Think you know what the costs to accept credit cards are? Calculating the total cost of accepting credit card payments can complicated and confusing.
The following are 4 things that impact the total cost of accepting credit card payments:
1. Interchange and Assessments
Interchange rates are non-negotiable fees set by the card brands and make up nearly 90% of the cost of every transaction. All in all, there are more than 300 interchange categories that impact your rates.
Interchange rates vary depending on:
- The type of credit card that’s used
- Where the transaction happened
- How the card information is captured
- What industry the business is in
A % of transaction costs are assessments from the card brands for things such as:
- Brand usage fees
- Network access fees
- Cross border fees
- High ticket transaction fees
And a small % of the cost for the processor who makes the entire transaction possible.
2. Chargebacks
A Chargeback is when a customer disputes a transaction directly with their bank (credit card provider) and is refunded, after which the bank will take the issue up with the merchant. Typical causes of a chargeback involve product delivery failure or dissatisfaction. Chargebacks that are not successfully refuted with sufficient evidence by a merchant will incur an expensive chargeback fee. A merchant that consistently exceeds acceptable chargeback limits may have their Merchant Account terminated altogether.
When a chargeback happens, the merchant is charged a chargeback fee, usually $15 to $30, on top of the cost of the transaction and the sale amount. Companies also spend on labor incurred just processing a chargeback. In some cases, companies set a floor limit and write it off any chargeback that falls below it to avoid further labor costs. What’s even worse is that if a company has excessive chargebacks, the card brands can impose fines up to $25,000 or even cancel their account.
3. Fraud
Credit card fraud is a wide-ranging term for theft and fraud committed using or involving a payment card, such as a credit card or debit card, as a fraudulent source of funds in a transaction. The purpose may be to obtain goods without paying, or to obtain unauthorized funds from an account.
Fraud detection programs that come with your credit card doesn’t eliminate the risk in taking credit card payments, especially online. In 2012, online merchants lost more than $3.4 billion to fraud. Nearly 7% of all online transactions are automatically declined even if some are legitimate transactions. These false positives result in further lost sales and lost customers.
Managing risk also requires more “human” work. 10 to 30% of all online transactions need manual review by a caseworker. On average, caseworkers earn $20 per hour and can review 6 cases per hour. So if a company generates 1 million transactions per year, and has to review 30% of them, it would take 24 caseworkers a full year to review all 300,000 cases at a cost of $960,000.
4. PCI Compliance
The Payment Card Industry (PCI) is a 3rd party regulator of the Credit Card Associations. It has defined a set of security and compliance standards to protect merchant account holders and their customers during and after a transaction.
In 2011, there were 855 incidences of breaches resulting in 174 million compromised records. Cardholder data is the number one target of hackers, making up 78% of known breaches. Other than the immediate financial loss, companies often suffer the loss of trust and confidence in the company, employee morale, and if a public company, devalued stock.
Maintaining PCI compliance is a continuous effort that can be costly but is necessary. Companies spend anywhere from $225,000 to $500,000 or more for annual certification. And that doesn’t include labor costs or technology upgrades required to maintain compliance.
These are some of the main things that impact the cost that comes with accepting credit cards. The most visible and immediate cost comes transaction fees. If you are interested in how those fees break down in a transaction, take look at The Anatomy of a Transaction.