Credit Card Processing Fees Explained: Are You Overpaying? | Merchant Pricing 101 | PEP127

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And if you don't opt up, you agree to it.
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Now we had one case recently where the gut the guy wasn't getting his statements.
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And they're going, oh, they were in the portal.
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And you know, it says on here, if you didn't dispute these, you agree to it.
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And we're going, but when did I even get portal access?
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And this guy had been doing it, it was like years and years and years until finally he's looking and he's like, I'm getting charged like 15% on my cards.
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And this guy was selling uh he was selling oil to houses.
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He was like a gas provider in the Midwest.
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And I'm like, don't mess with that guy, or people are gonna freeze.
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Welcome to the Payments Experts Podcast, a podcast of Global Legal Law Firm.
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We hope that you enjoy this episode.
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Really excited.
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We've got a in-studio and kind of remote podcast today.
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Jessica Walsh, associate attorney in our transactional department, is joining us in studio.
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And as well, we're joined by our managing partner of the law firm, James Huber.
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James, Jessica, looking forward to a great conversation today talking about merchant pricing and explaining that for our audience.
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Let's get going.
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I was discussing with a relative of mine the this podcast that I was putting together for the firm about merchant pricing.
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And she actually was a merchant for a long time, about 10 or 15 years.
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She recently retired, and I was describing to her the different kinds of pricing.
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And I was describing, you know, things like interchange, Durban, and she was telling me that her effective rate was like 3.1%.
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And she had never heard of Durbin and she didn't know about interchange.
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And it wasn't because she, you know, isn't intelligent, she's a very intelligent woman, but she just, you know, doesn't have the tools to understand this.
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And frankly, I'm not sure that she would need those tools because, you know, she was a a doctor and not, you know, um a lawyer, as opposed to, you know, me, I'm a lawyer in this space, and I like if I had a problem with my car, I wouldn't know what to do.
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I'd take it to a mechanic.
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So, I mean, that's really what you need to know about your business in a you know, a merchant-facing standpoint.
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That's great.
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I mean, most merchants that we run into, they're not so much having issues with their pricing, but when we're dealing with other issues, we look at their agreements and we're going, you know, this is generally not the best pricing.
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The best pricing is the least expensive pricing.
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So there's multiple types of pricing out there that the ISOs and the processors sell.
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And, you know, it's getting better nowadays, but early on, you know, you'd have these ISOs come in and say, hey, we've got this new pricing model, puts everything in buckets.
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So, you know, you've got qual, non-qual, low qual, high qual, mid-qual, um where these transactions fall, and then guess where they all fall?
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They fall into higher buckets.
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So now, because it's getting more competitive and hopefully more so after today, merchants are educated enough to um actually negotiate these.
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And we always say, you know, we're surprised that more merchants don't contact us on the front end because these contracts are negotiable.
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You know, we we saw I saw this more and more in as uh cannabis payments came in, all of those guys had gotten burned so many times.
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And then when some more legitimate ISOs and processors got into the space, they were willing to negotiate with these guys on things that typically it's take it or leave it.
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Here's the agreement, and we can negotiate on the rates, the rest of it's not there.
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But today we're gonna focus on the different types of pricing modules.
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And Jessica is our resident expert in this, so why don't you kick us off?
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Yeah, so like you were saying, James, I think it's interesting to note that um, you know, different types of pricing are not as transparent as other types of pricing.
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Like, for instance, the popular forms of pricing now are flat rate, and then we've got tiered, like you were discussing, and then we've got interchange plus and interchange plus plus.
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And interchange plus and interchange plus plus are significantly more um transparent than flat rate or tiered pricing, because you can see the interchange itself with the processor and the acquirer markup.
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But unlike um interchange plus, when you have flat rate pricing, it's just one rate for all transactions or it's one rate for type of transactions like um in-person debit or you know online credit, where um the price of processing that specific transaction isn't fully disclosed or understood to the merchant.
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And it's similar to what you were saying with the tier pricing, where they have the qualified, mid-qualified, and non-qualified, where um qualified is the the cheapest.
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And that's mostly associated with like in-person debit as opposed to you know mid-qualified and non-qualified, which are online.
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The pricing for small merchants is ends up being more expensive because they pick, in their mind, the easiest option, which is you know, either flat rate or tiered pricing, um, when there are maybe more complex types of fees that ultimately are usually cheaper in the long run and more transparent, like Interchange Plus or Interchange Plus Plus.
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So I think it's important for merchants to have, you know, in their minds this idea of what they're looking for before they go out and start to look.
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And I think what would really further that for merchants would be, you know, some sort of education where they are, you know, taught how to not only find payments, like the right processor at the right rate for them, but also to avoid a lot of the pitfalls of payment processing, like you were talking about earlier, Jim's, with the merchant agreement, because I mean those are very long, like super long.
