How to Identify Dubious Credit Card Processing Fees, Part 2

Editor’s Note: This is “Part 2” of a three-part series. “Part 1” we published last month.

The purpose of this series is to identify dubious fees that are commonly charged by certain credit card providers. Keep in mind, there is a lack of enforced standards in the card processing industry and all providers do not impose or calculate rates and fees in the same manner. It is possible, therefore, for two providers to offer seemingly the same rates and fees but still have significantly different processing costs to merchants.

Refund Processing Fee

All merchants should understand how the provider processes refunds before they sign the processing agreement. This is especially important for ecommerce companies because they likely have more refunds than the typical card-present merchants.

When a merchant refunds the customer for a returned item, Visa and MasterCard return the interchange fee for the original sale to the provider. The interchange rate generally makes up the majority of the entire processing fee. The amount returned by Visa and MasterCard may not be the exact interchange charged for the sale because of the tiered interchange refund schedule they use. Nonetheless, the vast majority of the interchange is returned to the provider. However, there are no enforced industry standards that require the provider to give the interchange back to the merchant. Even worse, some providers not only pocket the returned interchange but they also charge the full processing fee on the refund transaction. This dubious fee costs many ecommerce merchants thousands of dollars each year.

Providers generally handle refunds in one of four ways.

  1. Return the entire processing fee. Some providers not only return the interchange but also return the entire processing fee. They may charge a transaction fee (say 10 cents) for the sale and the refund.
  2. Return the interchange. Some providers properly return the interchange to the merchant. They charge their markup (say 0.10 percent) and a transaction fee on the sale and a transaction fee on the refund.
  3. Keep the interchange. Some providers keep the interchange. In fact, they keep the entire processing fee change on the sale and charge a transaction fee on the refund.
  4. Keep the interchange and charge another processing fee on the refund. Some providers keep the entire processing fee, including the interchange, charged on the sale and then charge another processing fee on the refund.

The cost difference between Provider 1 and 4, in the examples above, can be huge even if they both offer the same rates and fees. For example, say a merchant had 50 refunds totaling $10,000 and say the effective rate was 2.5 percent + $0.10 per transaction. Provider 1 would charge only 50 transaction fees for the sales and 50 transaction fees for the refunds — for a total of $10. Provider 4 would charge 2.5 percent + $0.10 on the $10,000 in sales and then charge 2.5 percent + $0.10 on $10,000 in refunds — totaling $510. The difference between Provider 1’s $10 fee and Provider 2’s $510 fee is material, especially when you consider the merchant’s net sales were zero for those transactions.

Address Verification Service Fee

The address verification service fee — AVS — is a fraud reduction tool provided by credit card associations and issuing banks to check the credit card billing addresses submitted by customers. Unfortunately, the AVS fee is one the most hidden and misleading fees used by some providers, to generate revenue at a merchant’s expense. This fee can have a material impact, especially for merchants with a low average sale amount or a very high transaction volume.

Moreover, many salespeople and customer service personal at merchant account providers do not know the true fees charged by the card companies. They may say that the AVS fee charged by the provider is a card company fee and not their fee. This is not necessarily accurate.

In fact, MasterCard charges a $0.0075 (0.75 cents) per transaction AVS fee for ecommerce and other card-not-present merchants when the merchant uses address verification service to validate a cardholder’s address. MasterCard also charges a $0.005 (0.5 cents) per transaction AVS fee for card-present merchants when they use the service. Nonetheless, some providers will try to charge their own AVS fee on all debit and credit card transactions. Generally, these providers will charge $0.05 to $0.15 per transaction. For these providers, the AVS may be used to make their rate of say 0.10 percent + $0.05 look better than the competitor’s rate of 0.10 percent + $0.10 when in fact they are charging a $0.10 AVS fee on top of the rate and the competitor doesn’t charge an AVS fee.

American Express Transaction Fee

It wouldn’t be surprising to find you are paying a higher per transaction fee for American Express than you are for Visa, MasterCard, and Discover. When auditing statements, it isn’t unusual for me to see the Amex transaction fee charged by the provider to be 2 to 4 times more than the other card brands. There is no justification for the huge difference in these transaction fees other than the provider knows the merchant isn’t concerned with the fee. It can be another dubious revenue generator for the provider.

Note: This series continues at “Part 3.”

Phil Hinke
Phil Hinke
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