Unveiling Merchant Account Rates and Fees
by Jim Conley II

Many new business owners are confused about rates and fees for merchant accounts, and rightfully so. You can spend hours searching the Internet to get answers to your questions. The purpose of this article is to help unveil some of the confusion you may have about credit card rates and fees.

When it comes to choosing which Merchant Account Provider to deal with (there are hundreds out there) the one factor that influences most people is the cost. Accepting credit cards can be expensive, so comparison shopping for the best deal is vital. And, be sure to read all the fine print. "Hidden" charges like cancellation fees are not uncommon.

Here's an outline of the approximate rates and fees associated with maintaining a merchant account:

Application/Setup: $0 - $100+ (One Time Fee)

All providers have an application fee. Some charge for it at the outset, while others add it into the solution purchase/lease costs.

Hardware/Software: Purchase: $99 and up    Lease: $20/month and up

One important note: stay away from leases if at all possible. It's always better to purchase than to pay a lease for the next 12, 24, 36 or 48 months.

Why? With a lease you'll often end up paying 3 times or more the amount you would have paid for an outright purchase of the hardware/software. While a $29.95 monthly lease for 48 months sounds good, in reality it isn't. Moreover, leases can be hard to get out of. If your business goes under before the 48 months are up, you still have to pay on the hardware/software costs until the last penny has been received by the leasing company. Also, the lease fee you see does not include your state sales tax or the amount charged for the damage/loss waiver.

If you do decide on the lease option, pay particular attention to the lease's buyout clause, end of lease terms, and any clauses that allow the lease company to continue charging you after the lease term has expired (clauses that say you need to provide written notice one month prior to the end of the lease - or be automatically renewed).

Programming: $0 - $100+ (One Time Fee)

This usually only applies to retail merchants who have changed from one provider to another. The programming process isn't difficult but watch out for the cost. Some providers may nickel and dime you on programming fees. Why do they charge this fee if you use your own equipment? The fee is to make up for the loss of not selling or leasing you their equipment.

Discount Rate: 1.49% - 4% Per Transaction

This is the fixed percentage amount that is deducted from the purchase cost. The lower discount rates are for retail outlets while the higher rates are for Mail Order/Telephone Order (MOTO) and Internet-based businesses. Why the lower cost for retail? The instances of credit card fraud are much lower, so banks are able to charge lesser percentages for these types of businesses. A typical discount rate for a US business is right around 2.49%, perhaps a little higher or a little lower. Non-US businesses will pay higher discount rates closer to the 3% to 4% range.

Don't let a few tenths of a percentage point be the deciding factor between two providers. For example, if Provider "A" charges 2.29% and Provider "B" charges 2.49% you'll only save $0.20 for every $100 processed through your merchant account.

Transaction: $0.20 - $0.50 Per Transaction

In addition to the discount rate, a transaction fee is also deducted from the purchase cost. As with discount rates, transaction fees are lower for retail businesses and slightly higher for MOTO and Internet establishments. Address Verification (AVS) may be included in the base transaction fee or may cost an additional fee. The typical transaction fee for US businesses is right around $0.30 with Non-US businesses paying up to $0.50.

Monthly Minimum: $20 - $25 Per Month

This fee is based on the monthly transaction and discount rate fees collected. For example, if your bank charges a $25 monthly minimum, this fee will be waived if the transaction and discount rate fees collected by the bank equal or exceed $25 each month. However, if the fees collected for that month fall below the $25 minimum, you will be charged the difference. Not all Merchant Account Providers have a monthly minimum fee, but most do.

Gateway Access: $0 - $25+ Per Month

In most cases, the company providing a Secure Payment Gateway (e.g. Authorize.Net, Verisign, etc.) is a separate company from the Merchant Processor and charges a monthly access fee for their service. The standard fee for gateway access is around $10/month.

Statement: $10 - $15 Per Month

At the end of each month, your processing bank will issue a statement that lists all the transactions that went through for that particular month. The statement fee covers the cost for this service.

Daily Close-Out: $0 - $0.15 Each Day

The fees associated with software and terminal processing solutions and end-of-business-day transaction close-outs. Most providers no longer charge this fee.

Address Verification System (AVS): $0 - $0.05 Per Transaction

The AVS service checks to see that the billing address given by the customer matches the credit card. If you opt not to use AVS, VISA and MasterCard will not support your transactions and will charge you an additional 0.17% to 1.25% on those sales. Most merchant accounts come with AVS at no extra charge. If there is a charge, it is usually combined with the per transaction fee. The AVS service works only with US credit card holders. Currently, there is no AVS service in place for non-US credit card holders.

Chargeback: $5 - $25 Per Instance

A chargeback occurs when a cardholder disputes a charge on their monthly credit card statement. Numerous chargebacks can result in your merchant account being dropped. If this happens, you may not be able to get another merchant account for several years. As a merchant, it is important that you take the necessary steps to reduce or eliminate the instances of chargebacks.

Reserve: Varies - Ask The Provider For Details

Some providers require a reserve account where the amount in the account is determined by a business's estimated sales receipts. The reserve fee is used to cover chargebacks on the merchant's account. A reserve is almost always required of Non-US based merchants who are trying to obtain a merchant account. High sales volume businesses may also be charged a reserve fee. In most other instances, a reserve fee is not the norm.

The rates and fees charged by most Merchant Account Providers fall within the fee ranges provided above. Lower fees in one area quite often mean higher fees in another.

So there you have it. Hopefully, you have a better understanding of the rates and fees you will encounter when opening your own merchant account.

The key to not being surprised by "hidden" fees is to always ask questions up front. And, if you get a "something isn't right" feeling while conversing with a merchant account representative, go with your gut instinct and look elsewhere. It just may save you some unpleasant surprises when you get your first monthly statement in the mail.

About The Author

Jim Conley II is the CEO/Founder of MerchantSeek. MerchantSeek allows merchants to search FREE for a Merchant Account Provider that best fits their businesses needs and budget. The site also has detailed information on all kinds of payment acceptance solutions.