Inside the Black Hole

Merchants accepting American Express cards are subject to various fees that can be assessed for a number of reasons. Mostly these are card acceptance-related charges, but can also include fees for non-compliance with AmEx policies and procedures.

American Express’ merchant fees are listed in each processing agreement. Following is a list of these fees, with description and amount.

Card acceptance discount fees.

• Discount – the amount varies. The discount is one of the amounts American Express charges merchants for accepting their cards.
• Monthly flat fee – $7.95 per month. If American Express charges a monthly flat fee, they will debit the merchant’s account for the amount of the fee instead of debiting the amount corresponding to the discount rate.

Authorization fees.

• Gateway fees – $0.001 per charge. If the merchant’s processing bank routes authorization requests through the Visa or MasterCard processing gateways, AmEx passes the associated fees to the merchant, after a certain thresholds are met.
• Non-swiped transaction fee – 0.30 percent of the transaction amount. This is a fee applied to any charge for which AmEx did not receive the full magnetic stripe-read data from the card.
• Voice authorization fee – $0.65 per request. If the merchant’s point-of-sale (POS) system cannot connect to American Express’ electronic authorization system, the merchant needs to call American Express and obtain a voice authorization.

Submission and settlement fees.

• Check fee – $1.50 per check. This is a fee assessed for any check issued by AmEx.
• Paper statement fee – $4.95 per statement. This fee can be assessed if the merchant chooses to receive paper statements.
• Paper submission rate – varies. Transactions are typically submitted electronically. Exceptions are made for merchants like taxis and limousine services, street fairs, etc., where transactions are submitted on paper and are charged a higher discount rate.
• Technical specifications non-compliance fee – $0.10 – $1.00 per transaction. This fee applies to any transaction submitted to American Express that does not comply with their technical specifications.
• Monthly gross pay fee – 0.03 percent of the transaction amount. This fee is charged to merchants enrolled in the Monthly Gross Pay Option, if the transaction amount exceeds a pre-determined threshold amount.
• Data incident management fee – not to exceed $100,000 per data incident. This is a fee assessed to a merchant in respect of a data incident.
• Data security non-validation fee – $50,000 – $400,000. Depending on the merchant’s transaction volume, the merchant has reporting obligations under AmEx’s Data Security Operating Policy including providing Validation Documentation.

Excessive dispute fee – $5 per disputed transaction if the merchant is in the Immediate Chargeback Program or $15 per disputed transaction if the merchant is not there. This fee is assessed if in any three months, a merchant’s monthly ratio of disputed transactions to total transactions (minus credits) exceeds three percent, and then in any month when the merchant again exceeds this ratio. It is applied for each disputed transaction in excess of this ratio.

Accept card payments quickly and safely

Accept credit and debit card payments at the lowest processing costs. You will get:

• Free merchant account set-up.
• No fixed monthly fees.
• 24 / 7 customer support.

In a very interesting development, American Express has begun reaching out to merchants in an attempt to prevent a repeat of the 1991 “Boston Fee Party,” we learn from Bloomberg’s Peter Eichenbaum.

AmEx’s PR campaign comes on the heels of the company’s decision from earlier this month to refuse to settle the Justice Department’s anti-competitive behavior lawsuit. For their part, larger rivals Visa and MasterCard both reached an out-of-court settlement with the government on similar charges, allowing merchants to offer discounts to consumers using certain types of cards or to steer customers towards cash, check or other forms of payment. However, American Express’ decision to fight the government in court prevents merchants accepting its cards from taking advantage of Visa’ and MasterCard’s settlements.

The new initiative is clearly designed to help AmEx garner merchant support ahead of the bank’s showdown against the Justice Department. In the words of Bill Glenn, president of global merchant services at New York-based AmEx, as quoted by Eichenbaum:

We certainly wanted to reach out and proactively communicate with as many of them as possible to talk through the suit and why we took the position that we did. We know we have to prove value to them, or they don’t need to accept us.

But the biggest U.S. issuer by purchases will have their work cut out for them. American Express’ card processing fees are significantly higher than its rivals’. Again from Eichenbaum’s piece:

Retailers paid AmEx an average of 2.56 percent on each credit-card transaction in the three months ended June 30, according to the company’s second-quarter financial supplement. The debit- and credit-card rates Visa and MasterCard post online don’t provide weighted averages just for credit transactions. The Nilson Report, an industry newsletter, estimated the fees averaged 2 percent in 2008. AmEx doesn’t issue debit cards.

The difference is quite substantial, even though it has narrowed significantly in the past twenty years. Back in 1991 several Boston restaurants took exception to AmEx’s high merchant fees and stopped accepting the bank’s cards altogether. Back then, according to Wikipedia, American Express merchant fees averaged about 4 percent, compared to 1.2 percent for Visa and MasterCard (these figures are questionable, but there is no doubt that the gap was exceptionally wide).

The 1991 restaurateurs’ revolt, known as the “Boston Fee Party,” quickly spread out to cities all over the country, including New York City, Chicago, and Los Angeles. More than 250 restaurants nationwide joined the boycott. Eventually, AmEx negotiated its way out of trouble, and gradually reduced its merchant fees.

