Merchant Account Fees & Pricing Structures

It may seem like there are endless costs involved in processing credit cards. In reality many merchant account fees only apply to specific types of accounts and others only apply when an account is used improperly. Do your homework and take advantage of the resources available through MerchantCouncil.org and using your account improperly shouldn't be concern. The next section will list and define the more common merchant account rates and costs. If you have a question, please contact us.

The following is a list of rates and fees commonly associated with all types of merchant accounts. Feel free to print or bookmark this list so that you can reference it quickly.

When working providers to tailor merchant account quotes to fit your needs, remember that it's unrealistic to expect that you will be able to have a provider lower EVERY cost to the bare minimum. Instead of trying to get every fee lowered concentrate instead on adjusting the ones that matter most to your business.

For instance, if your business is seasonal you will want to have the monthly merchant account statement and monthly minimum fee lowered so that you don't have to pay them off-season. In order to have these costs lowered you may have to allow the provider to leave the discount rates and transaction fees where they are.

Please note that this list is comprehensive and not all providers will charge every fee listed. Also note that many fees can go by more than one name. The following are listed in alphabetical order.

• Account Maintenance - The account Maintenance fee is charged by the provider to perform changes to the merchant account after it has been set up. Changing address information, banking information, and business name would all be considered account maintenance tasks and may incur an account maintenance fee.
• ACH Reject - An ACH reject fee is charged when a processor tries to electronically withdraw charges for processing services and there is an insufficient balance in the merchant's account. The merchant bank (your bank) rejects the processors ACH draft request and the processor charges an ACH reject fee for their troubles. An ACH reject fee is very similar to a returned check fee that is charged by a bank when a check is written against an account with insufficient funds.
• Annual - An annual merchant account fee is a yearly flat cost charged to maintain a merchant account.
• Application - An application merchant account fee is charged to process the merchant account application paperwork.
• Authorization - An authorization fee is charged when credit card processing equipment obtains an authorization for a transaction.
• AVS (Address Verification Service) - The AVS fee is charged when a credit card transaction is processed and the customer's billing address and zip code are entered into the credit card equipment. The billing information provided is compared to the information on file at the issuing bank and a "Y" (or similar positive code) is returned if the addresses match and an "N" (or similar negative code) is returned if the addresses don't match. The cost to perform this service is called an AVS fee.
• Batch Header - A batch header merchant account fee is charged when a batch of credit card authorizations is sent to the processor for settlement. Every time a merchant clears their batch they will be charged a batch header fee.
• Cancellation - A cancellation fee is charged when a merchant terminates their merchant account with the processor or merchant service provider. This charge may or may not be governed by time constraints, meaning that it may be waived after an account remains open for a certain amount of time.
• Change - A change fee is very similar to an account maintenance fee and is charged when changes need to be made to an existing merchant account. For instance, a request made by a merchant to have banking information changed on an existing merchant account may incur a change charge.
• Chargeback - A chargeback fee is charged when a customer issues a chargeback against a merchant. Chargebacks are usually charged regardless of whether or not a merchant wins the chargeback dispute.
• Debit Network - A debit network fee is usually charged on a monthly basis to allow a merchant access to the various debit card networks.
• Discount Rate - The discount rate is the percentage of a transaction that is charged as a processing cost. Discount rates often account for the majority of charges on a merchant statement and they are also the most unpredictable and complicated of all costs. The next section is dedicated entirely to the important topic of discount rates.
  Qualified Discount
  Mid-Qualified Discount
  Non-Qualified Discount
• Early Termination - An early termination merchant account fee is charged when a merchant terminates their merchant account prior to the expiration date declared in their merchant processing agreement (MPA). For instance, a merchant will incur an early cancellation fee if they sign a three-year merchant account contract and cancel the merchant account two years later. Some merchant accounts have a prorated early termination fee schedule where the termination fee is decreased the longer an account remains open.
• Gateway - A gateway fee is a monthly fee that is charged to gain access to an online payment processing gateway.
• Help Desk - The help desk fee is a fee that is charged for customer service related issues. The help desk fee is charged when a merchant calls the processor or merchant service provider for assistance with their merchant account.
