Payment Processing: The Truth on Factors that Impact Your Processing Costs

The payment processing (merchant services) industry is one of the most important industries in the world.  In modern times, it has an impact on everyone on the planet.  It is the life blood of commerce and yet most people have no understanding of how it works and more importantly how the costs are determined.

There are multiple players involved in the payment processing ecosystem that all get a piece of the fee.  In this article we will focus specifically on the 3 key members that are involved in every card payment.

Issuer

The Issuer or issuing bank is the financial institution that provides the consumer with a card.  HSBC, RBC, Capital One, American Express, TD Bank, etc.  

Network

The Network or card brand is the company that delivers the infrastructure and technology to connect the card issuer's customer account to the acquiring bank (merchant bank) to enable funds transfers for each transaction.

Acquirer

The Acquirer, acquiring bank or merchant processor is the company that provides the payment services to the businesses wanting to accept card payments from consumers.  All merchant processors must be backed by a sponsor bank to connect to the card network.

With the players out of the way, we will get to the heart of the fees that are charged for payment processing.  There are 3 core components that make up your total cost of payment processing.  In most cases there are other factors and players that add to this core that include payment technologies (gateways, shopping carts, POS devices, etc.) there are fraud service providers and other data solutions that can add significant costs on top.  Again, for this article we will focus on the core components that are always there.

Interchange

Interchange is, typically, the largest cost component with your total costs of acceptance.  For most merchants the Interchange makes up 60-75% of your total effective fees.  Interchange is a combination of a rate and transaction fee that is charged and is collected by the card holders card issuing bank.  (i.e. If you use your HSBC credit card to make a purchase, HSBC is the 100% benefactor of the interchange revenue).  There are over 800 different interchange rates charged by the card brands that varies in cost based on a number of factors.

Network Fees

Network Fees are a range of costs that are charged by the card network (Visa, MasterCard, Interac, American Express, etc.).  The collected fees go back to the card networks as revenue to provide the infrastructure and profit to support them.  As these networks are publicly traded businesses, shareholders demand growth and profitability, as such we have seen steady increases and new fees added over the past few years that have significantly impacted total costs of acceptance.  Although smaller than interchange, the network fees are averaging to be 10-15% of the costs to process payments.

Processor Fees

Processor fees are the fees that your merchant service provider charges to deliver the services to you as the merchant.  Depending on how you were setup for pricing, how well you negotiated, the systems that the services are connected to, and a number of other factors the average costs for the processor fees are 10 - 30% of the fees you are charged for payment processing acceptance.  

Whats interesting and unique about most payment processors is that they do not publish pricing.  This is because they work on a case by case basis to extract the most possible fees from businesses as they can.  You can go to 2 businesses selling the same products in the same town and they will be priced completely differently.

Pricing Model 

There are many ways that processors can charge fees for payment processing.  The most obvious is in with the pricing model that you were setup with:

• Bundled or Flat Rate - Although simple in concept typically are 20% more than any other pricing model.

• Tiered Pricing - Multiple buckets of rates based on specific transaction types and in most cases costs 10-20% more than other pricing types

• Discount With BillBack - One of the most deceiving pricing strategies used by processors that are more cost effective than the above, but not in all cases.

• Pass-Thru - Complex billing but the most transparent and cost effective.

Depending on your payment company and the model that you are setup with you may not get the benefit of any of these interchange reductions.  Don’t trust your processor to be transparent with you either, as they are biased and may tell you what you want to hear but not actually work to your benefit.

For example, if you are processing with Square, they provide flat rate pricing and you will not see any differences in your rate from Square, and in that case they are pocketing the savings as added revenue.

Expense Defence is here to help

EXD is not a payment processor, we are not paid by the card brands or payment companies.  We are entrepreneurs from the payments industry and are on a mission to help businesses to stop from being overcharged and deceived by the industry.  With over 30 years of direct industry expertise our payments SMEs are able to analyze merchants' processing and in minutes identify issues and areas of opportunity to reduce your payment costs without ever having to change a vendor or lift a finger.  On average, we are saving merchants over 20% in merchant costs that can add to 100’s of thousands of dollars.  

Expense Defence are advocates of entrepreneurs and passionate about giving every business and entrepreneur the best opportunity for success and greatness.  Are you ready to fight back against big banks and ensure you have the best pricing possible for your business?  All it takes is a 15 minute call and a copy of your most recent processing statements and within 30 days you will be on the path to saving 20% or more on your recurring payment processing expenses.  

Visit www.expensedefence.com to learn more.