How Merchant Processing Fees Really Work.

When a business accepts a credit/debit card for payment, 3 entities get paid:

1. The Payment Network Pass-Through Fees - Nicknamed the fee from the brand logo on the card - Visa, Master Card, Discover and AMEX. Currently they get:
   
   

   Visa has 36 different fee levels and the most common is called Assessments and that fee gets $0.14% of all the credit card sales volume. All US Visa credit card transactions are also charged $0.0195 per transaction. That equals about 16 cents per $100.00 sale. Visa gets $0.13% of the debit card volume and $0.0155 per debit card transaction. That equals about 14.55 cents per $100.00 sale. The other fees from Visa add additional costs to the merchant depending on which fees apply!

   Mastercard has 26 different fee levels and the most common is called Assessments and that fee gets $0.1375% of the credit/debit card volume and $0.0195 per transactions for sales under $1,000.00. That equals about 16 cents per $100.00 sale. Mastercard gets $0.01% of credit card volume and $0.0195 per transaction for sales over $1,000.00. That equals about $1.49 for a $1,000.00 sale. The other fees from Mastercard add additional costs to the merchants depending on which fees apply!

   Discover gets $0.13% of card volume and $0.0195 per transaction. That equals about 15 cents per $100.00 sale. Discover also gets $0.025 per authorized transaction submitted for settlement.

   AMEX gets 0.15% of the card volume. That equals 15 cents on a $100.00 sale. AMEX gets $0.30% of all Card Not Present volume, which would be any non face to face transaction such as a phone order or online payment. That equals an additional 30 cents per $100.00 sale.

2.   The Interchange Fee

   Interchange fee is a term used in the payment card industry to describe a fee paid between banks for the acceptance of card-based transactions. Usually for sales/services transactions it is a fee that a merchant's bank (the "acquiring bank") pays a customer's bank (the "issuing bank"); and for cash transactions the interchange fee is paid from the issuer to acquirer, often called reverse interchange.

   In a credit card or debit card transaction, the card-issuing bank in a payment transaction deducts the interchange fee from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant. The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and an additional, usually smaller, fee for the acquiring bank or independent sales organization (ISO), which is often referred to as a discount rate, an add-on rate, or passthru. For cash withdrawal transactions at ATMs, however, the fees are paid by the card-issuing bank to the acquiring bank (for the maintenance of the machine).

   These fees are set by the credit card networks and are the largest component of the various fees that most merchants pay for the privilege of accepting credit cards, representing 70% to 90% of these fees by some estimates, although larger merchants typically pay less as a percentage. Interchange fees have a complex pricing structure, which is based on the card brand, regions or jurisdictions, the type of credit or debit card, the type and size of the accepting merchant, and the type of transaction (e.g. online, in-store, phone order, whether the card is present for the transaction, etc.). Further complicating the rate schedules, interchange fees are typically a flat fee plus a percentage of the total purchase price (including taxes). In the United States, the fee averages approximately 2% of transaction value.

   In recent years, interchange fees have become a controversial issue, the subject of regulatory and antitrust investigations. Many large merchants such as Wal-Mart have the ability to negotiate fee prices, and while some merchants prefer cash or PIN-based debit cards, most believe they cannot realistically refuse to accept the major card network–branded cards. This holds true even when their interchange-driven fees exceed their profit margins. The fees are also the subject of several ongoing lawsuits in the United States.

   With over 400 cards in circulation, the interchange rates vary considerably from credit to debit, swiped face to face card present transaction, key entered card not present transaction such as a phone payment, online sales and reward cards.

3.   The Processor - That is the name on your monthly merchant service statement showing the breakdown of the merchant fees . Most of the big issuing banks offer merchant services directly and also have independent sales organizations, called ISO's, representing and selling merchant services for them. The Processors and ISO's fees are unlicensed and unregulated and are all over the place. This is the hardest part to understand and what is fair and legit. Unless you understand every fee being presented and charged, use the All-In-Rate tracker to see where you are at. Then monitor it monthly to catch any changes!

