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Factors That Determine the Transaction Fee Effective Rate

Transaction fees, also called effective rates or merchant fees, are fees that are charged to you by your payment processor on each transaction processed. The fee includes the bank interchange, the credit card association fees, and the processor fee. There are several factors that will determine your transaction fees:

Your type of business. A women’s clothing store operates differently than a car dealership, which operates differently from a convenience store or doctor’s office. The type of business you are in, and the potential risk (or non-risk) that it carries, is one factor that will affect your fees.

How you are going to process payments. The rate you will get will depends on your business categorization, whether consumers are swiping their card at your physical store (called a card-present-transaction or face-to-face payment), processing payments through a website or online business (called a card-not-present transaction, or CNP for short), or taking orders over the phone or through the mail. Each of these transaction types carries a different level of risk, which affects the transaction fee.

The volume of your sales and the average ticket. Volume means the number of electronic transactions that you process each day (and does not include cash transactions). Ticket size indicates the average size of the order, whether it’s $10, $100, or any other number. Both of these factors will be considered when setting your merchant fee. Generally, the more volume you do, the lower your fee will be. However, don’t over-estimate volume, as you can be penalized by your processor if you come up short on sales.

The types of payments you accept. The card associations have issued several “tiers” of credit cards, from standard, no-frills cards, to rewards cards, to corporate cards. Some cards will be processed at the qualified rate, while others will be categorized as mid-qualified, resulting in a higher fee overall.

Interchange rates set by the card associations. Interchange is the basic flat fee charged by Visa and MasterCard for credit card or debit card transactions, and by Discover, American Express, and JCB for credit card transactions. Visa and MasterCard’s interchange rates are publicly available, but rates for Discover, American Express, and JCB are available only through the association directly. Rates will vary by card categorization and by association.

Interchange is often seen as the most important fee factor because it is set by the associations and is non-negotiable with your processor.

Published: June 11, 2013
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