- Contactless Payments: Contactless payments have revolutionized the way we pay for goods and services. Contactless payment technology allows customers to make purchases without having to physically insert their card into a terminal, making transactions faster and more convenient.
- Mobile Payments: With the widespread adoption of smartphones, mobile payments have become increasingly popular. Mobile payment solutions such as Apple Pay and Google Wallet have made it easier for customers to pay for goods and services using their mobile phones.
- EMV Technology: EMV technology, also known as chip and pin, has been adopted by many countries worldwide. This technology has replaced the traditional magnetic stripe on payment cards, making transactions more secure and reducing fraud.
- Payment Security: With the increasing threat of cybercrime, payment security has become a top priority for the card payments industry. Payment card industry (PCI) standards have been introduced to ensure that payment data is stored and transmitted securely.
- Open Banking: Open banking is a new concept that has emerged in recent years, allowing customers to share their financial data with third-party providers. This has created new opportunities for payment service providers to offer innovative products and services.
However, along with these trends, fees and rates have continued to increase year over year. Many of these increases are published, but some can be hidden in the details, making it difficult for companies to understand why their cost of acceptance is always increasing.
The Rising Tide of Card Processing Fees
Interchange Fees
Interchange fees are a significant component of card processing fees. They are set by card networks like Visa and MasterCard and paid by merchants to the card issuers. These fees are often shrouded in complexity, with multiple tiers and varying rates based on factors like transaction type, card type, and industry category.
Interchange fees serve several purposes within the payment ecosystem:
- Compensation for Card Issuers: Interchange fees reimburse card issuers for providing credit and debit cards to consumers. These fees help cover operational costs, fraud prevention measures, customer service, and the risk associated with extending credit.
- Incentivizing Card Networks: Interchange fees provide an incentive for card networks to invest in the development and maintenance of secure payment infrastructure, advanced technology, and innovative payment solutions. They contribute to the ongoing improvement of payment systems.
- Funding Rewards and Benefits: Interchange fees partly fund the rewards programs and benefits offered to cardholders, such as cashback, airline miles, or discounts. These incentives encourage card usage and loyalty.
The U.S. has the highest interchange rates in the developed world. Various considerations are involved in how interchange rates are set in the U.S., including the following macro and micro considerations.
| Micro Considerations | Macro Considerations |
|---|---|
| Merchant's industry type (MCC - Merchant Category Code) | Competition amongst card networks |
| Type of card (Visa Traditional, Visa Rewards, Visa Signature, Visa Debit, etc.) | Card network and issuer strategies |
| Method of entry (swiped vs. keyed) | Emerging markets/verticals |
| Risk and adherence to compliance standards | Legislation |
Payment Processor Markup
Payment processors add their own markup on top of the interchange fees to cover their operational costs and generate profits. This markup can vary between providers and can be presented as a percentage of the transaction or a flat fee.
Ancillary Charges
Apart from interchange and processor fees, businesses may encounter additional fees for services such as chargeback management, fraud prevention, PCI compliance, terminal rental, and statement generation. These fees, while crucial, often remain undisclosed or buried within contracts, making it difficult for merchants to grasp the full cost of acceptance.
Hidden Details on Fees:
- Bundled Pricing: Some payment processors offer bundled pricing, where multiple fees are combined into a single rate. While this may seem convenient, it can make it challenging to differentiate the various components and identify areas for potential cost optimization.
- Tiered Pricing: Tiered pricing structures classify transactions into different tiers (qualified, mid-qualified, and non-qualified), each with its own interchange rate. This can lead to confusion as the criteria for tier classification may not be clearly defined, and businesses may unknowingly incur higher rates for certain transactions.
- Contracts and Terms: Payment processing contracts can be lengthy and filled with complex terminology. Understanding the terms and conditions, cancellation fees, contract durations, and potential rate adjustments is vital to avoid unexpected costs.
Navigating the Card Processing Fee Landscape:
- Review and Negotiate: Regularly review your processing statements to identify any hidden fees or unexpected increases. Don’t hesitate to negotiate rates and terms with your payment processor, especially if you have a solid processing history or can offer volume guarantees.
- Seek Transparency: Partner with payment processors who prioritize transparency and are willing to provide clear breakdowns of fees. Ask for a detailed explanation of all charges and make sure you understand the various components of your card processing fees.
- Explore Alternatives: Consider exploring alternative payment solutions and providers. New technologies like mobile payments, digital wallets, or even direct bank transfers may offer lower transaction costs and fewer hidden fees.
As the world becomes increasingly cashless, businesses must grapple with the ever-increasing card processing fees. Understanding the complex web of interchange fees, payment processor markups, and hidden charges is crucial to effectively manage costs. By seeking transparency, negotiating rates, and exploring alternative payment solutions, businesses can navigate the card processing fee landscape with confidence and optimize their cost of acceptance. Stay informed, be proactive, and ensure that your payment processing fees align with the value and service you receive.
We believe that it is essential for companies to stay informed about the latest trends and changes in the card payments industry. Join us on Tuesday, May 23rd, Taige Caldwell and Tom Wrigley will be discussing the various aspects that contribute to the increase of card acceptance and what merchants can expect from the payments industry down the road.
