Payment Processing: The 3 Secrets Revealed No matter your job or team or title or industry, you work hard for your money. So it’s only natural to expect service providers to do the same.
But …
… that’s not usually the case, especially for the merchant services space, an industry that tends to be a touch old school/antiquated. An industry known for hidden fees and other complexities that cost businesses thousands of dollars a year in excess credit card processing costs.
It is 100% possible to get everything you want—and more—out of a merchant processor. That’s why you are here, why you are reading this now. Why you will continue to read.
This guide serves as your playbook, your blueprint, for all things payment processing. Here you will find a clear breakdown of: 1. Fees everyone has to pay (unavoidable) 2. Fees you might have to pay (possibly avoidable) 3. Fees you should never have to pay (100% avoidable)
Reality check: Most merchant services providers make their services challenging to understand and as complicated as possible on purpose.
They’re banking (pun intended) on you—the business owner—not understanding how payment processing works.
We’ll also explain the processing industry’s ins and outs, including markups, parties involved in charging fees, and helping you understand the various services and products available. Finally, this guide will address what you should require demand from your merchant processor and why you shouldn’t settle for anything less than the best.
They are hoping you just nod and move on, no questions asked.
Merchant services might seem complicated now, but they should be much easier to understand by the time you are done here.
The secrets of credit card processing: the less you know, the more they can earn.
Let’s start with FEES …
Well, we have some good news.
1
What you have to pay
2 What you might have to pay 3 What you should never pay
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Fees Everyone Has to Pay
Transaction Fee
We will start with the bad news (or the good news if you are a glass-half-full kind of person). Let’s get the “you have to pay these, so no need to stress” fees out of the way.
As consumers, most of us are aware of the transaction fee. Every swipe (or tap or Apple Pay or chip insert, if you pay in person) or every time you hit “submit” (or “pay” or “confirm” or whatever initiates the transaction … see what we did there?) there is a, well, transaction fee.
Surprisingly, there are just 3 primary fees everyone has to pay.
Unavoidable. Always happens. Don’t sweat it. Don’t fight it.
Interchange Fee Credit card companies make money in one of 3 main ways (not counting partnerships, paid promotions, and … ): 1
Late Fees
2 Interest
3 Transactions
The first two are on the consumer side, while the third (transactions) is what business owners incur (unless passed on to the end buyer). These “interchange fees,” as they are called, are a percentage charged by the credit card companies for every transaction run. They cannot be avoided. The interchange rates are the same no matter which processor you use. Interchange is typically the most significant processing expense for merchants. Interchange is different for every card type from each credit card company. All major Credit Card associations publish their interchange fees online (e.g., Visa, MasterCard, Discover, American Express). More on Interchange Fees
Don’t let transaction fees (or interchange fees) ruin your day. Expect to pay them. ƃ
10¢ to 20¢ per transaction for swiped credit cards
ƃ
25¢ to 30¢ per transaction keyed in credit cards
Many merchant providers are not always transparent about additional fees incurred from processing less common transaction types, such as over-the-phone debit pin cards. Also … often, these fees are averaged into a flat rate. More on Flat Free Processing. Always ask about any possible transaction fees before you sign up with a provider, and keep your eyes peeled afterward for anything unexpected. Now onto the “might have to pay” fees.
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Fees You Might Have to Pay Maybe. Possible. Likely. There is a chance. The following are all fees you MIGHT have to pay. Let’s start with flat fees.
Flat Fees Terminal Fees
Simply put, the cost of the terminal machine. The hardware. The physical card swiper. Merchants who have physical stores and require an actual machine to accept and swipe credit cards often have to pay some sort of hardware fee.
If your processing company offers to include a terminal in your contract, be sure to read the fine print. Get the exact amount you’re being charged. Sometimes you can buy one yourself for less money. Do your research and come armed with the retail value of a terminal before you buy from your preferred vendor. Bonus: You can also negotiate a free card terminal as part of your plan. A good card terminal can cost anywhere around $250-$500. More if you’re looking at the big box (and less if you go the virtual terminal route!)