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Um, and you know, pretty complex, I think.
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And they're super, super processor friendly, really not friendly for merchants unless you are able to negotiate these those yourself.
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But you really don't, I mean, I haven't really seen a lot of negotiation on the merchant end.
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I don't know about whether you have James.
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Yeah, I mean, we see quite a bit.
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One of the issues that is unfortunate is, you know, we can all agree interchange plus pricing is the most transparent pricing.
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That's where you're taking straight interchange and then putting a little piece on top of it.
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The problem is there are ISOs out there and there are processors out there that pad interchange.
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By design, it is almost impossible to charge interchange.
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The most common example that we run into in litigation is where I can win every single litigation case saying that you're mischarging me.
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You know, no, that's not a statement guaranteeing results or anything, is the kilobyte fee.
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This is a dynamic fee that every single processor rounds and they charge a flat rate.
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A guarantee, not one has ever rounded it down so that they're losing money.
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So by design, that one fee, the kilobyte fee, they're doing what we we would call padding interchange.
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So it would just be too easy.
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So, you know, interchange.
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I think there's 147 different interchange categories, and how that is is it's a you know, a debit card with a pin, a debit card, no pin, a debit card over the internet, this type of rewards card that's in person.
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And so you do that, you know, complex thing that gives you, you know, 100 147.
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Last time I checked, which is a long last time I counted, which was a long time ago.
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I'm sure there's more now.
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It's really hard to charge that.
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So when you're some of some you know, ISOs and processes are advertising interchange plus, but they're just bucketing these all into one different fee type, also.
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So to get true interchange plus, this would be something for a merchant to go, no, I want true interchange plus.
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Show me.
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Because otherwise, you're just still getting the you know, tiered pricing, really, where it's still falling into different buckets.
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Yeah, and it's rough.
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I mean, that's still probably your best option because Jess can go over the other models that that are out there, which uh, you know, none of them are designed to lose money.
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They're designed to make more money.
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You're not gonna, you know, the flat rate, you're never gonna get them because you're, you know, charging a flat rate.
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You know, it's not like, you know, we'll do we'll do work for the firm where it's, you know, okay, it's a flat, this fee will do all the work.
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And sometimes the clients come out better because, you know, the other side created all these issues or something.
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That's not this case.
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The flat rate is likely not your best option.
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Yeah, especially with um debit cards.
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I was looking at um flat rate pricing right before this, and I think it's something like 2.6 plus um like 10 cents or something, which is crazy considering that, you know, um like regulated Durban issuers can only charge 21, 22 cents plus like five BPs.
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I mean, the the I mean of course un unregulated debit is you know not subject to Durban and they can charge, you know, other higher fees, but I mean when even then it's like one or two percent, I think, for for interchange on those, and like where is the difference?
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Like where is the difference going that 2.6% plus 10 cents?
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Like that's so much more than like the actual amount of interchange.
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Jessica, what do you mean by unregulated debit?
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Can you tell our audience about that?
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Yes, yeah.
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So um regulated versus unregulated debit is under Durbin, which capped the interchange fees on debit cards issued by banks with, I think, over$10 billion in assets.
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So those big, big banks cannot charge um higher interchange fees than that.
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Whereas other banks who now on purpose are like staying below that line can still charge um above Durban fees um however much that they you know think that they can charge.
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And then also, I mean, um these unregulated, I mean, of course they're regulated, but um, you know, with uh with respect to Durban, unregulated banks are I think also more likely to be able to provide um rewards to consumers that went away during um or after the implementation of Durban, like uh lower debit fees or free checking for debit or maybe even uh rewards on debit which went away after uh Durbin went into effect because of the lower interchange rates.
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So on that point, I think another thing to consider with regard to merchants and pricing is that when merchants look to offset their pricing via surcharging or cash discounting, I think it is um more difficult, especially related to surcharging, because the calculation of the MDR, the amount that merchants can charge for their surcharge doesn't include all of the things that you might need to process transactions like POS devices and also SaaS fees, other kinds of fees like that that aren't included in the calculation of the MDR set forth by the card brands.
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Or I don't like it, but I find it interesting in a kind of a cringe way of when they're saying, well, you know, when they're doing these surcharging regulations, they're going, hey, you can't charge more than you're being charged.
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And look right here, your rate is 2.8%.
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But I'm going, well, hold on.
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I have a monthly compliance fee, I have a PCI compliance fee, I have a data security fee, I have a statement fee, I have a statement warranty fee, I have a batch charge, I have an authorization charge, I have a pre-authorization charge, chargebacks, retrievals, account fees, it goes on and on and on.
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And, you know, for these huge companies, even if they're charging a nickel or a penny for these things, they add up.
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And I always like to use the restaurant business where a really successful restaurant, their margin is 10%.
