Many businesses need merchant accounts to take debit and credit card payments either via a chip and pin machine for face-to-face transactions of through a payment gateway for online and mail and telephone order (MOTO) transactions.
If you have already started to compare merchant accounts you will have discovered that prices can vary, to such an extent that choosing the right merchant account for your business can have a large impact on your profits.
If you already bank with a high street bank, then it is the best place to start.
They know you and your business; however they are likely to decline your application if you are a new business or they consider you to be high risk , in which case you will need to look elsewhere.
What fees come with a merchant account?
Getting a merchant account comes with a variety of fees, some periodic, others charged on a per-item or percentage basis. Some are set by merchant account providers but most per-item and percentage fees, also called ‘interchange fees’, are passed on to credit card issuers according to a rate schedule they set. Interchange fees vary based on card type and transaction circumstances. Transactions made by swiping cards through terminals are categorized differently from those manually keyed in.
- Discount rates refer to dues, fees, assessment charges, network charges and mark-ups for accepting credit and debit cards.
- Bill back/Enhanced recover reduced or ERR fees are interchange plus pricing fees. They’re called ‘bill back’ because you’re billed one rate and billed back another. You’ll typically see surcharges on your next statement though that would require a great deal of time to research the actual cost per transaction with this system.
- Authorisation fees, or ‘authorisation request fees’, are charged each time a transaction is sent to the card issuer for authorisation. These apply whether or not the request is approved but note that this is not the same as transaction fees.
- Transaction fees are charged when you accept your authorisation requests but only apply to those accepted without error.
- Statement fees are monthly fees associated with the statement you get at the end of each processing cycle.
- Monthly minimum fees cover costs to maintain your account.
- Batch fees, or ‘batch header fees’, are charged when you settle your terminal, ‘batch’ or send completed transactions for the day to your acquiring bank for payment.
- Customer service fees, or ‘maintenance fees’, pay for customer service costs and may also be known as ‘merchant support’, ‘customer support’ or ‘service’ fees.
- Annual fees pay for costs to maintain your account.
- Early termination fees are charged if you end contracts before their term. While terms of 1 to 3 years are typical, some have terms of up to 5 years and require one year prior notice. Some also charge statement fees and monthly minimums that remain prior to contract termination. Others may also assess lost profits based on assumed profits had the contract reached full term.
- Chargeback fees should not be confused with refunds. In credit card issuers’ rules, your processing bank is 100% responsible for all the transactions you make. Chargeback risks are taken most into consideration during contract application and underwriting.
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What pricing models do providers use?
Banks use several price models to bill for services rendered.
3-tier pricing is the most popular, simplest and most transparent pricing method. Merchant account providers group transactions into three tiers with respective rates.
These are charged when you accept a regular consumer credit card and process it in a manner defined as ‘standard’ by your merchant account provider using an approved credit card processing solution. It’s usually the lowest rate you’ll incur and the rate commonly quoted when you ask about pricing.
Also referred to as ‘partially qualified rates’, these are charged when you accept credit cards that don’t meet the standards for qualified rates. This may occur when you key in a customer’s credit card details to a terminal instead of swiping their card or when they use a special kind of credit card like a rewards card.
These are usually the highest percentage rates you’re charged. In most cases, all non- or mid-qualified transactions will take this rate like when you key in a customer’s credit card details to a terminal instead of swiping it and address verification isn’t performed; when a special kind of credit card is used and all required fields aren’t entered; and when you don’t settle your daily batch within the allotted time frame, usually past 48 hours from the time of authorisation.
6-tier pricing allows Visa and MasterCard to compete against PIN-based debit cards processed outside their networks. They lowered interchange rates for debit cards well below those for credit cards because some providers can pass on lower costs directly to you.
Interchange plus pricing uses rates in interchange tables and results in discount rates by adding interchange rates plus percentages and authorization fees. It is a common pricing model for very low and very high average tickets.
There are only a limited number of merchant account providers who publish pricing, as the majority negotiate prices on an individual business by business basis. An established high volume low risk business with a major bank merchant account could pay as little as a 1% charge on each tier 1 credit card transaction, while a higher risk merchant might have to settle for an account with a 3.5% transaction charge. There are similar disparities with set-up and monthly fees.
A comparison of transaction fees is useful, but taken alone it fails to tell the whole story; often there are other costs that you should consider.
One of these is rolling cash reserves that are retained by your merchant account provider as protection against chargebacks. These can be significant, and they can be held for up to six months before they are refunded to your current account. For instance, if your turnover is £10,000 a month and your rolling reserve 10%, then £1,000 a month will be withheld each month for six months. This means that your cashflow will have been reduced by £6,000 over the period before the money is refunded.
Another consideration is the settlement period. While some merchant accounts will transfer money into your current account within a few days, others may take considerably longer, possibly weeks.
Reducing the Cost of your Merchant Account
There are a number of ways in which you can try to reduce the cost of your merchant account.
As we explain in related articles, the way in which account providers view your risk has a huge impact on the fees you will be charged. Risk is assessed by many factors that you can’t change, for instance your business sector, however there are some that you can control such as your personal credit rating and that of your business.
The longer and more solid your trading history is, the more favourably you will be viewed. If you are a young business, then it pays to review your account regularly. You should be able to find better deals as your business grows.
If you can make a good case then you should be able to negotiate lower fees than the headline ones; remember that they want your business.
Some providers will offer discounts to members of the Federation of Small Businesses (FSB) which are greater than the cost of membership, so consider joining if this will help reduce your outlay.
Carrying out a UK merchant services comparison isn’t always easy as there are many factors that will affect the price. If you would like information on cheap UK merchant accounts for your business, please complete the simple quote form and we will get back to you with free no-obligation quotes and further information tailored to your specific requirements.COMPARE PRICES NOW