While it’s generally accepted that credit card customers often spend more than their cash-paying counterparts, the decision to accept credit cards is not without its own risks and costs. The costs associated with processing credit and debit cards can generally be grouped into five primary categories:
- The Interchange fees. The fee set by the Card Association (Visa, MasterCard, Discover) and paid to the card-issuing Bank. It is a percentage of each transaction plus a per-transaction fee, and varies based on the card type, your industry, the method processed, and several other factors. It represents the largest component of the fee structure, usually between 70% to 75% of the costs; and is, in essence, a fee for the overnight payment of funds to you, relieving you of any further concern for collecting from the customer, unless there is a dispute. Since they are set by the Card Associations, they are the same regardless of who you contract your merchant services through.
- Card Association fees. Each Card Association sets their own fees and contracts with financial institutions to issue their cards. They route their own transactions to the correct Issuing Bank for authorization and settlement, and charge a percentage of each transaction plus a per-transaction fee. These fees usually represent between 5% and 8% of the total cost, and are not negotiable.
- Processing fees. The processor, affiliated with an acquiring bank, is the financial institution that you contract with to accept and process your transactions for goods and services. Often you don't even know who your "processor" is, as you probably deal with an intermediary called an Independent Sales Organization (ISO) or Merchant Services Provider (MSP). Processor costs are typically covered in the margin charged by your ISO/MLS, and represent approximately 7% of the overall cost of a transaction.
- ISO/MSP/MLS. An Independent Sales Organization, also referred to as a Merchant Services Provider by MasterCard, registers with one or more processors and represents the customer-facing aspect of the relationship. ISOs handle the sales process, determining the best solution for each unique merchant and then providing customer service once the account is setup. Properly priced fees in this area should be around 15% of the total cost to process, and these are the only true negotiable fees in a merchant account.
- Third Party Providers. There are numerous reasons why a merchant may require services that are not provided by the Processor. Examples include, a middleware, often called a gateway, that connects a point-of-sale system or website to the processor. ISOs/MLSs that handle the end-to-end process of setting up merchant accounts will serve as resellers of these services to help steamline the process. Often ISOs can secure these services for less that going direct or using the processor to seure the added services. PCI compliance certification is also a third-party service that is typically provded thourhg the ISO/MLS. Unless you purchasing a very expensive POS system, these fees are generally between 1% and 3% of costs