequently, many quoted rates for eCommerce and card-not-present transactions already have an AVS charge included as part of the flat per-transaction fee. But some don’t! If you run mostly card-not-present transactions, you’ll definitely want this matter clarified up front. Meanwhile, brick-and-mortar merchants will only see an AVS charge on the odd occasion that they must manually key-in the customers’ card info.
- Gateway Fees: Payment gateways are used to authorize transactions that occur via the internet only. Since not every business needs one, gateways are often separate add-ons to merchant accounts, with separate fees. Gateway fee structures usually involve a monthly fee, and sometimes a flat per-transaction fee as well. You can see how costs could add up quickly for an eCommerce business if there was gateway fee, plus an AVS fee, plus a main transaction fee, plus a separate authorization fee! Thankfully, many eCommerce payment providers will charge a gateway fee in lieu of the AVS fee, or just charge one main “transaction fee” that covers everything. The important thing is to know the exact set-up for your account.
- Voice Authorization Fee: This is a telephone dial-up service for transaction authorization. When a transaction is outside the normal range of a particular customer’s purchasing behavior, a voice authorization may be triggered. The customer will need to provide additional information over the phone to verify he or she is, in fact, the cardholder. Occasionally, merchants use this service as a backup if their terminal, internet connection, or software isn’t working to authorize transactions. Most businesses will rarely need this service, but it’s typically a per-transaction, flat fee if you do.
- Other Authorization Fees: You’re gonna hate me for saying this, but there are lots of other authorizations that could be charged in addition to the regular “transaction fee” that’s part of a normal rate quote. Many of these charges come from the large processor behind the scenes of a merchant account, such as First Data, Elavon, or TSYS. This means your smaller merchant account provider might consider them as “pass-through” from their perspective, providing a convenient little excuse not to bring them up. The authorizations are usually named for the way the authorization is communicated, such as over a toll-free number, a “wide area telephone service” (a.k.a. WAT or WATS), a local phone number (LOC), digital data over voice, a dial-up point of sale device, carrier pigeon, stagecoach…you get the idea. So, if that’s the way your transactions are normally processed, you could get charged the corresponding fee every single time.
Final Thoughts: How can I keep my transaction fees under control?
You can’t avoid the fact that when it comes to card processing, multiple entities will whittle away at your profit, one tiny piece at a time. (You were tired of having money anyway, right?) The good news is that with a little time spent educating yourself on transaction fees, you can begin to spot any that are suspiciously high, and perhaps some that shouldn’t be there at all.
Here are a few actions steps, as well as questions to ask your merchant account provider about your transaction fees:
- Know your pricing model. You should know what type of pricing model you have and which non-negotiable fees (i.e., interchange fees, card brand fees) are already blended into your rates.
- Before you sign up for a merchant account, ask for a sample processing statement. If they agree to give you one (most good providers will), it may not have every possible transaction fee represented. However, you can still begin to familiarize yourself with their terminology, abbreviations, and categories for fees. It helps to have something concrete in front of you that you can ask questions about. Plus, you’ll have a baseline for spotting unexpected fees later.
- Ask specifically about transactions fees and authorizations. Don’t be afraid to press your merchant account provider about transaction fees. “Will the transaction fee that’s part of the processing rate I’ve been quoted be the only transaction fee I’ll be charged? Are there any other separate authorization fees I should expect to see on the bulk of my transactions?” POS-WAT or POS-WATS is one that comes up a lot as an extra authorization charge for brick-and-mortar merchants, so you could even ask about that one as an example. If your sales rep can’t adequately answer these questions, ask to be put through to someone who can.
- Card-not-present merchants: be especially aware of AVS and Gateway fees. All eCommerce and other card-not-present transactions will need to access the Address Verification Service to complete the authorization. This means eCommerce merchants should specifically ask if this fee is already included in your normal transaction fee, or if it will be a separate charge. eCommerce merchants should also inquire as to whether an additional gateway per-transaction fee is part of the pricing plan or if it’s already covered by the main transaction fee in your rate quote. Knowing whether these fees are already included in your rate will also help you better compare costs between providers.
- Carefully review your statements. Even though this is the Complete Guide to Credit Card Transaction Fees, we couldn’t possibly cover every authorization, strange abbreviation, or totally made-up term your provider may use to identify each of the fees on your statement. Sneaky merchant account providers may mark up card brand fees, or invent tiny transaction fees that add up over time. Then, they’ll name their fees in confusing ways to cover their tracks. If you’re not sure about a certain interchange or card brand fee on your statement, you can usually look it up to see if 1) it’s a valid fee in the first place, and 2) the established price is what you’re being charged. If these wholesale costs were supposed to be blended into your rates, you should still keep an eye out for extra transaction fees charged separately. Compare what you were told when you signed up with what you see on your statement.
- Watch out for multiple authorizations. Really, you shouldn’t be charged multiple times to authorize one transaction. At most, there may be an extra security step and fee involved (like in the case of AVS for eCommerce transactions). But even in that case, good providers will either charge you one flat per-transaction fee to cover authorization costs, or fully disclose additional fees like AVS, Voice Authorization or a backend processor’s pass-through authorization if it’s charged separately. The most exasperating fees are extra authorizations you were never told about, but that occur on pretty much every transaction. The only way to catch these is to scan your statement carefully for those flat per-transaction charges.