Card Payment Acceptance and Transaction Fees
To accept credit and debit card payments, a business must establish an account with a bank and a payment processing vendor, and invest in payment acceptance, hardware, software, and service. Outlined below are the key products necessary to facilitate payments today.
- Payment Terminal
- Point-of-Sale (POS) System
- Mobile Payment Devices
- Virtual Terminals
- Online Payment Tools
The most basic method of accepting payment is by using a payment terminal hardwired to a cash register or Point-of-Sale (POS) system. Traditional terminals allow cards to be swiped and dipped, as well as feature a keypad for manual entries. Modern devices connect wirelessly to a merchant’s POS system, come equipped with Near Field Communications (NFC) technology to allow mobile payments, and include built-in scanners and printers.
A POS system incorporates the hardware and software to accept payments, as well as integrating some basic business management solutions all in one. POS systems integrate payment terminals with a computer and a monitor. They are equipped with tools to accept payments, including a cash register, cash drawer, barcode scanner and receipt printer. Some come with basic business management software already installed, and offer additional programs so merchants can customize them to meet their specific needs.
Enabling merchants to accept payments from anywhere, the first generation of mobile payment devices plugged into mobile phones or tablets and turned them into payment terminals. They allowed cards to be swiped, dipped, or tapped and processed payments through a mobile app. Today, providers offer devices wirelessly connected to POS systems, enabling order taking, inventory checking, and payment processing.
To accept payments from a desktop or laptop, merchants need to set up a virtual terminal. Most are offered as software or web-based solutions integrated into a POS System. A virtual terminal is often used for mail order and telephone orders, too.
Merchants can set up a hosted payments page or utilize a shopping cart to enable consumers to order and pay for products and services. There are also end-to-end eCommerce platforms integrated with payment processing tools that are designed to enable merchants to create and manage their own online store.
The banks, processors, and card networks work together and aspire to help merchants provide consumers with seamless payments experiences. To cover the costs, they deduct fees from every payment processed. While the merchant is charged a single fee per transaction, the bank, processor and card network are all paid a portion of the total amount.
This is the amount the cardholder’s bank (issuing bank) charges the merchant’s bank (acquiring bank) for allowing the merchant to accept the payment. These fees are established by the card brands.
The fee is automatically deducted from the total of each payment processed and includes a flat transaction levy plus a fee based on the variable interchange rate based on a percentage of the total sale including taxes.
The acquiring bank pays the issuing bank the total interchange fee. The processor and the card network charge additional processing fees.
The interchange rate charged depends upon a number of factors including the network being used, the card type (e.g., credit vs. debit, rewards card vs. standard card, etc.), how the payment is made (e.g., in-person, over the internet, via phone, etc.), the industry and size of the merchant, the region or country where the purchase takes place, etc.
Interchange Fee Example:
$100 sale at an apparel retailer*
|Payment Method||Fee Charged||Fee Base|
|Credit Card||$2.10||10¢ levy + $2.00 fee (2% of total sale)|
|Debit Card||.95||15¢ levy + .80 fee (.08% of total sale)|
|Pre-paid Debit/Gift Card||$1.30||15¢ levy + $1.15 fee (1.15% of total sale)|
To cover their own processing services, payment-brand assessments, and network access fees, acquiring banks tack on these additional fees. Banks offer different fee structures that include variable, bundled and flat rate, and allow merchants to choose the best one for their needs.
The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress in 2010 as a solution to an ongoing dispute between major banks and merchants over debit card processing fees.1 The amendment took power away from the banks by requiring the Federal Reserve assign caps on the fees banks could charge merchants.
The key goal was to regulate fees as a way to help merchant’s lower costs and in turn lower prices for consumers. While the amendment has effectively saved many merchants money, those that regularly process debit transactions under $10 have seen costs because the fees charged no longer vary based on the amount of the transaction. In addition, consumers did not benefit as merchants have not lowered prices and banks started charging consumers higher fees and decreasing perks to make up for their lost revenue.