Two (free) pro tips: 1. Do not lease a terminal. It will end up costing you way more in the long run 2. Select a terminal that is not “closed”* and allows you to switch merchant services providers without requiring the purchase of another terminal. Your business may find a better merchant fit as it grows.
Good news: These terminal* machines’ prices (and sizes) have decreased over the years. * There are two types of terminals. POS (Point of Sale) is the “big” boxes and EMV (Europay, MasterCard, and
Quick note on open vs. closed terminals: An open system terminal can be used with whatever payments provider you choose, regardless of the software (so long as the provider’s platform/software is able to connect with it). A closed system terminal can ONLY be used with a specific hardware (i.e. Square terminals cannot be bought and used with another processing provider because the hardware is set to only run on Square’s payment software/platform).
Visa) terminals tend to be the smaller, card processing hardware products (the devices customers actually swipe or tap to make their payment).
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Payment Gateway Fees
Monthly Fees
These are the “online version” of terminal fees applied to eCommerce (or just “online”) companies. The most well-known payment gateways are Authorize.net and NMI.
Monthly fees are … well …fees that are charged monthly. Fees can be anything from a monthly flat rate from providers who don’t charge any markups (more on markups below) to less transparent fees like random monthly charges.
Learn more about gateway providers here.
Expect a monthly charge in the $15 to $30 range. While these are rarely hidden fees, make sure your merchant provider isn’t overcharging you for accessing a gateway or using it to lock your business into an unfair processing contract. Payment Card Industry (PCI) Fees Want to stay up-to-date with possible fraud or other nefarious behaviors? Of course, you do. That’s where PCI fees come into play.
Yes, that’s a thing.
Incidental Fees Connected with. Related to. Associated with. Incidental fees do not occur all the time, and sometimes you don’t know they exist until you see a charge on your statement. Sneaky.
The Payment Card Industry (again, PCI) puts standards in place to protect both consumers and merchants. Think: sensitive customer data. The Credit Card Industry charges certain PCI fees to fund the industry’s efforts to track, check, and maintain compliance. These are the PCI fees you should expect to pay. Some merchant services providers charge additional PCI fees to keep you PCI compliant. However, not every provider transparently charges these PCI fees, which are PCI fees you can 100% avoid. Note: By staying compliant with PCI standards, you can significantly reduce or even eliminate unnecessary PCI fees (including fees for non-compliance).
Address Verification Service (AVS) This fee is charged on transactions commonly seen in eCommerce and any “card-notpresent” situation. The service allows you to verify a customer’s provided address by comparing it to the billing address on file with the card holder’s issuing bank.
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Chargeback and Retrieval Fees
Fees You Should Never Have to Pay
A customer reaches out to their bank to dispute a charge you made on their credit card … and charges YOU a fee. What?
Everything noted before are fees you either MUST or MAY have to pay.
This may come as a surprise, but it’s uncomfortably true.
The following fees are ones—if you see— should cause you to definitely pause, maybe question, and possibly run. They are the fees you NEVER have to pay …if you’re with the right provider. Yet, these are also the fees merchant services providers will do their best to hide. So be sure to specifically look out for these fees or ask about them before you sign up with a provider.
It is important to know that this will happen, so be prepared. Know what fees to expect and how a provider will handle them. A typical cost is ~$15. Non-Sufficient Funds Fee (NSF) Don’t have enough funds in your account to cover merchant expenses? It happens— hopefully not too often. But, if/when it does, it’s likely you’ll be charged an NSF fee. IRS Report Fees These fees, sometimes known as “IRS regulatory fees” are charged for reporting transaction information to the IRS (1099-K). The fee is supposed to cover administrative costs related to IRS reporting. Since 2011, payment processors have been required to file this 1099-K form to the IRS AND each merchant who processes $20,000+/year.
Early Termination Fees Not every partnership (or relationship) lasts forever. Especially for contract-based agreements. If (when?) you decide to terminate your contract before its end date (early), several merchant services providers charge a fee.
