Every small business owner, regardless of the industry, has at one time or another questioned and complained about the merchant processing fees they are being charged. Some have pulled out their monthly merchant processing statement trying to find answers. This often leads to more questions than answers.
To say that payment processing is complex is a severe understatement. This blog will attempt, with a wide brush, to paint a picture explaining merchant processing and the statement fees. To do this properly, we will first need to explain the major players in the payment processing industry and how they relate to each other. Then, we’ll discuss the common fees seen on the merchant statement.
There will be a plethora of exceptions that this blog will simply not be able to cover and explain. However, this blog should give you a good overview of your merchant statement and its fees moving forward.
The Major Players
Let us look at some of the major players involved in the payment processing industry and the roles they play.
The Card Brands
One can not talk about credit cards without first talking about Visa, Mastercard, Discover, and American Express. They are often referred to as the Card Brands. These entities together control the credit card industry. They set all guidelines for underwriting, fees, and security. Banks and other entities need permission from them to be able to set up and interact with merchant accounts. In short, all roads lead back to them.
The Transaction Acquiring Banks
As with everything relating to money, a Bank is always involved. Once Banks have permission from the Card Brands, they can set up a merchant account so that a business owner can take credit cards as a form of payment. When a Bank does this, it’s called the Transaction Acquiring Bank. Most of these Transaction Acquiring Banks are ones you have heard of, but there are a few you have not. Bank of America and Fifth Third Bank are two examples of these.
These Transaction Acquiring Banks are responsible for underwriting the merchant that wants to take credit cards. They calculate underwriting risk and loss risk, such as if the merchant files for bankruptcy or commits fraud and disappears, before approving or denying a new merchant account. Transaction Acquiring Banks then sponsor Independent Sales Organization, known as an ISO, to handle the marketing and sales of merchant accounts.
The Transaction Processors
Before getting into ISOs, we’ll introduce Transaction Processors. Transaction Processors, or Transaction Gateways, do a lot of the legwork of the payment processing industry. A few examples of Transaction Processors are Global Payments, TSYS, and First Data.
Transaction Processors have a whole host of responsibilities. They approve or deny sales transactions as they go through. They pay the merchants on sales made daily. They also calculate and issue the merchant statements each month and pull the fees out of the Merchant’s checking account on a monthly basis. Transaction Processors, much like Transaction Acquiring Bank, also have a direct relationship with the Card Brands. The Card Brands will set the guidelines and approve a Transaction Gateway’s network security for them to work as a Transaction Processor. As a Transaction Processor, they also partner with Independent Sales Organizations, known shorthand as ISOs.
The ISOs
Independent Sales Organizations (ISOs), are the companies you probably hear about most as a small business owner taking credit cards. They bring the Transaction Acquiring Bank and the Transaction Processors together. They can negotiate rates with any Transaction Acquiring Bank they want to get their best rate. The same goes for Transaction Processors. ISOs can pick one or several to work with. A few examples of Independent Sales Organizations are Worldpay, Bold Payments and Maverick Payments.
While ISOs are free to choose who to work with, all Transaction Acquiring Banks and Transaction Processors impose restrictions on how they operate. These restrictions can vary between them. For example, the Transaction Acquiring Bank will give their ISOs a “Do Not Sign” list. This is a list of industries such as travel, towing, and adult entertainment. The ISOs are not allowed to sign up any business in these industries for a merchant account. This is because these industries have a high rate of chargebacks.
A high rate of chargeback is known as “High Risk.” There are certain ISOs that can handle “High Risk” industries and businesses because these ISOs have partnered with a Transaction Acquiring Bank outside the United States. The Fees for a merchant account within a “High Risk” industry are much higher than the fees for any other type of business. ISOs will then contract Independent Sales Agents (ISAs) to sign up business owners with merchant accounts.
The ISAs
Independent Sales Agents, a.k.a. ISAs, are local dealers. Total Merchant Supply is an ISA. We can sign up with as many ISOs as we want. Total Merchant Supply is currently an ISA for two different ISOs. Our main responsibilities as an Independent Sales Agent are to sell, set up, and maintain the merchant account, as well as cultivate a positive business relationship with the merchant.
