How to Know When You Are Taken for a Ride, Credit Card Fee Edition

A week ago I explained how self-proclaimed “new-age” e-commerce platforms like Shopify and payment processors like Stripe are employing some of the worst practices the industry is unfortunately known for to trick unsuspecting merchants into getting, and paying for, much more than they bargained for. Prominently featured on such companies’ websites is the promise to enable you to “start accepting payments instantly”, although the fact that the processor would not actually release your money before your merchant account application is approved is conveniently hidden from view — and if it is not, you may never see your money. Similarly, you are told not to worry about chargebacks — this new state-of-the-art system would take care of it all, helpfully informing you that “the customer can arrange for the chargeback to be cancelled at any time”. But nowhere are you warned that, even if you win them all, a fairly low number of chargebacks will get you in trouble with Visa and MasterCard. And I guess I understand — if they talked about these things, the Shopifies and Stripes of the world would only spoil the fun.

I did, however, leave the pricing matter out of my post and I did it deliberately, for it deserves separate treatment. Now, I freely admit that I have often struggled in that past to make comparisons between different pricing models that are both thorough and easy to understand — there are so many moving parts there that it is extremely difficult to pull off such a feat. Initially I thought that, while people may have trouble grasping the details over a phone conversation, once they’ve had the opportunity to go over a sufficiently well prepared written presentation, they’ll quickly get the idea. Not so. My sole consolation has been the fact that I am yet to see someone else succeeding where I’ve failed. Well, today I’ve decided to give it another try, using a different strategy. This time I will use an unrealistically simplified model, which, I hope, will nevertheless do the job.

UniBulio vs. Stripeo

Let’s begin by introducing the protagonists of our little story. On the one hand, we have the market’s incumbent — UniBulio. UniBulio charges his one client — Merchantio — a pre-defined fee, which is the same for all transactions, debit or credit. The issuer of each card accepted by the client also charges a fee, which differs from one card to another, so that Merchantio’s aggregate fee varies from one transaction to another.

In the opposite corner we have UniBulio’s brash young antagonist — Stripeo. Now, Stripeo is fully aware that Merchantio hates the fact that his processing fees cannot be calculated in advance and has devised a clever plan to take advantage of this constant source of irritation and snatch the client away. Stripeo’s plan revolves around one core principle — simplicity — which rules supreme. To achieve his objective, Stripeo announces that he will charge one single rate for all card transactions — credit, debit or whatever — and that fee would be the sum of the card issuer’s fee and Stripeo’s own charge. That is nice and simple and Stripeo revels in his cleverness, proclaiming that his offering

has no setup fees, no monthly fees, no validation fees, no refund fees, and no card storage fees. There’s also no charge for failed payments. You’ll never have to decipher a complex statement, because you know what you’re charged in advance.

Merchantio listens to Stripeo’s breast-beating, takes a look at his offering and is tempted. After all, it would be so helpful to know precisely what your payment processing cost would be in advance of taking a card for payment. Moreover, Stripeo is such an affable character, knowledgeable people are saying such incredibly nice things about him and his website promises all the right things. Yet, Merchantio senses a vague feeling that something isn’t right here. See, he has been around for long enough to know that if something sounds too good to be true, it probably is; at the very least, it should be examined. So Merchantio makes a couple of simple calculations to evaluate Stripeo’s claims. Let’s see what he discovered.

Merchantio Does the Math

First, Merchantio asks himself what his processing cost would be with each processor if all of his sales were paid for with debit cards. It is a very simple calculation. On the one hand, Stripeo charges 2.9 percent plus 30?ó per transaction. UniBulio charges 0.3 percent plus 5?ó above interchange, which is 0.05 percent plus 22?ó; so the total is 0.35 percent plus 27?ó. Here are Merchantio’s monthly fees with each processor:

Then Merchantio proceeds to calculate what his processing cost would be if all of his sales were paid for with credit cards. Now, this calculation is a more complicated one, because there are many different credit interchange rates. To simplify things, Merchantio looks at his latest monthly statement and discovers that about three-quarters of his credit card volume came from rewards cards. Rather inconveniently, there are several different interchange rates for the various types of rewards cards, but for Merchantio the average was less than 2.00 percent plus 10?ó, so he decides to use that rate in his calculation. The other quarter of the credit transactions were processed at interchange rates that were about equally split between rates that were lower than those for rewards cards and rates that were higher than them. It is probably a wash or something close to it, so Merchantio decides to use in his calculations the rate he had roughly calculated for the rewards transactions. Here is what he gets (note that UniBulio’s mark-up for credit cards is the same as it is for the debit variety: 0.3 percent plus 5?ó):

Having performed his calculations and discovered that Stripeo’s claims are not supported by the facts, Merchantio feels that he must have left something out of the picture, for Stripeo must be the better choice — everyone says so, including people with insider knowledge who write stories for the likes of Mashable and TechCrunch. So he takes another look at his statement and sees a couple of monthly fees — one for his merchant account and one for his payment gateway — for a grand total of $20. Then he recalls that once a year UniBulio charges a compliance fee for something called PCI, which Merchantio hates with all his heart, but it is only $99 or $8.25 per month. That’s all he can find.

So Merchantio decides to trust his math, swallow his hate for uncertainty, stick with UniBulio for the time being and ignore Stripeo. If quantum theorists can learn to live with uncertainty at the core of their best theory of how the universe works, Merchantio rationalizes his decision, so can he. That realization makes him feel even more content with his decision; he even feels that his hatred for PCI is slowly diminishing (although he knows that soon enough it will flare up again). He leaves it at that.

Image credit: Flickr / ladycynamin.