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And if you're getting eaten up by these little fees, and all those ones that I just brought up, like a PCI compliance fee is generally like 15 bucks a month.
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Um, and that's 15 bucks a month that you know you could have bought, you know, probably about 30 egg roll shells to put around your egg rolls.
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And you know, it it cuts in and it adds up.
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So aside from just the fees and the rate and the fee structure, you've really got to look on the agreement and see all of those fees.
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Now, one of the other tricks that the processors will do, you know, ISOs will do that aside from all of these fees that some of them are just made up, is they'll send out a statement message that says, your fees have gone up.
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And if you don't opt up, you agree to it.
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Now we had one case recently where the gut the guy wasn't getting his statements, and they're going, oh, they were in the portal.
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And you know, it says on here, if you didn't dispute these, you agree to it.
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And we're going, but when did I even get portal access?
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And this guy had been doing it, it was like years and years and years until finally he's looking and he's like, I'm getting charged like 15% on my cards.
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And this guy was selling uh he was selling oil to houses.
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He was like a gas provider in the Midwest.
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And I'm like, don't mess with that guy, or people are gonna freeze.
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So um, you know, that that ended up being a successful one for us, but it's not just the rate, it's all these fees that are added on and the statement messages.
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So you think you're safe once you've got a good rate.
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That's how a lot of them will do it.
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They'll sell you on this price and then just crank the fees up.
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What percentage of merchants out there in the United States do you, Jessica, do you, James, do you believe no even two or three of those fees exist?
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How many merchants are completely just unaware, you guys, of those fees that you were listing out, James?
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I was blown away by the number of fees that you just rattled off off the top of your head.
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And I'm sure there's scores more.
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I would say it's, you know, it's the 0.1% that are actually educated.
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Wow.
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I yeah, I was gonna add also that I have been, you know, I do research in my free time on, you know, differential pricing and things like that because it's really interesting to me.
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And I came across this article related to surcharging where the author was really advocating for merchants to receive more education because they didn't, I mean, a lot of them don't understand their fees and they don't understand how to offset their fees.
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And she was all likening it almost to like a consumer protection issue where these, especially like small merchants, needed to be educated so that they could protect themselves against, you know, increases in fees where they could, you know, effectively offset the prices of um processing if they chose to do so, but they were really unaware of their options because they they lacked the education to maybe pursue their options.
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I think related to merchant education, I mean the card brand settlement was it it hasn't gone through yet, but it was preliminarily approved in June.
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And on that point, um, V said MasterCard were supposed to or are supposed to provide education to merchants.
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So I think that would be really interesting to see like first the availability of the education, and then also like the quality of the education.
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I know MasterCard has an education portal.
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I've seen the portal, I mean I haven't been able to access the portal because I'm not a merchant.
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But I mean that would be really interesting to see what they have and like if it's behind a paywall, and also how much it costs to access um those courses, or if there are some that are cheaper, um, that I think would be really interesting.
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I've got a question for you both.
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That something I can I see on my end a lot is you've got a merchant, you know, mom and pop shop, and to them, you know, paying a law firm, let's just call it, you know, maybe a$1,000, couple thousand dollars to, or maybe more, to review their MPA, et cetera.
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Can you talk to that merchant, Jessica, James, why is it in their benefit potentially to actually pay a couple thousand dollars uh to a law firm to review their MPA, to maybe help them negotiate that MPA?
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What kind of savings do you think they could be making for the months and years to follow?
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Just not just the savings on pricing and things like that.
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It's that these agreements are some of the most draconian agreements out there by design.
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And I can say that confidently because we've written a number of them.
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Um, and they're designed to take away all the rights, remedies, and everything from the merchants because that's how you know business works these days.
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If you don't read your agreement or negotiate it, you're out.
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And for the small guys, you know, they feel like they don't have bargaining power.
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They're like, you know, who cares?
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All right, you charge 3%, you're all crooks, whatever.
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But you do, you can negotiate.
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It is very competitive out there, even if you're a small merchant to go negotiate.
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Because with Vamp, which is something saying you can't have these merchants that are having all chargebacks, if you're a merchant running a regular clean business that's actually selling goods and providing it to your customers, you have a huge bargaining power because they want your business because it offsets their money-making business over here, where it's uh, you know, a more complex business type and they need bigger solutions.
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So you have the ability to negotiate things away, like, you know, hey, if you want to sue us, you're going to arbitration, or hey, if you want to sue us, you're going to, you know, organ or somewhere.
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Um so there's all sorts, it's not just the rates, but like I said, you know, if you're saving, you know, even a half a percent on all of your card charges, you know, even a small merchant will make back the amount that you would pay a legal person to review.
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The other benefit is we know everybody in the business.