   Merchant Processing Terms Defined

   Payment Card Industry – The payment card industry consists of all the organizations which store, process and transmit cardholder data, most notably for debit cards and credit cards. The security standards are developed by the Payment Card Industry Security Standards Council which develops the Payment Card Industry Data Security Standards used throughout the industry. Individual card brands establish compliance requirements that are used by service providers and have their own compliance programs. Major card brands include American Express, Discover Card, JCB, Mastercard, Mir, RuPay, UnionPay and Visa. Most companies use member banks that connect and accept transactions from the card brands. Not all card brands use member banks, like American Express, these instead act as their own bank.

   Merchants Bank / Acquiring Bank – A bank or financial institution that processes credit or debit card payments on behalf of a merchant. The acquirer allows merchants to accept credit card payments from card issuers such as Visa, MasterCard, Discover, China UnionPay, American Express.

   The acquiring bank enters into a contract with a merchant and offers it a merchant account. This arrangement provides the merchant with a line of credit. Under the agreement, the acquiring bank exchanges funds with issuing banks on behalf of the merchant and pays the merchant for its daily payment-card activity's net balance — that is, gross sales minus reversals, interchange fees, and acquirer fees. Acquirer fees are an additional markup added to association interchange fees by the acquiring bank, and those fees vary at the acquirer's discretion.

   Issuing Bank – A bank that offers card association branded payment cards directly to consumers, such as credit cards, debit cards, contactless devices such as key fobs as well as prepaid cards. The name is derived from the practice of issuing cards to a consumer.

   Credit Card / Charge Card – A payment card, usually issued by a bank, allowing its users to purchase goods or services, or withdraw cash, on credit. Using the card thus accrues debt that has to be repaid later. Credit cards are one of the most widely used forms of payment across the world.

   A regular credit card differs from a charge card, which requires the balance to be repaid in full each month, or at the end of each statement cycle. In contrast, credit cards allow consumers to build a continuing balance of debt, subject to interest being charged at a specific rate. A credit card also differs from a charge card in that a credit card typically involves a third-party entity that pays the seller, and is reimbursed by the buyer, whereas a charge card simply defers payment by the buyer until a later date. A credit card also differs from a debit card, which can be used like currency by the owner of the card.

   As of June 2018, there were 7.753 billion credit cards in the world. In 2020, there were 1.09 billion credit cards in circulation in the United States, and 72.5% of adults (187.3 million) in the country had at least one credit.

   Debit Card / Check Card / Bank Card – A payment card that can be used in place of cash to make purchases. The card usually consists of the bank's name, a card number, the cardholder's name, and an expiration date, on either the front or the back. Many new cards now have a chip on them, which allows people to use their card by touch (contactless), or by inserting the card and keying in a PIN as with swiping the magnetic stripe. Debit cards are similar to a credit card, but the money for the purchase must be in the cardholder's bank account at the time of the purchase and is immediately transferred directly from that account to the merchant's account to pay for the purchase.

   Some debit cards carry a stored value with which a payment is made (prepaid cards), but most relay a message to the cardholder's bank to withdraw funds from the cardholder's designated bank account. In some cases, the payment card number is assigned exclusively for use on the Internet, and there is no physical card. This is referred to as a virtual card.

   In many countries, the use of debit cards has become so widespread that they have overtaken checks in volume or have entirely replaced them; in some instances, debit cards have also largely replaced cash transactions. The development of debit cards, unlike credit cards and charge cards, has generally been country-specific, resulting in a number of different systems around the world that are often incompatible. Since the mid-2000s, a number of initiatives have allowed debit cards issued in one country to be used in other countries and allowed their use for internet and phone purchases

   Debit cards usually also allow an instant withdrawal of cash, acting as an ATM card for this purpose. Merchants may also offer cashback facilities to customers so that they can withdraw cash along with their purchase. There are usually daily limits on the amount of cash that can be withdrawn. Most debit cards are plastic, but there are cards made of metal and, rarely, wood.

