Modern consumers prefer to pay for goods and services with credit or debit cards. In 2019 alone, there were more than 39 billion credit card transactions in the U.S. That equates to over 100 million transactions per day.
As demand for credit card processing rises, the overall cost of processing credit card transactions has also increased. As a result, credit card transactions now account for a larger percentage of sales for businesses of all sizes.
For merchants who are already paying high credit card processing fees, receiving notification of a merchant rate increase can be stressful. Therefore, it’s important to understand why merchant fees increase and what to do if you’re notified of a fee increase.
What Causes Merchant Fee Increases?
Merchant fees can increase for a number of reasons, but some of the most common causes are:
Your Business is Considered High Risk for Fraud
Some businesses are at a greater risk of fraud than others, and these businesses generally pay higher merchant fees as a result. For example, despite the popularity of online shopping, card-not-present transactions are considered a fraud risk. International transactions can also be considered high risk, and the fees are set accordingly.
If your business processes a lot of online or phone orders or has international customers, you may be bumped into the high-risk category and charged higher fees.
Take a close look at your statement to see whether you’re incurring extra fees for high-risk transactions.
Credit Card Networks Increase Their Merchant Fees
Merchant fees may increase if credit card networks are also increasing their fees. The merchant service provider will simply pass this higher cost on to merchants. There’s nothing they can do about credit card networks increasing their fees.
For example, Visa and Mastercard recently announced that they would be increasing their interchange rate for card-not-present transactions (e.g., online purchases, phone purchases, etc.). While the card networks ultimately decided to delay the rate hikes, the move will likely result in many merchants having their rates increase.
If your merchant fee is rising and it’s because Visa and Mastercard increased their fees, confirm that no additional charges will be added.
Padded Interchange Fee Hike
Processing fees are comprised of three main components:
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- Interchange: The bulk of the processing fee. These funds go directly to the banks that issue your customers’ cards.
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- Assessment: The fees that go to credit card companies.
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- Markup: The fees that go to your processor.
Your merchant service provider has no control over interchange or assessment fees. The only fee they can control is their markup. Markups can come in the form of monthly fees, percentages, cents fees, or a combination.
At National Processing, we charge a flat margin in addition to the base interchange rate. This is known as interchange-plus pricing, and it’s the most transparent way to see your processing fees. It allows you to compare interchange charges to determine whether you’re experiencing a legitimate interchange rate increase or if it’s a padded interchange.
Some processors will pad the interchange fees and claim the increase is out of their control. Processors cannot lower interchange fees, but they can add to them.
Comparing interchange charges can help you determine whether your processor is padding the fee. If you suspect this is the case, consider consulting with an expert to confirm it and then switch to a different processor.
The Payment Processor Was Sold to Another Company
Unfortunately, it’s not uncommon for payment processors to be bought out by larger companies. When this happens, rate hikes often follow.
Unfortunately, it may not be easy to negotiate a lower rate, as the company is new and may not be familiar with your business.
What to Do if You Experience a Merchant Rate Increase
Merchant rate increases are inevitable. Merchant service providers are like any other business. Costs rise over time, which means that your merchant fees will also rise. However, there are some steps you can take to ensure that you’re not overpaying for credit card processing.
Negotiate with the Credit Card Processor
If your rate increases, you can negotiate with your credit card processor. True interchange fees are non-negotiable, but other fees may be.
If you’re a merchant with a high transaction volume, you may have more negotiating power. The processor may not want to lose your business, and you may be able to come to a compromise.
Take Steps to Reduce the Risk of Credit Card Fraud
If you’re paying higher fees because of high-liability transactions, it may be time to sit down and look for ways to reduce the risk of fraud.
There are two main ways to reduce your risk of fraud:
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- Entering security information
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- Swiping cards
Swipe cards whenever possible, as the fees for keyed transactions, are higher than swiped. Another way to lower your risk of fraud is to provide security information. Enter billing zip codes and security codes when prompted. Skipping this step may mean that you’ll be paying a higher rate.
Here are some other ways to reduce the risk of credit card fraud:
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- Upgrade to a point-of-sale system that processes EMV chip cards.
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- Utilize the address verification services from Visa, Discover, Mastercard, and American Express. These services match billing addresses with the card issuer’s information to verify the purchase.
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- For online purchases, collect as much information as possible about the card and the customer. Along with the entire credit card number, they should provide the CVV2, their phone number, and email address.
Taking steps to reduce the risk of fraud may help you avoid risk-related rate increases. At the very least, it will give you some leverage when negotiating a lower rate.
Consider Moving Away from Flat Rate Pricing
If you’re working with a processor that uses flat-rate pricing, you may want to consider other options. Flat rate pricing may sound appealing – and it does have its place – but it’s less transparent than other pricing models. In this case, all processing components (interchange, assessment, and markup) are lumped together. You have no way of determining what you’re paying for interchange, markup, and assessment.
The biggest issue here is that if your rates increase, you won’t be able to determine whether it’s because interchange fees are higher, whether the payment processor is increasing their markup, or if it’s a combination of both.
If your average transaction is greater than $10 and you process more than $5,000 in credit card payments each month, you may actually save money by switching to a different pricing structure. You’ll also be able to better scrutinize rate increases.
The Takeaway
Merchant fee increases are inevitable, but it’s important to have clarification on why and whether it’s the payment processor simply increasing their rates. When you have a better understanding of why your rate is increasing and how it will affect your business, you can weigh your options and determine whether it’s best to switch to a new merchant service provider.
