Understanding the Impact of Credit Card Processing and Swipe Fees on Your Bottom Line

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Most businesses, no matter the size, simply cannot operate in today’s increasingly cashless society without accepting credit and debit cards. However, as card processing fees are usually among the three highest expenses for business owners, it’s critical to understand what those fees are, if and how they can be reduced, and their impact on your bottom line.

One of the most talked about fees in recent years has been the interchange or “swipe” fee. October 1, 2012, marked one year since the implementation of the Durbin Amendment, part of the Dodd-Frank Wall Street Reform Act, which lowered interchange fees from 44 cents per transaction to 22 cents (plus 0.05 percent of the volume of transaction).

While this issue was, and continues to be, one of the most hotly debated topics in the history of card payments—as trade associations and other industry stakeholders argue about its true benefits—it’s evident that the reform has been beneficial for business owners.

Reaping the “swipe” fee reform benefits
Swipe fees are a percentage of each transaction amount imposed by the card brands (Visa®, MasterCard® and Discover® Network; American Express charges a flat discount rate) that the issuing banks collect from businesses every time a consumer uses their credit or debit card. Interchange fees invariably represent the largest portion of a merchant’s cost of accepting cards.

Though you may think the interchange fee reduction may not seem significant, those per-transaction pennies can quickly add up. Consider this: In just one year, Heartland Payment Systems credited its merchant customers with more than $250 million dollars in signature debit interchange reductions resulting from the Durbin Amendment. While the savings for each business are determined by the volume and dollar amount of debit transactions, among other factors, Heartland’s average merchant experienced savings of approximately $1,000 annually per location.

In today’s business climate, it stands to reason many businesses could find a number of uses for these savings—that is, if they’re getting them. Unfortunately, while the Durbin Amendment was intended to offer financial relief to business owners like you, it doesn’t require that processors pass the fee reductions through to the merchant. Unlike Heartland, which passes through all savings, some processors absorb the windfall to benefit their own bottom lines rather than pass the savings on. For this reason, it’s imperative that you talk to your payment processor about their pricing model to ensure you’re getting 100 percent of the savings. If the processor is not forthcoming, it’s time to find a new one.

Understanding card processing beyond interchange fees:
Since card processing statements can be very complex and typically outline a number of fees, you should understand what exactly you’re paying for and why.

There are four primary entities involved in a card transaction: the merchant/business, a merchant processor, the card brands and the issuing bank. The merchant processor processes the transaction on behalf of the merchant, sending the transaction to the card brands, which in turn send it to the issuing bank for authorization. The issuing bank then settles funds to the card brands, who settle funds to the merchant processor, which makes sure the merchant gets its payment. Merchants don’t have direct agreements with the card brands or the issuing banks but enter into agreements with merchant processors.

There are three components of fees a merchant faces when a transaction is processed.

Interchange fees:
These fees are set by the card brands and charged to the merchant. They’re a combination of a per-item fee and a percentage of the sale, and they are paid to the issuing bank. This fee is collected by the merchant processor and passed on to the issuer through the card brand. It was these fees that were limited for debit transactions by the Durbin Amendment.

Dues, fees and assessments:
These are fees set by the card brands (Visa, MasterCard or Discover) and charged to the merchant. These fees are a combination of a percentage of the sale and a per-item fee, and they are collected by the merchant processor.

Acquirer fees:
These are fees set by the merchant processor and charged to the merchant. The acquirer may charge its fees separately, in a pricing approach known as “interchange plus,” in which the interchange fees and the card brand assessments, as well as the acquirer’s fees, are charged separately on the merchant statement. Alternatively, the acquirer can establish a fee schedule that represents one or more discount fees, which would include the interchange and assessments, as well as the acquirer fees. In either case, the acquirer’s fee covers the cost of processing and servicing the merchant account, including the acquirer’s profitability.

Because every processor approaches pricing to the merchants differently, it’s up to you to know which questions to ask. You can find helpful information on educational websites such as www.MerchantBillOfRights.org or often through industry trade associations.

Lookout for hidden fees:
Membership fees, access fees and compliance fees are just a few of the many vague, deceptive fees often found hiding in processing statements. Unscrupulous processors often charge hidden or “junk” fees, hiding them behind cryptic codes, jargon and fine print in offers and contracts. Some will also use seasonal interchange increases in April and October to their advantage by not disclosing the breakdown of costs, allowing merchants to believe that card companies are charging higher interchange rates than they actually are. Many processors also tend to quote a low rate just to make the initial sale and fail to point out that only a small percentage of the business owner’s transactions qualify for that special rate, while the remainder will be charged at a fee that could be as much as double or triple that low rate.

These hidden fees represent a substantial toll on merchants’ bottom lines, at a time when small- and mid-size businesses are desperately trying to grow their revenues. By learning the facts about payments processing, you can eliminate hidden fees and reduce your out-of-pocket expense on every transaction and, most importantly, put these savings toward growing your business.

About Robert Baldwin 1 Article
Robert Baldwin is vice chairman of Heartland Payment Systems (NYSE: HPY), the sixth largest payments processor in the United States. Heartland delivers credit/debit/prepaid card processing, school solutions, loyalty marketing services, campus solutions, payroll and related business solutions and services to more than 250,000 business and education locations nationwide. A FORTUNE 1000 company, Heartland is the founding supporter of The Merchant Bill of Rights, (see www.MerchantBillofRights.org), a public advocacy initiative that educates merchants about fair credit and debit card processing practices. The company is also a leader in the development of end-to-end encryption technology designed to protect cardholder data, rendering it useless to cybercriminals. For more information, visit HeartlandPaymentSystems.

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