What Credit Card Companies Really Charge Merchants (and Why)

Credit card companies and processors give a Merchant Category Code (MCC) to every business to identify the business type. MCC assesses risk categories, regulatory assessment, and chargeback history. For example, an e-commerce coaching platform with subscription billing could be assessed as more risky than a brick-and-mortar hardware store. Thus, high-risk merchant accounts exist for businesses that are assessed as high fraud risk/chargeback risk or those that need rigorous compliance^[3]. Others might have high risks merely because of their category, meaning exploring and negotiating is required because they might get charged all the time. Increases like these are predetermined. Market history means nothing to credit card companies.

In addition to the type of business, the way your processor prices transactions will impact what you pay. With Tiered Pricing, transactions are “qualified”, “mid-qualified” and “non-qualified”, meaning it’s tiered person payments based on what level it falls into; this provides less confusion in billing but ultimately hides the cost. Interchange-Plus pricing provides transparency in the transaction breakdown as it outlines how much goes to Interchange and how much is markup for the processor. For good reason, high-risk merchants want the second style because it provides thorough assessment of how much goes to credit card companies versus how much goes to processors—thus providing them with negotiation leverage.

Different types of cards carry different interchange rates. For example, debit cards (especially PIN debit) come with lower fees than credit cards. Likewise, premium or rewards cards cost merchants more to accept because the issuing bank has to subsidize cardholder perks. For example, a Visa debit card might provide an interchange rate of 0.8%, while a rewards credit card could go beyond 2.5%^[4]. While as a merchant you cannot control what type of card a customer presents, understanding which types comprise your mix can help you measure your effective rate and seek areas to eliminate high-cost card acceptance.

Card-not-present transactions (like e-commerce) are more expensive than card-present transactions. Why? Because they pose more risk. Credit card processors know that without a physical card or signature, there’s a greater chance of fraud, and thus charge higher interchange rates. A physical restaurant may pay 1.9% for a credit card it swipes, while an e-commerce merchant that bills customers monthly might see rates over 3.2%. The distinction is important for high-risk e-commerce merchants who need to find safe credit card processing and fraud prevention to keep their rates down.

Chargebacks are one of the biggest expensive threats to merchant profitability. Merchants not only lose profits due to chargebacks, potential fees, and penalties, but ongoing chargebacks can cause credit card processors to change your categorization—and raise your rates—or, even worse, cancel your account. Chargebacks for high-risk merchants could cost $25 to $100 per chargeback, depending on the processor^[5]. Some processors have chargeback mitigation tools or fraud filters to assist; finding those processors can save merchants a lot of money in addition to their reputation.

Merchants who want to save on credit card fees can start with a few easy steps on their own. First, assess your statement and break it down so you know how much of your rate is interchange, assessments, and retail markup. Second, ask your credit card processor if you qualify for Level 2 or Level 3 data submission, which reduces fees for B2B transactions. Third, utilize AVS and CVV checks to identify fraud. Fourth, and I would argue the most important, is to work with a processor that understands your industry. For instance, if you are a high-risk merchant, never settle for a vanilla processor, i.e, a processor without the infrastructure to handle varying risk levels.

There are processors specific to high-risk merchant accounts that understand compliance and operational quirks for CBD, adult, coaching, digital subscriptions and more. Their underwriting flexibility, fraud protections, ethical developments and incremental rate increases ensure that while the starting base rate may be higher, the potential to keep your account in good standing while scaling your business goes well beyond a nominal increase. For example, Payment Nerds also offers PCI security assistance and customer service trained troubleshooting abilities in niche as well as customized payment flow options that help with new customer conversion rather than increased penalty rates over time.