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Some are fixed termination fees while others are variable termination fees — the latter often being quite costly. If you choose to go with a provider that requires a contract, know their termination or cancellation fees before you sign anything. Ideally, seek out quality providers who focus on service and offer “No Contract” and “No Termination Fees.” Setup Fees Does your business need 20+ machines? If you answered “no,” do not pay a setup fee! It’s 2022. Most new equipment can be shipped within a week (or the next day, in some cases), AND it will be pre-activated. With a few clicks or a short phone call, you can switch your machine’s provider. This fee seems to be on the “outs,” so if you see it … Annual Fees An annual fee is one way for some merchant providers to bump up their revenue. Look for a fee with a vague description, such as “Annual Fee,” and avoid it at all costs. Note: Some providers do have legitimate costs associated with your account. But others may concoct flimsy answers in an attempt to mask this fee. BEWARE!
Monthly Minimum Fees Don’t reach your agreed-upon monthly minimum transaction volume? Well, expect (some) providers to charge a fee. While not uncommon, this fee is easily avoidable by switching to a different provider. Statement Fees Do you get a credit card statement in the (snail) mail? If so, some providers will charge a monthly fee (~$10-$15) to cover printing and mailing costs for the aforementioned statements. Receive your statements electronically? Well then, these statement fees are 100% unnecessary. Batch Fees Whenever the merchant “settles” (or “batches”) their terminal—sends their completed transactions for the day to their acquiring bank for payment—there can be an associated fee. This is something you are required to do and therefore should not be an additional fee you are charged. Reprogramming Fee There are times when your terminal gets “out of whack.” Some providers will charge you a fee to reprogram it. These fees are pure profit for the provider. Avoid ‘em!
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Next Day Funding Fee While rare, this fee will appear if you are receiving next-day funding. SPOILER ALERT: There are no real fees associated with receiving next-day funding. All providers should be able to offer this! Customer Service Fee EXTREMELY RARE FEE. Yet, it still shows up sometimes … for access to customer service, of course. Think about it: Why in the world should anyone have to pay a customer service fee to get help from your service provider? Business is earned. It’s silly to pay for something you should be getting from your solutions provider. If you do pay, you typically expect VIP, whiteglove service, which is usually not the case.
The more money you make, the more they secretly charge you and the more money they make. Markups are where many merchant services providers make the majority of their money. Markups vary between providers and may increase without merchants being notified. These markups can be decided by your transactional volume, industry type, and numerous other variables. Fun fact: The more transactions you process, the less you may pay in actual interchange fees. BUT, likely, you’ll never see those passthrough savings based on how the provider sets up their markup.
Electronic Benefits Transfer (EBT) Fee Merchants who accept EBT are sometimes charged fees for access to the service. You do not need to pay for these!
The Processing Industry Explained What Are Markups? A markup is an amount charged on top of the interchange fee. It’s a variable cost, a “contribution profit” merchant service providers charge to make (more) money.
Some markups also result in added fees for mid-qualified and non-qualified cards. It’s important to note unique cards, such as smaller brands or reward cards, will often generate higher fees. Any additional markups on top of interchange are avoidable.
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Parties Involved in Charging Fees In the payments world there are many parties, many intermediaries. The Payers. The Payees. The people who help the payers connect with the payees.
Not to get too technical, but sometimes the payment processor and the credit card acquirer are the same people, depending on who is owning/managing which tasks. The acquirer maintains the merchant account and assists with the settlement. They hold a merchants account and accept the deposits from the merchants sales. As a result - they are able to authenticate/authorize transactions and connect with the issuing bank (the customer’s bank) on the merchant’s behalf. A payment processor is just helping with the actual processing of payments (the transaction level).
So, how do we remember who does what? Now that you understand the fees let’s quickly run through the parties involved. Credit Card Associations The companies that create the credit cards set the rules, and control the standards: Visa, MasterCard, American Express, and so on. See: “Fees Everyone Has to Pay” section above. Any fees set by them are unavoidable. Credit Card Issuing Banks Financial institutions that issue credit cards: Chase, Bank of America, Citi, Wells Fargo, and so on. Credit Card Processors Also known as Acquiring Banks and/or Acquirers, these companies act as the messengers between merchants and credit card associations.
