Beware Hidden Increases from Credit Card Providers

The fact that some credit card providers periodically sneak in cost increases to their merchants isn’t new. The providers often do this with a notice like this to their merchants: “The card companies have recently modified their rates and fees so we are passing on the cost increases to the merchant.”

But the cost increases implemented by some of these providers have little or nothing to do with the actual card company modifications. And there are other ways in which providers can increase your processing cost; they may have nothing to do with changing the rates and fees stated on your contract.

Increase Processing Cost without Changing Rates, Fees

Providers can increase your processing costs without changing your rates and fees. Here is an example item from an actual March 2014 statement.

• Description: Visa Refund Customer
• Amount: $470.00
• Rate: 1.76%
• Fee: -$8.27

Visa and MasterCard returns the interchange to the provider when you refund your customer. The amount returned to the provider is not necessarily the exact interchange, but it’s very close. In March 2014, this example provider, above, properly passed the returned interchange ($8.27) to the merchant.

However, the provider made a policy change after March 2014 and is now keeping the returned interchange. Refund categories are no longer stated on the statements.

A provider’s return interchange policy is important to understand, especially for ecommerce merchants as they generally have more refunds than brick-and-mortar merchants. Some providers return the interchange as the above-mentioned provider did in early 2014. But some keep the interchange, as is now the case with the above provider. Moreover, some providers not only keep the interchange but also charge the merchant an additional processing fee for the refund.

Merchants, and particularly ecommerce merchants, should know how their provider handles return interchange before signing a contract. I have seen merchants overpay by thousands per year simply because of the provider’s return interchange policy.

Review the Statement — And the Provider

Merchants need to review their provider as well as their statements.

Do you periodically search on Google for your provider to see if it’s going through changes or to see ratings and reviews about the company? Do this at least twice per year, especially prior to your contract expiration date.

There is consolidation occurring in the credit card processing industry. Some of the bigger providers have been purchasing smaller ones, especially those with a niche. Your cost and possibly your terms and conditions may change if your provider is purchased by another company.

I’ve recently encountered disturbing audit results with some merchants. For example, in June 2014, a merchant’s rate was on an interchange plus pricing plan, whereby the provider had a set markup over the card companies’ wholesale cost (interchange and the pass-through fees).

Here is an example of a two itemized items from that statement in June 2014. I have removed a per-item fee that the provider added to the interchange fee.

• Description: Interchange
• Amount: $4,166.81
• Transactions: 27
• Fee: $8.02

• Description: Interchange
• Amount: $2,104.30
• Transactions: 6
• Fee: $49.00

I can verify that the $8.02 charge on the $4,106.81 is properly set at the published regulated debit rate of 0.05 percent + 22 cents. The $2,104.30 volume is for EIRF (Electronic Interchange Reimbursement Fee) credit transactions and is properly charged at the published interchange rate of 2.30 percent + 10 cents.

Fast forward to March 2015, however, and this merchant had regulated debit and EIRF credit card transactions as shown below. The statement had not changed and the merchant was aware of any pricing changes.

• Description: Interchange
• Amount: $4,386.66
• Transactions: 55
• Fee: $29.19

• Description: Interchange
• Amount: $2,152.30
• Transactions: 11
• Fee: $72.13

I can see that regulated debit cards of $4,386.66 are now being surcharged 0.5 percent and the rate is now 0.55 percent + 22 cents. The EIRF credit transactions of $2,152.30 are being surcharged 1.0 percent and the rate is now 3.30 percent + 10 cents. In fact, all debit and credit card transactions are now being surcharged 0.5 percent to 1.0 percent.

Merchants need to periodically review their provider’s online information as well as review their statements. One easy way to determine if your provider has increased or added new rates or fees is to simply calculate the effective rate of your current statement against two or three statements from a year or more ago. Say you processed $100,000 in April 2015 at a cost of $2,300. Your effective rate was $2,300/$100,000 = 2.30 percent.

The card companies have not implemented any significant changes over the last year unless you accept a high percentage of non-U.S.-issued cards. Therefore, if your effective rate was consistently around, say, 2.10 percent in March, April, and May of 2014, and now it’s 2.30 percent, this could indicate that your provider has added costs beyond card company changes.