How Are Fees & Charges For High Risk Merchants Calculated?
As a high risk merchant, the fees and charges applied to your credit card processing capabilities are calculated based on a number of different factors, including:
- Industry. The higher the risk associated with your industry, the higher the fees and charges for credit card processing. Industries are categorized based on historical data from businesses operating within that industry.
- Transaction Types. If your business is mainly accepting credit card payments via a terminal in-store, the fees will generally be lower compared to accepting card-not-present payments online or over the phone.
- Credit Card Type. Every credit card type has a different rate associated with it. For example, a no-frills, basic credit card will incur a lower charge than a rewards credit card.
- Ticket Volume. If your business processes a large number of tickets, acquiring banks will generally offer a lower rate.
Who is Involved?
The first step to understanding fees and charges for high risk merchant accounts is to know about the different parties involved in every transaction. These include:
Credit Card Associations
These are the major companies such as Visa, MasterCard, Amex, and Discovery who create the credit cards. The main rules regarding credit card transactions and processing are set by these companies.
Credit Card Issuing Banks
Issuing banks are the financial institutions who issue the credit cards on behalf of Visa, MasterCard etc. Some credit card associations such as Amex and Discover do not use issuing banks and instead develop and issue their own credit cards.
Credit Card Processors
Credit card processors are also called “Acquiring Banks” and act as a middleman between credit card associations and the merchant. They pass along information between both parties, allowing for authorization of a transaction so that it can be completed. It is possible that a merchant will come across several credit card processors during a single transaction – one for technical support, one that creates statements, and one that issues the money to a bank account.
Merchant Account Providers
Merchant account providers manage the credit card processing capabilities of a business. They often have the ability to find an acquiring bank for high risk merchants who have been rejected elsewhere and provide support to merchants.
The payment gateway is a portal which is generally used for online shopping. It sends transactions to an acquirer to authorize any given sale. Read more about Payment Gateways.
Different Types of Fees in a Given Credit Card Transaction
Every time your business accepts a credit card transaction, there are various fees applied. Some of the fees are charged to all transactions, while some are only charged in particular circumstances.
Transactional fees represent the largest cost when processing credit card payments. These fees are applied every time a client pays with a credit card and are broken down into two categories: Interchange Reimbursement Fees and Assessments.
Interchange Reimbursement Fees are usually calculated using a percentage of the transaction value along with a flat transaction fee (for example, 2.3% + 0.15). On the other hand, Assessments are usually calculated using a percentage of the total monthly transactions. High risk merchant accounts are generally quoted interchange transactional fees due to the risk associated with the business.
In addition to transactional fees, there are flat fees which cover a wide range of services, including:
- Terminal Fees. If you operate a physical store and use a credit card terminal to process credit card payments, there are usually fees associated with the use of the terminal. In some instances, it is possible to purchase the terminal outright, saving recurring fees in the long-term. If you operate your business solely online, you do not have to worry about terminal fees.
- Payment Gateway Fees. A payment gateway is similar to a physical terminal except it is used to process online transactions for e-commerce businesses. These fees are similar to terminal fees. However, sometimes payment gateways are included in the merchant service free of charge.
- PCI Fees. These represent fees that go directly to the Payment Card Industry for either compliance or non-compliance. For compliance, the fees ensure your business remains within the latest regulations. For non-compliance, the fees are charged due to your business not working within PCI standards, costing your business extra money in the long-term. Most providers ensure you are in compliance at all times.
- Monthly/Annual Fees. These fees are usually charged on a monthly or annual basis to cover the use of a service provider. These fees cover customer care, setup and maintenance of your account, and much more.
While transactional and flat fees are almost always charged, incidental fees only occur due to certain circumstances. For instance, a chargeback will incur an incidental fee. There are several different types of incidental fees:
- Address Verification Service (AVS). It is essential to protect your business against fraud and using an address verification service is one such way to help prevent online credit card fraud. Implementing this system during your checkout process can incur a small additional fee.
- Chargeback Fees. If a client files a chargeback dispute against a purchase made from your business, a chargeback fee is incurred. If the chargeback is processed, you could be charged an additional fee as well as losing the sale. See Ten Ways To Avoid Chargebacks to prevent this from happening.
- Batch Fee. When you submit a batch of transactions, a fee is charged to process these transactions. The fee is very low for this process and isn’t worth worrying about too much.
- NSF Fee. If for any reason you cannot cover your merchant expenses, an NSF (non-sufficient funds) fee is charged to your account.
Different Types of Merchant Pricing Models
There are four different pricing models for high risk merchant accounts, each of which can affect the fees you pay when processing credit card transactions.
The first is known as Interchange Plus and offers transparent fees and charges for merchants. This pricing model shows fees and charges as itemized lists on your statement so you can clearly see where each fee has occurred. While this is great for seeing an exact breakdown of fees, it can take a lot of time to find where all fees have been charged on your statement. High risk merchants may not qualify for an interchange plus pricing model.
The Tiered pricing model is the most popular for high risk merchants and comes in three tiers – qualified, mid-qualified, and non-qualified. Each merchant is assessed on a range of criteria and assigned to a category. Merchants who adhere to correct practices when processing credit card transactions may be promoted to a higher tier, while merchants who fail to meet standards may be downgraded to a lower tier.
Subscription or Membership
A newer form of the pricing models, subscription or membership is similar to interchange plus in that the fess are itemized and transaction fees are separate from the markup. However, this pricing model doesn’t charge a percentage markup and instead uses a set fee per transaction. This method is ideal for businesses who process high-value tickets.
Similar to the tiered pricing model, Blended works with a set percentage and transaction fee for all merchants regardless of cost. This makes the rates very transparent and usually, there is no monthly fee associated with the merchant account. This is a great option for low volume merchants and a popular pricing model for high risk merchants.
At EthosPay, we specialize in finding the best merchant account for your high risk business. We consider all available options to choose merchant services that are tailored specifically for your business. Apply Today and see how EthosPay can help your business to start accepting credit card payments in just 72 hours!