Merchant Account Providers These companies manage the processing of credit cards and offer merchant services. This is usually done through the help of an acquirer. Payment Gateways These are online technologies that protect and transfer transactions to an acquirer. As mentioned above Authorize.net and NMI are providers of this technology. As it turns out, Stax also has payment gateway capabilities. Think of a payment gateway as a “connector” that helps bridge one technology system to another, making it easier (more efficient) to pass information back and forth. Gateways are often used to create more integrations between systems that otherwise would not be related.
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Understanding the Services and Products Available to You Before you sign an agreement … Before you choose a merchant provider … Before you do anything else …
A provider might seem ideal on paper, but then you learn they don’t offer the processing solution you need. Oops.
You must understand exactly what products and services a provider will be able to offer.
Here are some common processing solutions to look for:
Europay, MasterCard, and Visa (EMV) “Smart” Terminal Brand new terminals are now EMV compatible — accepts chip card technology and supports contactless Near Field Communications (NFC) payments, such as Apple Pay. They run a phone line or Ethernet.
Mobile Reader and Mobile App A mobile reader is a payment solution that plugs into the headphone jack of a smartphone or tablet. It is often a smaller handheld device used to collect payments “on the go.” A mobile app (think iOS or Android) is an appbased terminal that enables users to process transactions, send invoices and collect payments by text. Online Shopping Cart A solution that allows customers to pay with credit/debit cards through your online store secured through a payment gateway. Integrations
Virtual Terminal An online terminal where merchants “key in” or swipe transactions, set up recurring billing, reinvoice the same customers (and more) without having to re-enter their card information.
Depending on your equipment, merchant providers may enable payment processing by running a download on your current terminal or integrating with your existing Point of Sale (POS) system. This can save you thousands of dollars on processing without incurring new hardware costs.
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3 Things You MUST Require of Your Merchant Processor When shopping for a merchant processor, these are 3 “must-haves.”
1. Transparency
3. Amazing Customer Service
Let’s be honest. You should demand transparency with every vendor you partner with. And yes, ideally, it’s a partnership.
You are the boss. You are in charge. You are the customer.
Merchant services providers often enact “smoke and mirrors” when working with merchants and their businesses, allowing them to sneak hidden fees into your statements (see above). Insisting on transparency empowers your organization to run with the utmost efficiency at a fair cost. Transparency also means that if you have any questions at all about your merchant bill, your provider will answer honestly and directly.
When it comes to customer service, merchant services providers often fail to remember these facts. For way too long, providers have offered minimal customer service—if any—leading the end-users (you!) just to accept poor (or lack of) service to be “how it is.” However, some payment technology providers (see: Stax) lead with customer service, and treat solid customer care as a business pillar.
2. Simplicity Merchant Services is not rocket science. It’s not solving worldwide poverty. Yet too often, merchant service providers make it a challenge for others to understand. It shouldn’t be that complicated! Merchant service providers should strive to make processing as simple as possible and educate throughout the process, so partners feel empowered to make processing decisions without a flurry of uncertainty.
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All-in-One Solutions for Your Business Evolution You deserve transparency, simplicity, and out-of-this-world customer service Stax provides all of that and more. Our platform connects your entire payments experience with the personalized business solutions you need to move fast, think smarter, and make better business decisions. Stax is uniquely positioned as an awardwinning fintech leader. Since day one, our innovative all-in-one payments technology and dedicated team of experts have remained at the forefront of delivering the best in product and service experiences.
¼ Accept any payment anytime, anywhere, in one easy-to-use platform and manage your business from a single dashboard. ¼ With no contracts, hidden fees, and transparent pricing you’ll always know what you’re paying and why. ¼ Our U.S.-based customer success team is available to answer your questions at any time. ¼ Access advanced insights and integrations with customizable tools designed to enhance your business.
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