Why are my merchant account fees high?

I often get asked this question. No doubt if you own a business you’ve asked this exact question too. I’ve seen frustrated business owner shop for merchant services time and time again because of high merchant account fees. They get a “great rate” only to find there really wasn’t any saving switching. Sometimes they end up paying higher merchant account fees after the switch. You get your merchant statement and see pages of charges and fees which make no sense. So what’s the answer? How do you cut your merchant services fees?

It may seem counter intuitive but you can have a “great rate” AND pay too much!

A national non-profit organization recently contacted me. They asked “We have a merchant account at the National level and pay significant fees. We are a non-profit educational association and every dollar goes towards training. Would you be interested in working with our National Treasurer in an attempt to make sure we are getting the best deal on our merchant account? I know you have significant expertise in this area and I value your input.” I wrote back “If you are paying high fees then it will take a bit of investigation to figure out why? It’s not always because you have a “bad deal”. Sometimes changing the way you process transactions will significantly cut your fees. Processing inefficiencies and “self-inflicted” fees will add up to higher costs.”

Your merchant services cost is not just “a rate”. In fact it’s far more complex. Start by understanding there are two sides to merchant card processing, just like there are two parties in a business transaction, the customer and merchant. The customer is represented by the Card Issuer. The merchant is represented by the card processor known as an Acquirer. The Card issuer and Acquirer have separate fees. It’s not often easy to distinguish the difference.

Most of what gets paid on each merchant statement goes to the Card Issuer. Typically 75% plus of what a business owner pays goes to the Card Issuer in a fee known as Interchange. Interchange is a fee paid by the Acquirer to the Card Issuing Bank for a settled transaction. This fee is typically a percentage rate and per item fee. There are hundreds of interchange rates. Interchange varies depending on different qualification factors. Interchange rates are managed by the Card Brands –Visa, MasterCard, Discover and American Express. Interchange rates are reviewed and update at least twice per year.

I’m recognized by CalCPA and offer a class on interchange which is good for continuing education credit for CPA’s. I give an example where a business owner can pay six different interchange rates depending on variables in the transaction. Keep in mind each example has the same customer, same card, and same dollar amount. There is one best rate. Four of the examples result in higher interchange fees because of the business owner. Two examples result in higher interchange fees because of the credit card processor. The difference in cost between the lowest interchange rate and highest interchange rate is 264%. Most of the time the merchants credit card processor has the same fee, regardless of how transactions qualify in interchange.

You can see how the processor may have set up a great processing rate but you can easily pay too much on back end interchange, up to 264% too much. Crazy isn’t it?

Sean Franke
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