Merchant Account Fees Explained: Avoid Hidden Costs in 2025

Did you know that navigating the world of merchant fees can be complex, with various charges impacting your bottom line? In this episode, we break down the key fees associated with payment processing, including the merchant discount rate, chargeback fees, and refund fees. We also discuss essential contract terms like service fees and early termination penalties. Join us as we clarify these costs and empower you to make informed decisions for your business.

In this episode, these questions and topics will be covered:
• 00:35 - Overview of key fees in payment processing: merchant discount rate, chargeback fees, refund fees, and essential contract terms. 
• 01:25 - The three different ways merchants can encounter discount fees on credit card processing statements. 
• 05:44 - Overview of the three pricing models in payment processing. 
• 11:10 - Discussion on refund fees, return fees, and reversal fees: understanding the differences and implications. 
• 18:53 - Retrieval fees: what they are and when they occur in the processing lifecycle. 
• 24:39 - Utilizing AI tools to review legal documentation and avoid surprises in bank agreements.

If you found this episode insightful, please leave a rating or review on your preferred listening platform and share it with other business owners! Let’s empower more merchants to navigate the complexities of payment processing effectively.

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Website: http://www.paydiverse.com
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Transcript

UNKNOWN: 0:00

Thank you.

SPEAKER_00: 0:05

Hey, welcome to The Payments Guy, your ultimate guide to demystifying the confusing world of merchant payments. I'm Frank Senna, your host, a merchant payment specialist with nearly a decade of experience. In each episode, we'll break down the toughest challenges in the payment space so you can be better informed when navigating payments for your own business. From minimizing the impact of chargebacks, avoiding funding issues, and ensuring you're never stuck without the ability to process payments, we'll help you make smarter decisions Let's get started. Hi. Payment processing fees aren't as mysterious as they might seem, if you know what to look for, that is. Today, we'll cut through the confusion and arm you with the knowledge to review your merchant agreement like a pro. From fees to contract clauses, we've got it all covered. Welcome to The Payments Guy. I'm Frank Sena, your go-to guide for navigating the world of payment processing. In this episode today, we're going to demystify the key fees like the merchant discount rate, chargeback fees, and refund fees, while also discussing essential contract terms like reserves and early termination penalties. Plus, we'll include a link in the description to a blog post that summarizes everything in writing. So first, let's talk about the merchant discount rate, or the MDR, and the various pricing models related to it. So the MDR is a percentage of each transaction which is charged to a merchant and it covers the cost of interchange fees, assessment fees, plus the processor's markup. So there's typically three different ways that a merchant can incur this merchant discount rate or that percentage that you see on your credit card processing statement. So the best way to think about tiered pricing, which is the first pricing model that we'll discuss. Think of it like buying an airline ticket where you have like the economy seats, which would represent debit card transactions and they cost less than the first class seats, which would be like a reward or corporate credit cards. So transactions are grouped into three buckets in a tiered pricing model. We have qualified transactions, mid qualified transactions or non-qualified transactions. So those are the three buckets and they're based on the risk associated with the transaction as well as the credit card type that the cardholder is using. So for e-commerce merchants, most transactions are going to fall into the mid or the non-qualified buckets because those transactions are going to be in a card not present environment. They're either keyed in by the merchant or they're entered in through the website by the cardholder. And depending on if it's a corporate card or a rewards card, it's going to fall into those two more expensive buckets. I think that these processors actually intentionally make this convoluted and confusing because they don't really want merchants to understand what they're paying. So that's where I come in. I can help you figure that out. And also I should mention At PayDiverse, we always do free pricing analysis for you, so you can share your merchant processing statements with us. We'll take a look and help you decipher what exactly you're paying for your merchant account, and then we can help find you something that's cheaper. So the second bucket that we should talk about is flat rate pricing. This is pretty straightforward, and this is how a lot of the Payfax or the payment facilitators like Stripe, Square, and PayPal operate. You're just paying as the merchant a flat fee, like let's say 3%, and then a per transaction fee, like 30 cents per transaction. And you don't have to worry about all those other fee categories that are often showing up on a merchant's credit card processing statement. So this could be a really good option for merchants that are doing low volume. But the problem is, is you're paying this fee no matter what the cost of interchange is. So if the cost of interchange, which is a cost that's set by the card brand networks like Visa and MasterCard, if it's low, you're still paying that 3%. Whereas in a qualified pricing model or a tiered