• Monthly Minimum - A merchant account monthly minimum is the lowest amount of fees that a processor will charge in a monthly period. If a merchant does not meet the monthly minimum amount in any given month they will incur an additional charge that is equal to the difference between the actual fees on their merchant account and the monthly minimum amount. For instance, a merchant would have to pay an additional $10 in a month where the fees on their account totaled $15 and their monthly minimum is set at $25.
• Over Limit - An over limit fee is expressed as a percentage of sales that will be charged if a merchant processes in excess of the monthly processing volume that they declared in their merchant processing agreement (MPA). For instance, if a merchant declares $5,000 a month in processing volume and processes $7,000, $2,000 of their total sales are subject to an over limit fee. Over limit fees can be as much as %5.
• PIN Debit - A PIN debit fee is charged when a customer pays for products or services using their debit card by entering their personal identification number (PIN) into an encrypted PIN pad.
• Reprogramming - A reprogramming fee is charged when a provider reprograms existing credit card processing equipment to function with a merchant account that they issue. Reprogramming fees may be charged for all processing equipment including terminals, gateways, and software.
• Reserve Account Maintenance - A reserve account maintenance fee is charged when a processor must keep a rolling reserve for a merchant. Reserve Account maintenance fees are typically flat monthly fees.
• Retrieval - A retrieval fee is charged when a processor notifies a merchant of a chargeback against their account, and requests that they return supporting documentation to validate the charge in question. When the merchant returns the documentation requested by the processor their account is assessed a retrieval fee.
• Return - The return fee is charged when a customer's purchase is reversed and funds are restored to their account. Returns do not incur a percentage discount charge, but instead are charged a flat return fee.
• Set-up - A set up fee is usually charged by a merchant service provider after the merchant account application process has been completed and the account has been approved. The provider will then charge a fee to complete the set up of the merchant account.
• Signature Debit Fee - A signature debit merchant account fee is charged when a customer uses their debit card like a credit card to pay for products or services. Instead of entering their PIN number into a keypad the customer's card is swiped through a terminal. In order for a debit card to be charged via swiping there must be a VISA or MasterCard logo on the face of the card. Debit cards that have a VISA or MasterCard logo are called check cards.
• Statement - A statement fee is a flat monthly fee that is charged to facilitate the mailing of monthly merchant bankcard statements. The statement fee may be incorporated into a number of different fees such as a monthly maintenance fee, support fee, or monthly account fee. Some providers will waive the statement fee if a merchant agrees to view their monthly merchant statements online instead of receiving a paper statement.
• Transaction - A transaction fee is charged every time a merchant's processing equipment contacts the processor to get or give information. The transaction fee can often piggyback other fees such as a return fee or a batch header fee.
• Voice Authorization - A voice authorization fee is charged when a merchant contacts the processor via telephone to verbally authorize a credit card transaction.
• Watts Surcharge - A WATTs surcharge is charged when a credit card processing terminal is unable to contact the processor using the default telephone number and it must roll over to a toll-free number instead. Most terminals are programmed to call a local number that is routed to the processor. There is no charge for local phone service so no charge is assessed. However, if the local line is busy or otherwise inaccessible the terminal will dial the toll-free number and a WATTs surcharge will be assessed to the merchant's account.
• Wireless Service - A wireless service fee is charged on a wireless merchant account by a carrier to provide wireless service making it possible for a merchant to process credit cards remotely. The wireless fee is usually a flat monthly fee that allows a merchant unlimited access to the wireless network.
• Wireless Transaction - A wireless transaction fee is charged in addition to the merchant account transaction fee on wireless merchant accounts. The wireless transaction fee is usually charged by the wireless network provider and not by the merchant service provider.

Before you read about the different merchant account pricing models, it's important to understand what interchange is and how it is directly responsible for the underlying cost of processing credit cards. If you haven't already done so, read through the interchange fees section of this guide.

Interchange Plus or Pass-Through Pricing

Interchange plus pricing functions just as the name implies. On this model the merchant service provider passes the actual interchange charges to the merchant along with a standard mark up in the form of a percentage referred to as basis points. Interchange plus pricing is transparent because the charge to the merchant is the actual interchange charge plus a fixed mark-up. There's a great article that discusses the difference between interchange plus VS tiered pricing here.

Flat Rate Merchant Account Pricing

The flat rate credit card processing model is the latest and greatest form of merchant account pricing. The biggest distinction and advantage of flat rate pricing is that it's the only pricing model where processing charges from the merchant service provider do not increase along with sales volume.