American Express will certainly try to avoid a repeat of the 1991 merchant revolt. This time, however, it also has to deal with DoJ’s lawsuit. It seems very likely that, when the whole hullabaloo is over, a fee reduction will again prove to be the way out of trouble for the company.

Accept card payments quickly and safely

Accept credit and debit card payments at the lowest processing costs. You will get:

• Free merchant account set-up.
• No fixed monthly fees.
• 24 / 7 customer support.

As expected, Visa and MasterCard reached an out-of-court settlement with the Department of Justice, agreeing to allow merchants to offer consumers discounts for using certain types of cards or to steer customers towards cash, check or other forms of payment, we learn today from the WSJ. However, American Express elected to fight in court the government’s charges that its policy for preventing merchants from offering customers discounts for using rival credit cards amounts to anti-competitive behavior.

At the core of the dispute are the processing fees merchants pay every time they accept a card for payment. The Justice Department has estimated that merchants pay a total of $35 billion each year in such fees. Retailers have claimed for years that these fees are excessively high and ultimately translate into higher costs for consumers. They scored a victory earlier this year when they managed to convince lawmakers to include a provision in the financial overhaul legislation that charged the Federal Reserve with the task of ensuring that debit card interchange fees (the fees assessed by card issuers that make up about 75 percent of the total processing fees) are “reasonable and proportional” (read lower). The Fed is expected to announce the new rules earlier next year.

Now, it should be said that interchange fees, although set by Visa and MasterCard, are actually collected by the two Associations’ card issuing banks. The Associations’ cut of each transaction is rather small – 0.11 percent of the transaction amount. Compare that with a range of 1 – 2 percent for the interchange fees. The two Associations’ interchange fees for equivalent card types are roughly the same, with small differences here and there.

This is not the case with American Express, however. Unlike the Associations, American Express, like smaller rival Discover, is a bank that performs the functions of both a card issuer and payment processor. Consequently, AmEx collects the full amount of the fees merchants pay for accepting their cards. Moreover, these fees are substantially higher that Visa’s and MasterCard’s.

American Express’ merchant agreements prevent retailers from steering customers to other card brands and the bank is apparently willing to go to court, rather than drop these provisions. AmEx claims that a settlement would give larger rivals Visa and MasterCard an unfair advantage by allowing merchants to promote its competitors’ cards.

American Express’ stubbornness clearly irritates the government:

“Because American Express has refused to change its rules, consumers are being held hostage from receiving the expanded choices and lower prices that they deserve under our settlement,” said Attorney General Eric Holder, as quoted by Washington Post’s Ylan Q. Mui. “We cannot allow this to stand.”

If, as it seems increasingly likely, American Express is eventually forced to change its policies, merchants will see real changes, but it is not at all clear how consumers will react to the new reality. It is an open question, for example, whether a customer, presented with a potential discount for using a plain-vanilla credit card, will put her 2-percent-cash-back card back in her purse. I guess that could depend on the size of the discount, but would it necessarily be a rational decision? Consumers often accept to pay substantial annual fees for rewards cards, even when they are not likely to accumulate enough rewards to offset the expense. In the end it may come down to who develops the better marketing strategy to deal with the new rules.

Accept card payments quickly and safely

Accept online payments via credit and debit cards and electronic checks at the lowest processing costs. You will get:

• Free merchant account and Authorize.Net gateway set-up.
• No monthly merchant account or gateway fees.

Visa and MasterCard are close to settling an antitrust probe over restrictions the two payment card associations impose on merchants accepting their cards, according to WSJ’s Robin Sidel and Thomas Catan.

At issue are a set of rules that merchants are required to accept and adhere to when they enter into an agreement with Visa or MasterCard member bank. According to these rules, merchants must:

• Accept all cards bearing the logo of the credit card association they have contracted with. This means, for example, that merchants cannot elect to accept debit cards, but to reject credit cards, which they may be tempted to do because processing fees are typically lower for debit cards.
• Not set a minimum sale’s amount for customers who want to use a card for payment.
• Not charge a fee to customers who use cards for payment.

According to WSJ, DoJ’s investigation is focusing specifically on Visa and MasterCard rules prohibiting merchants from charging fees to customers who use types of cards that cost more to accept. For example, debit cards are cheaper to accept than plain-vanilla credit cards which, in turn, are cheaper to accept than credit cards linked to a rewards program which are cheaper to accept that business-to-business types of credit cards.

To give you a better idea of what these differences can be, here is a list of what a merchant can potentially be paying for the acceptance of Visa cards in a card-present setting (for the purposes of this example I am using the interchange-plus pricing model):

1. Visa and MasterCard publish bi-annually lists of fees, called interchange fees, charged by their card issuing banks for the various types of cards in all possible card acceptance environments.

2. Interchange fees are set bi-annually by Visa and MasterCard and are collected by the card issuing banks.

3. Processor fee is the mark-up above interchange that processors charge for their services.

Under the expected settlement, merchants may potentially be allowed to encourage customers to use cards with lower processing fees, a practice known as “steering.” It is not clear, however, whether merchants will be allowed to charge an extra fee to customers who use cards that cost more to be accepted. An alternative option would be for merchants to offer discounts to customers who use debit cards or plain-vanilla types of credit cards.