pricing model, it's going to vary based on the card that's used and you will have opportunity to save money. So flat rate is is simple, but it can end up being more expensive for merchants. And then we have the third pricing model, which is called Interchange Plus, which you may have heard of or seen. It's kind of confusing. It's like, what does that even mean? So this is actually a really transparent pricing model because it says that regardless of the cost of interchange, which can vary based on many different factors, you're always going to pay that set amount over the the cost of interchange. So for example, if your interchange plus pricing is interchange plus 2% and 10 cents per transaction, that 2% represents the processor's markup over their costs of interchange. So you know that you're always gonna be making, gonna be charged 2% over whatever that cost is, and this pricing model adjusts based on the cost of interchange. So you're not always gonna pay the same amount, and as the costs are lower, you're going to pay less. So those are the three pricing models for the discount rate, which again is that percentage that a merchant pays based on the volume that they're processing. So next, let's talk about the authorization fee, the transaction fee, and the AVS fees, which you might have heard of. So authorization and transaction fees are both charged per transaction attempt. But the difference is per transaction fees are only charged if the transaction is successful and authorization fees are charged for every transaction attempt whether or not it's successful or not. So there's lots of reasons why a transaction might not be successful. It could be declined by the issuing bank because the merchant doesn't have enough funds on their debit card account or because for some reason the bank thinks that it's like a fraudulent merchant. It could be that the cardholder marked the card as lost. There's lots of reasons why the transaction might not be successful. That per transaction fee is only going to apply to the successful transactions. So typically if we have a merchant that has a large volume of transactions, we will price them with a low per transaction fee and a low per authorization fee so that they're not paying a high fee for every attempted transaction. Okay, so now we have AVS fees. AVS stands for Address Verification Service, and it's pretty standard for e-commerce because it is a fraud prevention tool. So how this works is it will actually verify that the address details that the cardholder enters when they're filling in their billing information to process a transaction, it will compare the address that the cardholder enters at the time of the transaction to the address that's on file with the cardholder's bank. So if you see this fee charge, it's basically saying like, oh, we're not going to let any transactions come through where there's a discrepancy between the address that the cardholder enters at the time of the transaction and the address that the issuing bank has on file. Some e-commerce merchants can choose to disable this fee, but the risk of that is that you get more fraud, which could result in more chargebacks, and then ultimately your merchant account gets terminated because you got a lot of chargebacks through fraud. So we always recommend that merchants keep this AVS fee enabled. On the other hand, you may have heard of a voice authorization fee. This is only incurred when a merchant has to manually authorize a transaction by calling the issuing bank. This is super rare and usually doesn't happen for e-commerce merchants. So if you see that voice authorization fee on your merchant account statement or on your agreement, you don't usually have to worry about it. I wouldn't think too much about it because you're likely not gonna incur it if you're selling products online. Okay, so next let's talk about batch fees because you're gonna see this on your statement as well. but the good news is a batch fee is typically incurred like once a day and it's usually like 20 cents or 30 cents so it's really a nominal fee but this is charged when a merchant like batches out from their terminal which means they take all the transactions for that day and they send them over to the bank to get processed so it's a batch of transactions and again most merchants typically do this once a day so it's just a couple cents each day it's nominal so So next, let's talk about the refund fee, return transaction fees, and reversal fees, which are becoming a lot more common, these reversal fees. So a refund fee is a fee that is incurred by the merchant for processing refunds on a successful transaction. So this is like the customer cancels their order. They need a partial or a full refund. The bank is going to charge this fee. It's typically a couple cents or a dollar. Return transaction fee, this is not the same as a refund. It's really if the transaction for some reason is not successful. It occurs when a payment fails due to insufficient funds or account closures or maybe there is like duplicate transactions. So if a customer enters like incomplete payment details, this fee could apply. But it's not super common. And then we have the reversal fee. So as merchants have been getting better at avoiding chargebacks, we're seeing banks charging this reversal fee a lot more often. So if you're using a chargeback mitigation service like RDR or rapid dispute resolution, that's going to prevent a lot of chargebacks from hitting your account. So these merchant banks who are used to revenue from chargebacks. If merchants are getting less chargebacks, the merchant banks are now charging this reversal fee as a way to monetize the loss of these chargebacks. So if a dispute is resolved in your favor, you get charged