On a flat rate model the merchant service provider passes actual interchange costs directly to the merchant for every transaction. Unlike all other pricing models, there are no mark-ups of any kind over interchange.

On this model, a merchant service provider makes their money by charging a flat monthly fee. This fee is often referred to as an account maintenance fee or monthly service charge.

When considering flat rate merchant account pricing it's important to make the distinction between actual processing charges that are a result of interchange, and the merchant service provider's charges. It's not possible for interchange to ever be flat because of the different categories and qualifications. The term "flat" only applies to the provider's charges.

Flat rate pricing is very transparent and often the least expensive way to process credit cards.

Enhanced Recover Reduced (ERR)

Enhanced Recover Reduced or ERR is a pricing model that's been around for a while but has been gaining in popularity lately as merchant service providers look for more profitable options to the less expensive flat rate or interchange plus pricing models.

ERR is often referred to as a mixed or blended rate because it's a combination of tiered and interchange plus pricing - with a twist. ERR is a non-transparent form of pricing because it uses a base qualified rate and also a truly hidden charge in the form of the difference between actual interchange and the qualified rate. This hidden charge is the “enhanced” part of the pricing.

With ERR pricing, a merchant service provider will quote three different rates – a qualified debit rate, a qualified credit rate and a non-qualified surcharge. When a merchant processes a qualified transaction they will be charged the qualified rate quote by the provider. Things get a little fuzzier when they process a transaction that doesn't qualify.

In this case, the merchant will be charged the true interchange rate, plus the non-qualified surcharge and the difference between target interchange for the transaction and the qualified rate. That's the "enhanced" part of ERR pricing that makes it look a lot better than it really is.

Tiered Merchant Account Pricing

Tiered merchant account pricing is currently the most popular pricing model. It's been around since the dawn of credit card processing, and it was a lot more cost effective back when the card brands only a few interchange fee categories.

Now that interchange has grown to over five hundred categories between Visa, MasterCard and Discover - the days of a tiered account being cost effective are long gone. The major problem with tiered pricing isn't that it's often more expensive than other pricing models, it's that tiered pricing makes it very difficult to tell what you're truly being charged. Tiered pricing allows merchant service providers to disguise actual processing costs by quoting low qualified rates that make an account appear less expensive than it actually is.

The tiered pricing model functions by reducing interchange down to as few as two or as many as six or more pricing tiers. The first tier of this model is called the qualified rate. The qualified rate is the base rate to which all subsequent tiers are added. The qualified rate is often referred to as a lost leader.

"Lost leader" is the term used in the sales industry to refer to something that lures customers by looking better than it actually is. It looks like a great benefit, but it never really delivers. The qualified rate is a perfect example of a lost leader because it's the rate that merchants focus on, but it's only responsible for a small portion of their actual processing costs.

Tiered pricing is a non-transparent pricing model because the actual interchange charge is disguised by generalized pricing tiers.

Most merchant accounts function on a tiered system where interchange categories rates are divided into three tiers called qualified, mid-qualified, and non-qualified. The qualified discount rate is the lowest obtainable rate, followed by the mid-qualified rate, and then by the non-qualified rate. Merchant service providers advertise their accounts using the qualified discount rate because it's the lowest and most appealing rate. For example, a retail merchant account may have a discount schedule that looks like this:

• Qualified Discount Rate: 1.XX%
• Mid-Qualified Discount Rate: 2.XX%
• Non-Qualified Discount Rate: 3.XX%

When a credit card transaction is raised to the higher mid or non-qualified rate it's said to have "downgraded". There are two very basic reasons why a credit card transaction will be downgraded to a higher qualification rate. The first reason has to do with the type of credit card that is being charged and the second is the method that the merchant uses to charge the card.

The first reason why credit card transactions will downgrade to a higher discount rate has to do directly with the type of credit card that is being charged. The card associations (VISA & MasterCard) have over 100 different qualification rates, called interchange qualifications, for different types of credit cards and each type of card is assigned a different qualification rate. Of course, having merchant accounts with hundreds of different rates would be very confusing so most merchant accounts are setup with three general rates.