Whatever the outcome, it will undoubtedly represent another setback for credit card companies that are still reeling from the record losses they incurred during the financial crisis and are on top of that now faced with much stricter regulations, as a result of the recently enacted CARD Act provisions. Moreover, the new financial overhaul legislation has charged the Federal Reserve with ensuring that debit card interchange fees are “reasonable and proportional.” The Fed’s rules, when enacted, are expected to place lower limits on those fees.

Accept card payments quickly and safely

Accept credit and debit card payments at the lowest processing costs. You will get:

• Free merchant account set-up.
• No fixed monthly fees.
• 24 / 7 customer support.

So you are finally ready to open the doors of your new business and let your customers in. But wait, you haven’t yet set up a merchant account to accept credit card payments. You left it for the last minute, because it is not as important as all these other decisions you had to make to get the whole thing off the ground and off to the races. But now is the last minute, so how do you go about doing it? This article will hopefully point you in the right direction and help you make a decision you will feel comfortable with.

There are many merchant account providers out there and selecting the one that will provide the best solution for your needs can be challenging, especially if you don’t have enough information. There are several factors to consider in your selection process. Typically, most inquiries that we receive are focused solely on our pricing. Pricing is very important, perhaps the most important factor to consider, so let’s go over it first.

Your cost for accepting credit card payments will consist of several components and you will need to know exactly how much you will be paying for each one of them:

• Discount rate – the amount a merchant is charged by the payment processor for the processing of each credit card transaction. It consists of a percentage fee (e.g. 2.25%) and a fixed, per transaction, charge (e.g. $0.25). For an internet or direct marketing merchant account, your discount should be no more than 2.20% + $0.25 per transaction. For retail accounts, it should be no more than 1.70% + $0.25 per transaction.

  
  It should be emphasized that there are several types of pricing models and you should first decide which one you will go with. We have discussed in detail the differences between the two main pricing structures – interchange plus pricing and tiered pricing – in a separate article.

• Authorization fee – another per-transaction fee. Authorization is the process by which a card issuer approves or declines a payment card transaction. You should not pay more than $0.10 for any type.
• Application and set up fee – one-time fees to apply for and set up your merchant account. You should not pay any set up or application fees!
• Monthly statement fee – as the name suggests, it is charged monthly to keep your account on file. You should not be paying more than $10.
• Support fee – another monthly fee, charged for customer service. You should not pay such a fee.
• Monthly minimum fee – sets the minimum amount that your processor will want to make from processing fees each month. So if your monthly minimum is $30 and you generate $20 in processing fees in a given month, your processor will charge you additional $10 ($30 – $20). Typically, monthly minimums are set to discourage applicants from setting up merchant accounts that they don’t really need.
• Payment gateway fee – specific to the e-commerce industry. Payment gateway is the service that connects an e-commerce website with the merchant’s processing bank and transmits transaction information between them. You will only need it if you want to let customers pay you over the web and it should not cost you more than $15 per month. Some gateway providers may charge you a set-up fee, which varies by provider and gateway, but should not exceed $50.

If you see any other charges in the proposed pricing agreement, you will be well advised to look elsewhere. Also if you are looking for a merchant account to replace your existing service, ask your prospective processor to provide you with a pricing comparison table to make your choice a better informed one. Make sure you check the math, though!

While pricing is important, it is not the only factor you should evaluate. You should also examine your prospective processor’s:

• Experience – you will need to be careful here. On the one hand, you will want to be sure that your processor will have the expertise to get the job done. On the other hand, however, many well established processors offer substantially higher rates, justifying it exactly with their long record and the piece of mine that it brings you. You should not be overpaying just because they’ve been in business for a while!
• Customer service – you will want to make sure that you will be getting knowledgeable support when you need it, because you will need it. You may want to contact a couple of your prospective processor’s existing merchants and ask about their satisfaction with the customer service they are getting. Many processors now offer 24 / 7 customer service.
• Chargeback management – chargebacks result when a cardholder disputes a transaction or when the merchant does not follow proper card acceptance procedures. They can be costly and time consuming. In extreme cases, if you cannot keep them under control, you may even lose your merchant account. You will want to make sure that your prospective processor has the expertise to help you reduce the level of chargeback-generating disputes and to implement adequate payment processing procedures. We have developed our Payment Card Acceptance Best Practices Guide to help you in that.
• Fraud prevention – your processor must be able to help you fight fraud! You will need all the help you can get to minimize fraudulent transactions, especially if yours is an e-commerce business. Make sure that your prospective processor supports Verified by Visa, MasterCard SecureCode, the Address Verification Service (AVS) and the Card Security Codes (CVV2, CVC 2 and CID).

It is important that you don’t cut corners during your due diligence process. The right processor will show you how to reduce processing costs and minimize chargebacks. You should go beyond looking at the prominently advertised processing rates, as often they don’t mean much or are totally misleading.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).