   Independent Sales Organization (ISO) - To market merchant accounts, an ISO/MSP must be sponsored by a member bank. This sponsorship requires that the bank verify the financial stability and suitability of the company that will be marketing on its behalf. The ISO/MSP must also pay a fee to be registered with Visa and MasterCard and must comply with regulations in how they may market merchant accounts and the use of trademarks of Visa and MasterCard. One way to verify if an ISO/MSP is in compliance is to check a website or any other marketing material for a disclosure "company is a registered ISO/MSP of bank, town, state. FDIC insured".

   This disclosure is required by both Visa and MasterCard and will cause a penalty of up to $25,000 if it is not clearly visible. In almost all cases, if there is no disclosure, the company is likely to be an uninformed fourth party or worse

   Discount Rates - The discount rate comprises a number of dues, fees, assessments, network charges and mark-ups merchants are required to pay for accepting credit and debit cards, the largest of which by far is the interchange fee. Each bank or ISO/MSP has real costs in addition to the wholesale interchange fees and creates profit by adding a mark-up to all the fees mentioned above. There are a number of price models banks and ISOs/MSPs used to bill merchants for the services rendered. Here are the more popular price models.

The following are the most popular discount rates pricing models:

1. Three-Tier Pricing – The three-tier pricing is the most popular pricing method and the simplest system for most merchants to understand, if not the most transparent. The newer six-tier pricing, including additional tiers covering debit, business, or international cards is gaining in popularity. In three-tier pricing, the merchant account provider groups the transactions into three groups (tiers) and assigns a rate to each tier based on a criterion established for each tier. A possible drawback from the merchant's perspective is that these "tiers" or "buckets" are variable from one processor to the next prohibiting any direct comparison from a tier-one provided by one provider to a tier-one provided by another provider.
2. First Tier - Qualified Rate – A qualified rate is the percentage rate a merchant will be charged whenever they accept a regular consumer credit card and process it in a manner defined as "standard" by their merchant account provider using an approved credit card processing solution. This is usually the lowest rate a merchant will incur when accepting a credit card. The qualified rate is also the rate commonly quoted to a merchant when they inquire about pricing.
   
   The qualified rate is created based on the way a merchant will be accepting a majority of their credit cards. For example, for an Internet merchant, the Internet interchange categories will be defined as qualified, while for a physical retailer only transactions swiped through or read by their terminal in an ordinary manner will be defined as qualified.
3. Second Tier - Mid Qualified Rate – Also known as a partially qualified rate, the mid-qualified rate is the percentage rate a merchant will be charged whenever they accept a credit card that does not qualify for the lowest rate (the qualified rate). This may happen for several reasons such as:
   • A consumer credit card is keyed into a credit card terminal instead of being swiped
   • A special kind of credit card is used like a rewards card or a business card

   A mid-qualified rate is higher than a qualified rate. Some of the transactions that are usually grouped into the mid-qualified tier can cost the provider more in interchange costs, so the merchant account providers do make a markup on these rates.

   The use of "rewards cards" can be as high as 40% of transactions. So it is important that the financial impact of this fee be understood.

4. Third Tier - Non Qualified Rate - The non-qualified rate is usually the highest percentage rate a merchant will be charged whenever they accept a credit card. In most cases, all transactions that are not qualified or mid-qualified will fall to this rate. This may happen for several reasons such as:
   • A consumer credit card is keyed into a credit card terminal instead of being swiped and address verification is not performed
   • A special kind of credit card is used like a business card and all required fields are not entered
   • A merchant does not settle their daily batch within the allotted time frame, usually past 48 hours from the time of authorization.

   A non-qualified rate can be significantly higher than a qualified rate and can cost the provider much more in interchange costs, so the merchant account providers do make a markup on these rates.

