A Merchant’s Guide to the Payment Processing Industry, Part 1: Where Do My Processing Fees Go?

Did you know that businesses accepting credit card payments can increase their yearly revenue by over 30%? How about the fact that credit card-wielding consumers engage frequently in impulse buying, boosting transaction sizes by 250%? If you’re a merchant that’s recently begun accepting credit card payments at your business, or if you’re contemplating accepting credit cards but unsure if it’s worth it for your bottom line, I’m going to attempt to help you realize that it is most definitely a worthwhile investment.

First of all, let’s clear up a myth about accepting credit cards: it has been said that if a small transaction is made, say for $5, a merchant can lose money. Therefore, many merchants have a sign saying, “Credit cards NOT accepted for purchases under $5” (or another low-dollar amount). This is untrue and, as a matter of fact, a sign like this violates their credit card issuer agreement. A percentage is taken from the total transaction value and the merchant receives the remainder, known in the industry as the Merchant Discount. As of the writing of this article, that percentage is somewhere between 1.79% and 2%. If you go into a gas station and purchase a bottle of cola for $2, the Merchant Discount amount would equal $1.96 (assuming the 2%), meaning the merchant gets $1.96 and the payment processing industry gets $0.04.

Now that we’ve gotten that myth cleared up, your next question might be, “Where does that 2% go? Why do I have to pay it?” You must first realize that the payment card industry exists not only to provide payment convenience but also to generate income itself. Each step that occurs with every card transaction all take a piece of the pie, or a small portion of your product’s sale price. At first, you might hesitate to begin offering credit cards at your business because you feel you’d make less money. Just remember that there are currently 1.5 billion payment cards in circulation and that most of your customers will not have enough cash on them to make any big purchases at your store without your ability to accept their credit cards. So, where does that 2% go?

1. After your customer presents their card to you and it is swiped through your card reader, that transaction goes off to become authorized. The authorization takes place at the customer’s Issuing Bank (i.e.: Chase, Bank of America, Wells Fargo, Citigroup, etc.). The Issuing Bank is the bank whose logo appears on the card and is the bank that ultimately sends the customer his monthly credit card statement. The Issuing Bank takes the biggest percentage of your processing pie: approximately 1.75% + $0.10 (or $1.85 from a $100 sale). This is called the Interchange Fee. Technically, this fee is assessed to the merchant’s bank (the Acquiring Bank), but ultimately this cost gets passed on to the merchant.

2. In the authorization process of a $100 transaction, $0.18 goes to the Visa or MasterCard associations. This is called the Assessment Fee. Current Visa assessment fees are listed as 0.1100% with MasterCard’s at 0.0950%.

3. The last piece of the 2% pie ends up going to the merchant’s account provider, typically the merchant’s Acquiring Bank or the Independent Sales Organization (ISO) maintaining the merchant processing relationship. The Acquiring Bank receives $0.07 of the $100 transaction, or.07% of the transaction value. An Acquiring Bank then pays the money to the merchant and waits for reimbursement from the card holder’s Issuing Bank.

This is the basic outline for costs associated with accepting credit cards. Occasionally there’s an additional step where the credit card processing platform (you didn’t think all this hard work was being done by hamsters on wheels, did you?) also takes a piece of the pie, but generally that cost is combined into the industry-average 2%.

As a merchant accepting credit card payments, you’re essentially expanding your target market and making current customers more likely to visit you. Even if you’re a low-ticket item vendor, it’s still in your best interest to seek out a merchant services provider to get you set up processing credit cards immediately. In the end, you gain a lot more than you lose due to processing fees, and you’ll be attracting more clients who spend more money at your business.

© 2010 Lorraine Wolfe