this reversal fee because the chargeback is reversed. So we're seeing this a lot more often because, again, the banks are not making as much money off of chargebacks anymore, so this is their way of recouping that lost revenue. Next, let's talk about monthly fees and PCI compliance monthly service fees. So a monthly service fee is a flat fee that is incurred by the merchant. And it's typically just for the cost of keeping the account live for providing reporting services. And it's typically like 50 bucks. If you're paying more than 50 bucks for a monthly service fee, then you might be getting ripped off. But it is a way that the banks kind of cover their costs if you're not using the account. There's also this other fee called a monthly minimum fee, which is charged if your processing volume doesn't meet a minimum threshold. So basically, this monthly minimum is a way for the merchant bank to ensure that they're earning something off of your account, whether you're using it or not. So So it might say monthly minimum of$100. And what this means is if you, the merchant, do not process enough volume to result in$100 worth of fees, the merchant bank is gonna charge you the difference from how much fees you did incur that month and from this monthly minimum fee. So for example, if the monthly minimum is 100, but you didn't really use the account that month incurred 50 bucks in fees, they're going to charge you an extra 50 bucks. And again, this is a tool used by the banks to cover the cost of underwriting your account, getting you approved and keeping your account live. There are costs associated with having that account. And this is a way for that merchant bank to kind of cover those costs without having to eat them themselves. So let's talk about PCI fees. Typically on a merchant statement, you're going to see two types of PCI fees. There's a non-compliance fee and a compliance fee. PCI compliance is a way that banks ensure that a merchant is properly handling the data of their customers in a secure way that would prevent any sort of fraud from occurring on the account. It's really easy to avoid the non-compliance fee. It's gonna be charged every month that you're not compliant, but all you have to do is complete this online questionnaire to show that your website is compliant. So typically the bank will have a third party service who can help you to complete that questionnaire, because it can be kind of confusing. But this is a great opportunity to avoid a fee, because this non-compliance fee, which can be 30 bucks to 50 bucks typically, it's optional, you don't need to encourage as long as you're compliant. And then, of course, some banks will charge a PCI compliance fee per month. This is maybe$20 or$30, and it is the cost of making sure that your website is compliant. So that is a monthly fee that you will incur. It's non-negotiable, but that's what it's there for. A chargeback fee and a retrieval fee are what we're we're gonna discuss next. You're probably familiar with a chargeback fee if you're a high-risk merchant. Chargeback fee is incurred by a merchant when the cardholder disputes a transaction. So if they are looking, if the cardholder's looking at their statement and they see a transaction they don't recognize, they might call their credit card company and say, I don't know what this fee is, or I don't know what this transaction is, I want to dispute it. issuing bank will say, no problem, we're going to refund you for this transaction and we'll take it up with the merchant bank. So this is the process of initiating a chargeback. Typically this fee is going to be on the low end$15 and on the higher end it's going to be closer to$50 or$45. It really depends on the processor, on their costs, and it's a way for the processor or the acquiring bank to incentivize merchants not to get disputes because when a acquiring bank gets a lot of chargebacks in their portfolio, the card brands will start putting pressure on those banks to close those merchants. So it kind of trickles down from the card brands, this pressure and incentive to avoid disputes. Typically, if you're getting a lot of cardholder disputes, you you're doing something wrong. Maybe it's not clear for customers how they can unsubscribe from your subscription, or maybe the quality of the products isn't great, or maybe there's an issue with fulfillment that's preventing those products or services from being delivered in a timely manner. So these chargeback fees are incurred when a chargeback is initiated and they can be avoided if you can manage your business in a healthy way and also utilizing some of the third party chargeback prevention tools that I discussed in my previous episode about chargebacks. So check that out if you want to learn more. There's also this fee called a retrieval fee. It's charged when the issuing bank requests documentation for a chargeback or a dispute. So a lot of times if you're using a third party chargeback mitigation service, they will often handle the retrieval for you and you can avoid this fee from your merchant bank. So when you do utilize a third party chargeback mitigation vendor, you should confirm with them whether the retrieval fees are going to be passed on to you or if they're going to handle that for you and basically prevent you from incurring a retrieval fee. One other thing that I always encourage merchants to review when they get a merchant agreement is looking at the early termination fee, which is basically a penalty if you cancel the merchant account before the length of the agreement is up. So you want to look at the fine print on your agreement to understand how long is the length of this agreement. Typically, some processors will only have like a month to month agreement. Some