Sunday, July 1, 2012

Considerations for E-Commerce Credit Card Merchant Services Fees

Considerations for E-Commerce Credit Card Merchant Services FeesWhat are acceptable rates you should agree to pay for your credit card merchant services? This is of course the most common question we are asked by businesses looking for processing services. Then we also get asked why card-not-present rates are higher than face-to-face rates. In this post I will explain the reason for it the discrepancy and will give you a template on the fees you should agree to be paying.

Why Are E-Commerce Processing Fees Higher?

This one is simple. E-commerce transactions are more expensive, because historically they have produced much more customer disputes than transactions processed by brick-and-mortar businesses. Disputes are a problem in themselves, however, to make matters worse, they often deteriorate into the even more unpalatable chargebacks, which are the biggest reason why Visa and MasterCard suspend merchant account services.

The Issue with Chargebacks

The problem with chargebacks is that, if their rate jumps above 1 percent of your total transaction count, your credit card processing service will be suspended one of the Credit Card Association, if at all it comes to that. What I mean is that your acquirer will be the one to suspend your account way before the rate comes anywhere close to 1%. Why? Because acquirers also get fined by the Associations quite steep penalties for any of their merchants whose chargeback rate exceeds this threshold and they won't accept that.

E-Commerce Rate Suggestions

So what should you pay for your w-commerce merchant account? Here are my suggestions:
  • Discount. E-commerce transaction processing rates should never exceed 2.11 percent for credit cards and 1.88 percent for debit cards. These rates, however, will be for the so-called "regular cards." There are other types like rewards, commercial, purchase, etc., that are usually processed at considerably higher rates. However, the type of pricing model you have set up by your processing bank will have much to do with the concrete rates you get. Some models, for instance, will give you one rate for both debit and credit cards. The problem with this type of model is that the interchange rates for the various debit cards are much lower than the ones for credit cards. What you should take of that is that such models will have you overpay. A considerably better model would be one based on the interchange-plus pricing structure, which provides for your acquirer's fee is directly added to the interchange fees set by the Associations. While you don't have control over what the Association charge, you can ensure that your processor charges the same for all transactions.
  • Transaction charges. Transaction fees at $0.30 per item should be acceptable.
  • Application processing and set-up fees. Do not agree to any such fees!
  • Payment gateway fees. Payment gateways are virtual tools used to connect shopping carts of online stores with the acquirer's payment systems and communicate information back and forth between the two of them. For instance, the most widely used gateway is Authorize.Net. A set-up fee of under $100 should be considered acceptable and a monthly fee of $10 is also OK.
  • Monthly statement fee. This one is known by any number of names, but in any case it shouldn't be in excess of $20 per month.
  • PCI compliance fee. This one is a new fee, charged either on a monthly or yearly basis. Whatever the calculation, the fee should remain below $150 a year.
Finally, evaluate each pricing proposal you receive as a whole, not by looking at its components separately.

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