The Card Issuing Banks
On the other end of the spectrum is the Card Issuing Banks. These are the Banks that approve and issue Credit Cards to the consumer. Examples of these are Chase and CitiBank. They do the underwriting on the consumer, approve or deny them, and set the terms of the credit line. They also print the plastic cards and review the security risk of each transaction as they are happening. Card Issuing Banks need approval from the Card Brands as well.
Merchant Processing Fees
Now that we have covered the major players in the payment processing industry, we will discuss the major fee groups that can often, but not always, be found on the monthly merchant statement. Monthly merchant statements can be laid out in a million different ways, and fees can be labeled clearly or with very vague descriptions. This can make reading and deciphering a merchant statement very difficult. We will start with what is often the largest fee and move down to the smallest. Of course, these can change for each business depending on a number of factors.
Interchange Fees
Interchange makes up the largest portion of the fees on the merchant statement. Interchange is the rates the Card Brands set for the transactions on their cards. In short, it’s the cost of the lost risk and the value of time of floating money between when the consumer makes the transaction and when the consumer pays their credit card bill. This period can be from three to six weeks.
Visa, MC, Discover, and Amex each have their own interchange table, thus making the total number of different Interchange categories over 300. The Card Brands review and update them every April and October.
Debit Cards are a bit different when it comes to Interchange. Originally, Debit Cards were just for getting cash out of an ATM. Now, when a consumer runs a Debit Card on a transaction, the money is taken out of their checking account one of two ways. With PIN Debit, the money comes right out of their checking account. When a Debit Card is swiped, this puts the money on hold until the middle of the night. Also, Debit Cards’ interchange rates from the big banks are controlled by Congress. All the Interchange fees, including from Debit Cards, go to the Card Issuing banks.
Dues, Fees, and Assessments
Dues, Fees, and Assessments are often the second largest group of fees. They go directly to the Card Brands and are for funding their operations.
Statement Fees, Minimum Monthly Fees, and Chargeback Fees
Statement fees, Minimum Monthly fees, and Chargeback fees are set by the Transaction Acquiring Bank. The Statement fee is for the monthly statement the merchant receives. The Minimum Monthly fee is the fee the merchant pays if their merchant account is active but goes unused. The Chargeback fee is the fee for any chargebacks the merchant gets hit with from the consumers. These fees go to the ISO.
Payment Gateway Fees
Payment Gateway fees are set by the Transaction Processors and are included in the per-transaction fees. The ISO collects them and sends them back to the Transaction Processors.
Setup and Equipment Fees
Lastly, there are the Setup and Equipment fees. These fees are for setting up the merchant account, often in conjunction with a POS system, and the cost of the necessary hardware, such as a pin pad. These fees go to the ISA.
Understanding the Complex Fee Structure
The agreements negotiated between a Transaction Acquiring Bank, a Transaction Processor, an Independent Sales Organization, and an Independent Sales Agent can vary greatly. Some of the fees mentioned above can also be split and shared with multiple entities. So the ISA can receive a small share of the ISO’s profit margin. However, this is always a really small percentage. It’s easy to think that the ISA, as the local dealer, is taking the lion’s share of the fees since that is only what the business owners see. The truth is that the ISA is just a very small part of a very big machine. The majority of the fees from a merchant account go to the Card Brands and the Banks. While this guide should help you broadly understand merchant processing and the statement fees, having trust and a good business relationship with your local ISA is ultimately key to maintaining a fair and competitive merchant processing rate. Contact Total Merchant Supply for more info about our merchant accounts. We can add credit card terminals or integrated pin pads to your point-of-sale systems so that you can start taking credit cards today! As a trustworthy and transparent ISA, we’ll guide you through the process and help you understand your statement so that there are no surprises. We also offer competitive rates and excellent customer service to ensure a positive experience for our merchants. Don’t let merchant processing fees confuse you any longer. Let us take the hassle out of payment processing for your business!