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We know who the good guys are, we know who the okay guys are, we know who the not so okay guys are.
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So we do a lot of you know, connecting the dots is one of the benefits to us.
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It's why, you know, all of our clients want to come onto the podcast once we told them that so many merchants are watching because they're going, I want to peddle our wares.
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And of course, we only, you know, allow the people that are doing things right to come on here.
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Uh so we uh, you know, it it's a no-brainer to me.
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I wouldn't sign anything with an at without an attorney reviewing it.
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You know, I just so happen to be one, but if I weren't, I would not put my name on a single piece of paper without having somebody look at it because it goes poorly generally.
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Generally, you know, if you you know, the agreement doesn't work.
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You can put it in chat these days, but chat, the people relying on it, it is the ultimate bubble waiting to blow up.
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You know, everyone's going, attorneys, aren't you so worried about chat?
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We're going, not based on what I see.
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These agreements that it's kicking out and the stuff it's saying to review, it's Hiding the wrong places and this, that, the other thing, you know, we're we're laying, what is it, you know, we're lying in wait just to see the mess that this has all created.
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So yeah, it's certainly a good investment.
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I think on that topic, James, I was recently reviewing a merchant agreement.
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So because this merchant had been charged a bunch in in RAM fines from the processor who had been charged by the acquirer, who had been charged by MasterCard.
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And I was trying to see if there was any way to get out of the imposition of the fine.
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And I was reviewing online to see if there had been any cases that were similar.
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And I found one that was a it was a PCI DSS fine to this merchant who got out of the fine on a it was a provision of their agreement that provided for exclusion of um consequential damages to both parties.
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So the judge was like, well, you can't you can't assess this fee because this is you know consequential damage.
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Um you know, this is what the agreement says.
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And then after that, I found that a few months ago, and I've been looking at a few merchant agreements since then, and none none of the agreements have that anymore.
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Like it is gone.
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So I think it's really an important thing to make sure that your agreement is protective of you as a merchant.
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Um, because I think a lot of the processors will identify areas where they could be, you know, subject to liability, and they'll just totally get rid of it, like as soon as they can.
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We hope you enjoyed this episode of the Payments Experts Podcast, a podcast of Global Legal Law Firm.
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Find us today at global legallawfirm.com.
00:23:55.599 --> 00:24:02.960
Matters discussed are all opinions that do not constitute legal advice, all events or likeness to real people and events is a coincidence.
00:24:03.279 --> 00:24:11.200
The biggest areas of uh pricing, we have flat rate, we have tiered pricing, and then there's interchange plus.
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So flat rate pricing is when the processor assesses one single flat rate across all transactions, or they assess a flat rate per transaction type.
00:24:23.119 --> 00:24:30.319
So for instance, they may charge, you know, 2.6% plus 10 cents for debit cards.
00:24:30.559 --> 00:24:34.240
They might charge more for credit cards processed online.
00:24:34.799 --> 00:24:40.079
But over the types of credit cards, the fee is the same.
00:24:40.319 --> 00:24:42.240
So that's flat pricing.
00:24:42.480 --> 00:24:51.759
That usually is more expensive per transaction, but it is easier and simpler to understand.
00:24:51.920 --> 00:24:58.160
So a lot of the merchants using flat rate pricing are usually smaller merchants.
00:24:58.559 --> 00:25:09.839
Um, and then we have tiered pricing, which slots each transaction into a bucket, usually qualified, non-mid-qualified and non-qualified.
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And the price per transaction changes depending on which bucket the transaction goes into.
00:25:19.279 --> 00:25:37.359
Um so qualified pricing is usually like in-person debit, whereas non-qualified or mid-qualified would be a credit card processed online, or it may be a business card online, or just a business card by itself.
00:25:37.920 --> 00:25:42.240
Um, and I think qualified pricing is becoming less popular.
00:25:42.319 --> 00:25:47.920
That's what I gleaned from my review online before this podcast.
00:25:48.160 --> 00:25:55.839
And then we have interchange plus pricing, which is just the interchange, which James described as varying, which it does.
00:25:55.920 --> 00:26:06.480
It varies based on the MCC, based on um, based on the card used, and also based on the environment which the card is used.
00:26:06.640 --> 00:26:15.920
But so interchange plus is just flat interchange plus the acquirer markup and the network markup.
00:26:16.079 --> 00:26:18.240
Um, but the network fees I think are very small.
00:26:18.319 --> 00:26:20.880
I think they're something like 0.15%.
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So um generally people recommend using Interchange Plus just because it's more transparent and it is, I think, overall cheaper per transaction.
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However, it does take more manpower to review these statements, and there's less certainty because you don't know exactly how much you'll be charged per transaction, um, just because interchange varies so much.
00:26:49.279 --> 00:26:52.880
So those are the um the main different types of pricing.