will have a one year agreement. Some will have a three year agreement, which is the most common. And I've even seen five year agreements. Now, with relation to the early termination fee, I will say a lot of banks do not always enforce it. So they'll put this language in the agreement saying like you could be charge this early termination fee, which can range from a couple hundred bucks to a thousand bucks. But it's really going to depend on a lot of factors. For example, if you have to close the account for some reason, maybe you had trouble integrating the account, you're getting some weird technical issues that you can't seem to resolve, then the processor will usually allow you to cancel the agreement without any sort of penalty. Sometimes they will penalize merchants if the merchant wants to cancel the account if they've been really difficult or if they owe the bank money, the bank's going to kind of stick it to that merchant and basically try to get as much money from them as they can. I've been able to successfully negotiate reduced termination fees for merchants who have to leave for various reasons or for getting that fee completely waived depending on the situation. It really is going to vary, though, whether or not that fee is incurred, it's going to vary based situation to situation. So it's just something to be aware of. And this is always in the fine print. So when you do get that agreement, I recommend that you review what is the term, what is the policy for terminating the agreement early so that you're not caught by surprise and you know what you're getting into when you sign up for that account. Reserve requirements are also listed on a merchant account statement and you should review your agreement when you're signing it for the details of how a reserve is handled. So we're going to talk about this in another episode, but a reserve is basically a subset of the merchant's funds that belong to the merchant, but that the acquiring bank has the right to hold onto to help them safeguard against the risk of loss from chargebacks. So typically this will be like a 10% reserve where the merchant bank will withhold 10% of the total volume of transactions and keep it in a special reserve account. And the terms of this reserve are actually determined during the underwriting process, but the details of how the reserve is handled are going to be listed in that merchant agreement. So the terms in the agreement are going to say something along the lines of how long that merchant bank can hold on to those funds for after the account is terminated. The information that's going to be determined during underwriting is what are the terms of the reserve, such as is it a rolling reserve or is it a static reserve? What is the cap on the reserve, meaning how much is that bank going to collect before they reach a cap or a limit and they don't need to collect additional funds? So I I am able to help my merchants kind of navigate this a lot. I'm usually able to help them get this reserve reduced after the bank gets to know them for a few months. Or we can have the terms just made a little bit more favorable, but it really depends on is the merchant being a good partner to the bank? Are they avoiding chargeback issues and avoiding chargebacks? That's the real reason why these banks hold on to these reserves. So usually if a merchant can demonstrate three to six months of processing without having any issues, then the risk team will be comfortable with reducing the reserve amount or reducing the terms. So, for example, if it's a 10% reserve, we could reduce it to 5%. So this is something that, while it's not exactly a fee, it is something that you should be aware of and be mindful of and do your due diligence as a merchant to make sure you know what you're getting yourself into when you're signing that agreement. Another recommendation that I have for all merchants is to utilize AI tools to help you understand the terms of your agreement. This is a trick that I recently learned while playing around with ChatGPT, but you can actually upload any sort of legal document to AI and say, tell me what I need to know about this agreement in layman's terms. And it will break down kind of all the important pieces and then you can ask it questions. Well, how long can the bank hold my money? money for the reserves. Or you could say, help me understand all the details of the reserve with this bank based on this agreement. And it'll give you all of that information up front. It's really helpful. It's a lot better if you're like me and you're not a legal person, you can't read legalese, then using these AI tools is a great way to help you ensure you understand what you're getting yourself into when you sign this agreement with the bank. Because like I said, it could be a five-year agreement and you want to know exactly what you're getting yourself into, so there are no unhappy surprises for you. So make sure that you understand the fees and the contract terms on your merchant agreement, and that's gonna help you save money or manage your money effectively and plan ahead. And then watch out for terms like the early termination fees, the reserve policies, and that length of the contract, just to avoid any surprises. If you're still feeling overwhelmed with any of your fees or your merchant account agreement, PayDiverse, my company, is here to help. Visit us at paydiverse.com or email support at paydiverse.com for a free rate review or if you just have questions about your statement and you want to understand it, we're happy to help you. And don't forget to check the blog post which we'll link in the description for all the details as well. Thanks so much for joining us today and looking forward to our next episode together.