When a transaction is processed the true qualification rate of the card being charged is rounded up to the next closest category which either mid or non-qualified depending on how the merchant account is setup by the service provider. Exactly how a credit card will qualify and into which rate category it will fall has a lot to do with the merchant service provider that governs the account. For instance, a corporate credit card may fall into the mid-qualified category when run through a merchant account that is provided by company "A", while the same exact credit card will fall into the non-qualified category when run through a merchant account that is provided by company "B".

Depending on the size of the provider and/or the agreement they have with their acquiring bank, merchant service providers have a certain degree of control over how different types of credit cards qualify under the merchant accounts that they issue and govern. If you will be accepting a lot of corporate credit cards, small business credit cards, or other types of non-personal cards, you should work with your provider to have these types of cards qualified into the best possible category.

The type of credit card that will run through at a qualified rate on almost all merchant accounts is a personal non-reward credit card that is issued by a United States bank. The following is a list of credit cards that are commonly charged at a mid or non-qualified rate.

• Small Business Credit Cards
• Corporate Credit Cards
• Government Credit Cards
• International Credit Cards
• Rewards Credit Cards
• Cash Back Credit Cards

The second reason why a credit card transaction will downgrade to a mid or non-qualified rate has to do with how the credit card is transacted by the merchant. Keying-In - Card-present merchant accounts are setup under the assumption that the merchant will process transactions by physically swiping credit cards through a terminal. This process is called electronic data capture. If a retail merchant keys-in a credit card transaction by entering the credit card number on the keypad of their terminal, the transaction will almost always downgrade to the non-qualified rate. It's very common for a retail business to also have an e-commerce website. Many retail businesses use their card present merchant account to process their online sales as well and they are unaware of the fact that they are paying higher fees for these transactions. In this scenario it often saves money to open a second card-not-present account for the online transactions.

Address Verification Service (AVS) - VISA requires all card-not-present transactions to be processed using AVS. VISA also requires the AVS information to match and be correct in order for transactions to run at the lowest possible rate (qualified). Any merchant that processes credit card transactions when the customer and/or the card is not present (such as an online or mail order business) must use AVS when charging VISA cards to avoiding having all VISA transactions automatically downgrade to the non-qualified rate. In order to use AVS properly the billing address of the credit card being charged must match the billing address on file for that card at the issuing bank.

When taking a credit card order collect the customer's correct billing address and zip code. Once you have this information you must enter it into your terminal, gateway, or processing software, when charging the customer's card. If the AVS information does not match, the terminal or processing equipment will let you know by displaying an "N". Please note that all processing equipment is different and you should verify processing symbols with your merchant service provider. It is recommended that you void transactions that don't show an AVS match and that you contact the customer to obtain the correct billing address. Once you have the correct billing address you may recharge the card and the transaction will fall into the qualified category.

It's not possible to know which qualification rate a credit card transaction will fall under before charging the card.

• Qualified Discount Rate - The qualified discount rate is the lowest possible percentage rate that can be charged for a credit card transaction. To maximize the number of qualified transactions be sure that you are properly charging cards per the guidelines set forth for your specific type of merchant account. These guidelines can be obtained from your merchant service provider.
• Mid-Qualified Discount Rate - The mid-qualified discount rate is the second highest discount rate.
• Non-Qualified Discount Rate - The non-qualified discount rate is the highest possible rate that can be charged for a transaction.

It's very important to keep an eye on exactly how much you are paying in mid and non-qualified fees by reading your merchant account statements every month.

Merchant service providers typically utilize two different methods for charging processing fees. After you familiarize yourself with the different ways you can contact you merchant provider and request that your fees be charged using the method that you prefer. Some providers have control over when fees are charged and others may not.

Throughout The Month (Real-Time)
The most common way that a merchant service provider charges for processing fees is to deduct the qualified discount rate from a transaction prior to depositing it in to your bank account. At the end of the month the processor will make an additional charge for all mid and non-qualified surcharge fees, as well as any flat dollar amount fees such as transaction fees, batch fees, and statement fees. Many merchants do not like this method because it makes it difficult to keep account balances and books in order.

The second method that a merchant service provider will use to charge for processing fees is to wait until the end of each month and then deduct fees in one lump-sum charge. This method carries more risk to the acquiring bank and some providers are not able to offer this option to their merchants. Third-party processors and larger independent sales offices (ISO) that assume risk for their own merchant accounts are usually able to provide this method of charging fees at their own discretion.