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Merchant Account Fees: Your Guide to The Cost of Taking Digital Payments
While having a merchant account boosts profits, understanding their cost is important.
What Are Merchant Account Fees?
While opening a merchant account unlocks a lot of potential for your business, no advantage comes with zero cost. That’s where merchant account fees come in. These are the fees you pay on each transaction you ask your acquiring bank (which provides you with your merchant account) to deal with and yes, they can sometimes be expensive.
The main reason they can be costly is down to the fact that there is more than one type of merchant account fee. Each payment that is made to your business goes through various processes and steps before it’s completed, and each step comes with a fee. This includes payment gateway fees, transaction fees and payment processor fees to name a few.
Understanding these fees is important for you and your business because it puts you in control when it comes to finding the best deal possible on your business’s merchant account. So, without further ado, let’s dive into our breakdown of merchant fees.
How Much Do Merchant Accounts Cost?
The first thing to remember is that fees vary from business to business. Some businesses will have to pay more or higher fees than others due to factors like their credit history, industry, number of transactions or the contract they have with their acquiring bank. All of these things are highly nuanced and your business’s total cost will be dependent on all of them.
That said, the fees you end up paying will all fall into one of the following categories:
Scheduled Fees
True to their name, scheduled merchant fees are ones you can always see coming, which makes them nice and predictable. They will be agreed upon between you and your acquiring bank when you first open your merchant account, and will usually be a monthly fee. They go towards the cost of maintaining your merchant account.
Common types of scheduled fees include card machine rentals, payment gateway fees, and PCI compliance fees. These fees ensure you can accept card payments easily, smoothly, and safely without putting your business at risk.
PCI compliance rules make sure the sensitive data you’re taking from your customers is handled responsibly. The rules are especially important when it comes to protecting your business against fraud and reputational damage. Most merchant account providers will provide this kind of protection as standard, while others charge an additional fee.
If you take payments without PCI compliance then you could be subject to heavy fines, or your provider may remove your ability to take card payments altogether.
Card machine rentals are fairly self-explanatory. If you use a card machine provided to you by your merchant account provider, you need to pay to use it. Companies like Square and Sumup charge little to no rental fees on their card machines, while other providers charge up to £20 or more per month.
Payment gateway fees pay for your payment gateway (the bit of the payment processing which enables money to flow from your customers to you). While mainly associated with online payments, in-person payments also often use a payment gateway, so you’re likely to be subject to a fee. These fees are usually a fixed per transaction fee or a percentage fee.
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Card Processing Fees
Every time a customer chooses to pay with a credit or debit card, you will be subject to a card processing fee. These fees are usually charged as a percentage of the transaction or sometimes as a percentage plus a fixed fee.
The transaction fee is usually small in comparison to the actual transaction, but it can add up to significant amounts, especially when you’re accepting card payments exclusively.
Credit card processing fees include multiple types of more specific fees. Interchange fees, for example, are paid directly to the customer’s card issuer, while processor fees are paid to your merchant account provider. Luckily for you, interchange fees in the UK are capped at 0.3% for credit cards and 0.2% for debit cards. Unluckily for you, processor fees aren’t, and this is where you pay the biggest chunk of your card processing fees.
Then there are assessment fees, which are paid to the credit card network (Visa, Mastercard, American Express, for example). These companies process each transaction on behalf of the card issuer and so want a slice of the transaction too. The fees depend on the card network and some businesses choose not to accept certain card networks due to higher costs. This will be something you also need to consider.
Incidental Fees
Unlike scheduled fees, you can’t always see incidental fees coming, which can make them the most inconvenient of all the types of fees explored here. These fees are usually paid on a one-time basis when something happens to incur them. This could be a refund fee (incurred when you have to refund a customer – usually a fixed fee), a chargeback fee (triggered when a customer is wrongly charged) or an early termination fee, where you leave your contract early.
The size of the fee you have to pay in situations like the ones described above will depend on what triggered the fee, with some costing significantly more than others. On the plus side, incidental fees can usually be mitigated.
Merchant Account Pricing
As you have read, there is no easy way to know how much you will pay in fees for your merchant account, only that fees will be charged. Many factors influence your final bill. There are, however, some broad assumptions you can make about how much you will pay for your merchant account.
If you are a larger business and process more payments, you may get more favourable rates. Small businesses typically get charged more and are unable to be as picky as larger ones, which is why it’s important to think carefully about who to choose as your merchant account provider as making the right choice now saves you money in the long run.
Likewise, businesses that operate in a high-risk industry are also exposed to the risk of higher fees, as are businesses with a bad credit history. In these circumstnaces it can be difficult to have your application for a merchant account accepted, and many businesses like this tend to look for merchant accounts that don’t perform credit checks on applicants.
Merchant account fees are often all bundled into one type of payment. One of the most important things that will influence the price you pay is the type of pricing model you choose. These pricing models are broken down below.
Merchant Account Pricing Structures
Interchange Plus Pricing
Also known as cost-plus pricing or pass-through pricing, an interchange-plus pricing model breaks down your fees into two parts. The first part is the interchange, which is the cost from the issuing bank to you via your acquiring bank. This includes the interchange fee and the assessment fee. The second part only includes the processor fee.
The interchange plus model means you can see the breakdown of fees, including the interchange fee and the processor’s markup, so you can see exactly where your fees are going. What’s more, the interchange plus model can often mean lower fees than with other pricing models (explored below). The downside, however, is that, given the variety of fees charged for each customer’s transaction, your total fees can be unpredictable.
Flat Rate Pricing
If the unpredictability of interchange plus pricing is something you don’t fancy, you might prefer to opt for a flat-rate pricing model. With this model, you pay the same fee for every transaction you make. Regardless of the card issuer or card network, the rate you pay will never change.
Similar to when you take out a mortgage, opting for a flat rate or fixed fee will usually mean you pay slightly higher rates, but you do have the advantage of having more predictability when it comes to your merchant account fees.
Tiered Pricing
Finally, there’s tiered pricing, where your transactions are categorised into qualified, mid-qualified, and non-qualified. How they are categorised depends on what card was used and whether it was made online or in person.
The fees you pay are dependent on the categorisation of the transaction, with qualified transactions being the cheapest. Be careful though, as not all of your transactions will be qualified and you could end up spending a lot of other types of transactions.
FAQs
Which pricing structure should I choose?
The type of pricing structure you choose is up to you, but there are some broad observations to be made. One is that interchange plus pricing is popular among small businesses as it can often mean smaller fees. Another one is that a flat rate pricing structure offers more predictability, which can also suit smaller businesses that depend on fees being manageable.
In the end, it’ll be up to you, so being as informed as possible is a good place to start.
How much does a merchant account cost?
Merchant accounts, while bringing in money, also cost money. There are several types of fees you’ll have to pay, and they vary from business to business. Some businesses will have to pay more or higher fees than others due to factors like their credit history, industry, and number of transactions.
All of these things are highly nuanced and your business’s total cost will be dependent on all of them.
How can I save on merchant account fees?
You can take numerous measures to ensure you’re saving as much as you can on your merchant fees. Doing things like implementing strategies to minimise chargebacks and refunds, ensuring customers receive accurate and detailed order information, and getting quotes from multiple payment processors to find the most competitive rates can all save you money.
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