Have you ever looked at your merchant statement and thought to yourself, “Well, this is as clear as mud.” Ever wondered, “What are all these charges? What do they even mean? How much am I paying???” If so, keep reading. In this article, we’ll identify and explain the major components of a merchant statement and examine how to calculate the fees. We will conclude with a simple example, to make it all make sense.
Generally speaking, merchant statements can be rather convoluted and not reader friendly documents. They are comprised of a number of items, each with differing fees charged by various participants in the processing industry. Specifically, those fees are Assessment Fees, Interchange Rates and Processing Fees (charged both as a percentage of each transaction, as well as a flat fee). Below, we set out the basic components of what goes into the fees you pay, and where that money goes. This is not an exhaustive list, but it will provide you with a solid understanding of the major components of the merchant statement and where the majority of the charges come from and to whom that money is being paid.
Assessment Fees (Component #1 of 3)
Assessment Fees are levied by the major card networks (Visa and Mastercard) and act like a “tax” on each credit card transaction. The cost of these Assessment Fees is roughly 0.10% of each credit card transaction. That money is collected by your payment processor and remitted to Visa or Mastercard, for the use of their network. This is how Visa and Mastercard make the majority of their money. Think about it: Visa and Mastercard collect 0.10% of every transaction charged across the entire network! By the way… if you notice that your Assessment Fees are greater than 0.10% of the transaction as shown on your merchant statement, then that means your processor has marked-up the Assessments to squeeze (or hide) some extra profit from you, in addition to their Processing Fee (see below).
Interchange Rates (Component #2 of 3)
Interchange Rates are determined, charged by and paid to the bank who issued the credit card the customer is using. The Interchange Rates are charged to the merchant as a percentage of each credit transaction, varying from approximately 1.5% up to approximately 3% of the transaction amount, depending on which card is in use. There are literally hundreds of different credit cards out there, each with a different Interchange Rate associated with it and a merchant has little to no control over which card a customer will use for a transaction. Cards that are rewards-based (e.g. cash back or travel points, etc.) tend to have higher Interchange Rates than do cards with no rewards associated with them. If you’ve ever wondered who is paying for the cash back or travel points, take a guess. Yup, you guessed right – it’s the merchant, by way of the Interchange Rate.
Processing Fees (Component #3 of 3)
The Processing Fee is the mark-up charged by your payment processing service provider, usually as a small percentage of each credit card transaction; this is charged in addition to the Assessment Fees and the Interchange Rates. The Processor implements these charges to cover its costs for facilitating the transaction, from consumer to merchant and on behalf of the banks and credit card companies. As a rule of thumb, merchants who conduct very high annual credit card processing volumes tend to benefit from preferred processing rates, whereas smaller merchants tend to pay elevated percentages. Due to the fact that processing fees are independently determined by each processor and vary depending on the size and nature of the merchant, there is no “typical” or “average” processing fee. Processing Fees can be higher for “high-risk” industries or on-line based transactions, as they carry a higher risk profile for charge-backs. In addition to the small mark-up, your processor may also charge a nominal, per transaction flat fee for each credit card transaction processed – see below, “Per Item Fees.”
Per Item Fees (Flat Fees)
Per Item, flat transaction fees may also be charged by the Processor in addition to the Processing Fee, for each credit card transaction that occurs. The Transaction Fee is usually rather nominal – a few cents, per transaction – and is intended to cover network fees levied by the major credit card companies for use of their network.
How the Fees are Calculated
Now that we’ve reviewed the major components of the merchant statement, let’s turn our attention to the math. The best way to describe how Fees are calculated is to use an illustrative example.
Assume a merchant puts through a single purchase transaction for $100.00 in a particular month, by way of a customer’s Visa card. The Visa card used by the customer is a rewards-based card, having a higher Interchange Rate. At the end of the month, how much of the $100.00 does the merchant keep? Or, put another way, how much does this transaction cost the merchant?
1. Firstly, it depends on the type of credit card used. For the sake of this example, let’s assume the rewards-based Visa card has an Interchange Rate of 2.20% associated with it.
2. Next, we would add Visa’s Interchange Fee of approximately 0.10%.
3. Finally, we would add the Processor’s mark-up, or fee, to the cost of that transaction. For the sake of this example, let’s assume the merchant has a processing fee of 0.25% with its service provider, plus $0.06 per transaction.
So, here’s the math based on the assumptions outlined above:
$100.00 x 2.20% = $2.20 (Interchange Rate: paid to the issuing bank)
+ $100.00 x 0.10% = $0.10 (Assessment Fee: paid to Visa)
+ $100.00 x 0.25% = $0.25 (Processor’s mark-up / fee: paid to the Processor)
+ $0.06 (Flat fee: charged by and paid to the Processor)
Total: $2.61 (Total cost to the merchant of this particular transaction, using the above assumptions)
Accordingly, if the merchant only conducted one $100.00 transaction that month, the net deposit credited to the Merchant would be $97.39 ($100.00 transaction – $2.61 cost of transaction = $97.39 net proceeds). As stated earlier, there are other fees that appear on a typical merchant’s statement (E.g. Monthly administrative fees, PCI Compliance Fees, Terminal rental fee(s), etc.) but those are rather self-explanatory and beyond the scope of this discussion.
Merchant statements are complicated documents, comprised of a number of fees and charges. Each of those fees and charges are instituted by the various participants in the processing industry, charged in the aggregate by the Payment Processor and remitted on the merchant’s behalf to the said participants on a monthly basis. Charges per transaction will vary, depending on the type of credit card used. At the end of the month, a merchant will net the difference between the total credit card transaction amounts and the aggregate cost of each of the transactions. Other monthly fees likely will apply, other than the Assessment Fees, Interchange Rate and the Processor’s mark-up and flat fee charges, but those monthly fees are generally itemized and charged as flat fees, irrespective of processing volume.
For more information about this topic or to have a complimentary rate review for your business anywhere in Canada or the United States, call PayLite Merchant Services toll-free at 1-877-671-1635 and speak to a representative.