5. Six Tier Pricing - As a result of the Walmart Settlement and to compete against PIN-based debit cards (which are processed outside of the Visa and MasterCard networks), Visa and MasterCard lowered the interchange rates for debit cards well below those for credit cards. Some providers can pass on the lower cost of these cards directly to merchants. Consequently, the three tiers programs have added two classifications for debit cards that are processed without a PIN or with a PIN for a total of six rate classifications.
6. Interchange-Plus Pricing - Some providers offer merchant account services priced on an "interchange plus" basis. These accounts are based on the "interchange" tables published by both Visa and MasterCard. This type of pricing creates a discount rate by adding interchange rates plus a percentage and authorization fees. This is a common pricing model for very low and very high-average tickets.

Automated Teller Machine (ATM) - An automated teller machine (ATM) is an electronic telecommunications device that enables customers of financial institutions to perform financial transactions, such as cash withdrawals, deposits, funds transfers, balance inquiries or account information inquiries, at any time and without the need for direct interaction with bank staff.

ATMs are known by a variety of other names, including automatic teller machines (ATMs) in the United States (sometimes redundantly as "ATM machine"). In Canada, the term automated banking machine (ABM) is also used, although ATM is also very commonly used in Canada, with many Canadian organizations using ATM rather than ABM. In British English, the terms cashpoint, cash machine and hole in the wall are also used. ATMs that are not operated by a financial institution are known as "white-label" ATMs.

Using an ATM, customers can access their bank deposit or credit accounts in order to make a variety of financial transactions, most notably cash withdrawals and balance checking, as well as transferring credit to and from mobile phones. ATMs can also be used to withdraw cash in a foreign country. If the currency being withdrawn from the ATM is different from that in which the bank account is denominated, the money will be converted at the financial institution's exchange rate. Customers are typically identified by inserting a plastic ATM card (or some other acceptable payment card) into the ATM, with authentication being by the customer entering a personal identification number (PIN), which must match the PIN stored in the chip on the card (if the card is so equipped), or in the issuing financial institution's database.

According to the ATM Industry Association (ATMIA), as of 2015, there were close to 3.5 million ATMs installed worldwide. However, the use of ATMs is gradually declining with the increase in cashless payment systems.

Cash Discount Merchant Processing With ZERO PROCESSING FEES & FREE DIRECT MAIL

The Cash Discount Program is legal in all 50 states! This gives all customers that pay with cash or check a DISCOUNT or typically 4% but you can decide the percentage if you want it to offer even more of a cash incentive. The price you regularly charge for your product or service would be the cost if any debit or charge card would be used. With a typical merchant processing account it is ILLEGAL to offer a cash discount to your customers which could end your ability to take charge cards.

Cash discount programs have been available for years to higher education, municipals, gas stations and utility providers, but only recently, since 2015 have independent business owners began to use the same programs typically called a convenience fee or surcharge.

With a typical merchant processing account in where you pay all the fees if you charge $100 you do collect all $100 but at the end of month most business are paying with discount rates, statement fees and other recurring fees levied by the merchant process around $3,000 to $3,500 per month. The fee also comes out as one payment so if you are running on a tight budget in where your bank balance can fluctuate your large monthly merchant processing charge can put some businesses upside down for a few days.

With Cash Discount you will never pay a single penny in discount fees or other monthly fees that are levied to merchant processing accounts. You will receive your money the next business day minus the 4%. So with a $100 charge, $96 would be deposited into your account. You would also now legally be able to encourage cash transactions by offering a 4% or even larger discounted if you prefer your customers pay in cash.

Since the pandemic the majority of businesses, especially in the restaurant industry, have embraced the cash discount paradigm as it 100% eliminates their merchant processing fees which average 2.75% to 3.25% for most restaurants and other businesses. With inflation and ever-increasing prices with the public very use to much higher prices on everything compared to pre-pandemic, businesses are having no problems raising their existing prices by 4% (or more) to offset the Cash Discount cost. Many businesses also say the percentage of people paying with cash greatly increases as without being able to legally offer a cash discount prior, the number of cards being swiped will decrease since many clients will be motivated to save the 4% using cash which will further decrease your total business costs.