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Merchant Fees Explained | Top Ten Things to Know Before Signing a Merchant Application

Date Updated: March 30, 2023

Opening a merchant account can provide a number of advantages to a growing business such as an increase in sales, an improvement in professionalism, an increase in the customer base, and a simplification of payments.

However, these benefits do come with several strings, or hidden fees attached.

What Are Merchant Fees For?


Businesses require specific merchant accounts to process and accept credit card transactions. When applying for a merchant services account with a payment processor, you will need to understand the basics of credit card transaction fees, card processing fees, and merchant services fees.

In this article, we will discuss some of the merchant account fees that appear on a merchant account processing application. Processing fees can have a sizeable impact on a merchant’s bottom line, it is essential to understand the universal merchant account fees that will show up on the monthly statement. This information will allow you to determine whether or not the merchant fees are reasonable or if the pricing negotiations are necessary.

Types of Merchant Fees


Fees associated with merchant accounts can come in a variety of forms, such as a discount, flat rate fee, transaction fee, monthly fee, authorization fee, and other fees. There are also several situational merchant account fees to know about such as early cancellation fees, irrelevant annual fees, various hidden fees, and mailing costs.

Understanding the difference between pass-through transaction fees and markup fees is vital for efficient credit card processing and growing your business. Part of being a responsible, successful business owner is working with a merchant services provider to find a pricing model that works for your business.

1. What are Monthly Fees?


The monthly maintenance of a merchant’s business account and the merchant services provided are two common parts of monthly merchant fees, that merchant service providers charge businesses. These merchant fees may follow a flat rate pricing model or offer tiered pricing, depending on the provider and the merchant services provided. Other types of merchant fees that could be included in your monthly bill are a maintenance fee, monthly service fee, statement fee, and payment gateway fee.

2. What are Annual Fees?

An annual fee is a merchant service fee imposed by providers for the annual maintenance of their accounts. The annual fee is normally billed regardless of the number of transactions handled by the merchant, and they may vary based on the merchant account provider and the merchant services not included with the account.

Annual fees may include account maintenance, compliance, and regulatory fees; as well as the cost of offering additional services, such as fraud prevention or chargeback management.

3. What is a Discount Rate?

Merchant service providers may charge discount rates as a type of fee for the processing of credit card transactions. This fee is determined by taking a percentage of the total amount per transaction and can be anywhere from 1.5% to 3% depending on the type of card being used and the business sector in which the merchant operates.

The fees imposed by the merchant services provider are covered by the discount rate. These expenses are included in the total processing fee. A markup, or premium, is added to the discount rate so that the merchant services provider makes a profit from the transaction.

4. What are Termination Fees?


An early termination fee can be charged by account providers when an account is closed prior to the conclusion of the contract term. Depending on the provider and the conditions of the contract, these costs might follow tiered pricing from a few hundred dollars to several thousand dollars.

Typically, early termination fees will cover the costs connected with closing the account and any incidental fees incurred by the merchant account provider. These costs may include administrative fees, equipment expenditures, and revenue lost due to the contract’s early cancellation.

Credit Card Merchant Fees

The many fees a company must pay in order to accept payments from clients using credit and debit cards are referred to as credit card processing fees or merchant fees. These credit card processing fees can involve a variety of processor charges such as gateway fees, processing fees, and interchange fees.

Depending on the type of card used and the payment processor the business uses, credit card merchant fees can change. Understanding these fees is crucial for managing costs and maximizing your payment processing strategy as a business owner.

5. What are AVS Fees?


AVS, which stands for “Address Verification System,” is a mechanism for combating fraudulent activity that is used prior to processing credit card transactions for online payments. During the process of checking out an online transaction, the AVS will compare the information provided by the customer with the address that has been previously registered with the card issuing bank.

The AVS fee is typically a per transaction fee that merchant service providers charge every time an online transaction triggers the use of the system. Depending on the pricing models used by the provider, these can range anywhere from a few cents to a few dollars per transaction. Despite the costs, AVS fees are widely regarded as an essential transaction cost for merchants as a means of helping to avoid fraudulent transactions affecting the merchant’s bank account.

