Sunday, November 15, 2009

Credit Card Processing Fees for Small Business - Avoid Bogus Fees

By Alexander C. Hemenway

The ability to accept payment via credit card is an important part of setting up a small business. Understanding the various fees and charges associated with a merchant account will help you get the best value for your money and help reduce the likelihood that you will pay bogus charges.

Discount Rates

The discount rate is a component of transactional fees however, since it is one of the largest fees I decided to mention it first. The discount rate is charged to the merchant and is based on a percentage of the product or service cost i.e. if someone buys something from you for $100 and the discount rate is 2.5% then $2.50 will be subtracted from the total.

There are additional fees that can be tacked on the discount rate such as Partially Qualified Fee, Non Qualified Fee and Surcharge Fees. You can incur these charges if during credit card processing the card info is keyed in rather than swiped or if someone pays using a card with a reward plan. These additional fees can add up quickly so it is imperative to find out how much they are.

Generally, the discount rate is in the 2% range. It fluctuates as a result of factors mentioned in the previous paragraph.

Monthly Costs

The two kinds of monthly fees are monthly minimum fees and monthly statement fees. A monthly minimum fee is charged if the merchant does not do the minimum amount of transactions per month. For example, if the monthly minimum is $20 and the business only does $10 worth of transactions that month, they are charged an additional $10. Monthly minimum fees are in the $15-30 a month range. The other type of fee is the monthly statement fee which is around $10 a month.

Annual Fees

In addition to monthly fees you might have to incur an annual fee. Although some merchant account providers do not charge this fee you might have to pay it if you received free credit card terminal equipment.

Startup and Termination Costs

These are fees associated with starting or terminating a merchant account. A setup fee is charged to setup the account (it is also known as an application fee). Some merchant accounts wave this fee. When setting up a account you are normally required to sign up for a one or two year contract, it is therefore important to find out what the cancelation fee is if you decided to terminated your contract early.

Transaction Based Fees

Transactional Fees consist of address verification fees, transaction fees and charge back fees.

If during a transaction the credit card is keyed in and not swiped, an address verification fee is charged. Address verification is a service that protects the merchant from fraud by validating the credit card owners billing address (it normally cost 5-10 cents each time). Transaction fees are charged to the merchant by the merchant account provider with every purchase and usually cost between 20-30 cents.

If the customer disputes a charge the merchant is charged a charge back fee. This fee is typically $25 per charge back.

Other Fees

The daily batch fee is charged to pay for settling your daily transactions into your account. If on a given day there are no transactions then there is no charge. The fee is in the 5-50 cent range.

Gateway Fees are charged for internet merchant accounts. This fee is assessed by the gateway service provider which might be different from your merchant account provider. This fee can be as high as $35.

Voice Authorization Fees are charged when calling in your transaction. The average cost is between 75 cents to $1.50.

Any changes to the merchant?s hardware or software can potential result in a reprogramming fee.

Bogus Fees

Beware of other fees not mentioned above particularly for terms like over the limit fee, file fee, conversion fee, audit fee, and excessive transaction fees. In addition pay attention for teaser discount rates that could spike after a couple of months.

A good understanding of credit card processing fees and how much they should cost will help you avoid paying unnecessary fees and help you get the best price on your merchant account.

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