Tuesday, June 5, 2012

Online Credit Card Payment Processing Fees

Online Credit Card Payment Processing FeesVirtual stores generally pay significantly higher fees for their online credit card payment processing services than brick-and-mortar merchants. This is commonly known and I think it will not surprise you. But what is the reason for it? More importantly, what should be the fees you should be paying? I will answer these questions in this post.

Why Are Card-not-Present Fees Higher?

So card-not-present transactions cost more to accept, because they are much more likely to result in customer disputes than face-to-face payments. This is a problem, in turn, because disputes have the bad habit of often deteriorating into chargebacks, which are seen as a bogey man by Visa, MasterCard and your merchant account vendor.

What Is the Problem with Chargebacks?

The issue is that if your chargeback level is left to exceed 1 percent of your overall transaction count, your credit card processing account will be suspended either by Visa or MasterCard, which makes no difference. What will happen way before that is that your merchant account vendor will suspend your service way before the level comes anywhere near 1%. See, processors get fined by Visa and MasterCard if your chargeback level exceeds this threshold and they won't allow it.

Now you can understand that the higher fees payed by e-commerce merchants are in essence an insurance premium against possible chargeback problems.

Card-not-Present Rate Considerations

The bullet points below represent the various components making up your total processing cost and our suggestions for what you should pay for each one of them:
  • Discount rate. Web-based processing rates should not be above 2.09% for credit and 1.89% for debit cards for regular card types. Other types of cards, most prominently rewards and business-to-business, are often processed at much higher rates. Much of what you pay would be dependent on the type of pricing model used by your processing bank. Some of them, for example, will offer you one rate for both credit and debit cards. The issue with this approach is that interchange fee for debit cards are much lower, which means that such models would be overcharging you. A much better solution would be based on the pass-through pricing structure, where your processor's rate is added directly on top of the interchange fees, effectively making certain that no single transaction costs you more than others.
  • Transaction fees. Transaction fees should not be higher than $0.30 per item.
  • Application and account set-up fees. No such fees should be agreed to!
  • Gateway set-up and monthly fees. E-commerce gateways are services that connect e-commerce website shopping carts with the acquirer's back-end payment systems and transmit data back and forth between them. For example, the best known gateway is Authorize.Net, which you might be able to get set up for under $50 and pay as little as $10 per month.
  • Statement fee. This is a monthly fee that can have a variety of names, but the point is that you shouldn't be charged more than $9.99 for it.
  • PCI compliance fee. This is a new fee that could be assessed either monthly or annually. Either way, it should be below $199 a year.
To conclude, always examine a pricing proposal as a whole, not its components individually.

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