6. What Are Authorization Fees?

When customers purchase something with a credit card, the merchant must obtain authorization from the credit card companies before they process transactions. A credit card authorization will verify that the customer possesses sufficient funds before authorizing the purchase.

The primary function of an authorization fee is to cover the credit card processor fees associated with acquiring authorization from credit card networks or the card issuing bank. These processor charges are often a very small fee based on a percentage of the total transaction.

Even though authorization fees might not seem like a significant price at first glance, they can quickly add up for high-volume merchants. Failed authorization attempts can result in several authorization fees being assessed for the same transaction.

7. What are Chargeback Fees?


Chargebacks are considered situational merchant account fees, as they are only applicable when triggered by a chargeback request.

Depending on the merchant account provider, this cost is often a set or flat fee. The fixed fee is intended to reimburse the costs associated with processing the chargeback and resolving the disagreement between the customer and the merchant.

8. What are RAAP Fees?

RAAP fees, also known as “Risk Assessment and Analysis Program” costs, are fees charged by merchant account providers to cover the expense of assessing and managing processing-related risk.

RAAP aids in the prevention of fraudulent transactions and other variables associated with processing transactions. This may include the cost of designing and deploying fraud detection and prevention techniques, as well as the expense of training employees to recognize and manage risks.

Monthly or annual RAAP fees may be based on the merchant account provider and the terms of the merchant account agreement. The monthly fee may vary based on the level of risk connected with the merchant’s business and the extent of risk management services offered by the merchant account provider.

9. What are PCI Fees?


Merchant account providers may charge PCI fees (short for “Payment Card Industry”) to offset the costs associated with adhering to the Payment Card Industry Data Security Guidelines.

The Payment Card Industry Data Security Standard (PCI DSS) was developed by the leading credit card networks as a set of guidelines for businesses that accept credit card payments to follow in order to keep customer information secure. All businesses that accept either credit card fees or debit card payments must comply with the PCI DSS, or face fines, penalties, and potential brand damage if they don’t.

Depending on the merchant account provider and the conditions of the merchant agreement, PCI fees may be imposed on a monthly or annual basis. The price may change based on the PCI compliance requirements of the merchant’s business account and the assistance and direction the merchant servicer provider offers.

10. What are PCI Non-Compliant Fees?

If a merchant does not comply with the PCI DSS requirements, the merchant will be liable for fines, penalties, and other sanctions imposed by the credit card networks. In addition, the merchant’s merchant account provider may charge the merchant a PCI Non-Compliant Fee (NCF) in order to compensate for the higher administrative expenses incurred as a result of the merchant’s lack of compliance.

It is important for merchants to carefully review the terms of the agreement that governs their merchant account in order to understand the potential consequences of non-compliance with the Payment Card Industry Data Security Standard and to ensure that they are taking all of the necessary steps to protect cardholder data.

 Why Understanding Merchant Account Fees is Important

To successfully negotiate and open a merchant account, you need a solid knowledge of the merchant fees involved in the decision to process credit card transactions. Merchants can minimize their merchant fees, maximize their effectiveness, and avoid unexpected charges by monitoring the merchant services fees. It is important to remember that many of these additional fees can be subject to negotiation if you fully understand how each fee can affect your business.

The degree of customer support that is offered by the payment processors, as well as any other services that may be provided, such as a payment gateway or fraud prevention, are important factors for merchants to take into consideration. With effective customer support, merchants are able to avoid some of the interchange fees that are triggered by customers requesting a return or inadequate security measures are used.

Processing with AllayPay

Navigating the complex world of payment processing can feel like an uphill battle at times. Learning how the different merchant service fees vary is key to minimizing the percentage of your profits that is dedicated to covering them. It is important to work with a merchant service provider that is able to ensure the complexities of account fees do not overwhelm you.

At AllayPay, we are committed to providing our clients with transparent, pricing models, excellent customer support, and industry-leading security features. Our team will be with you every step of the way as you discover how to negotiate and control your business’s merchant account fees so they do not claim a large percentage of your profits.

If you have any questions or concerns about merchant processing fees, don’t hesitate to contact us. Our team of experts is always here to help you find the right payment processing solution for your business.